ZOMDF 10-Q
Zomedica Corp. (ZOMDF)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
For the quarterly period ended
OR
For the transition period from __________ to __________.
Commission File Number:
(Exact name of registrant as specified in its charter)
Alberta, | ||
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) |
(Address of principal executive offices) | (Zip code) |
(
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
|
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
As of November 13, 2023,
ZOMEDICA CORP.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
September 30, 2023
TABLE OF CONTENTS
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3 | ||
Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 | ||
Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2023 and 2022 | ||
Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022 | ||
Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2023 and 2022 | ||
Notes to the Consolidated Financial Statements | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 | |
36 | ||
36 | ||
36 | ||
38 | ||
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
Zomedica Corp.
Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022
(United States Dollars in Thousands)
As of | ||||||
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| December 31, | |||
| 2023 |
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Assets |
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Current assets |
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Cash and cash equivalents | $ | | $ | | ||
Available-for-sale securities |
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Trade receivables, net |
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Inventory, net |
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Prepaid expenses and deposits |
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Other receivables |
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Total current assets |
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Prepaid expenses and deposits |
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Property and equipment, net |
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Construction in progress | | | ||||
Right-of-use asset |
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Goodwill |
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Intangible assets, net |
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Non current available-for-sale securities |
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Other assets |
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Total assets | $ | | $ | | ||
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Liabilities and shareholders’ equity |
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Current liabilities |
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Accounts payable and accrued liabilities | $ | | $ | | ||
Accrued income taxes |
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Current portion of lease obligations |
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Customer contract liabilities |
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Other current liabilities |
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Total current liabilities |
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Lease obligations |
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Deferred tax liabilities |
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Customer contract liabilities |
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Liability due to Qorvo |
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Other liabilities |
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Total liabilities | $ | | $ | | ||
Commitments and contingencies (Note 16) |
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Shareholders’ equity |
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Unlimited common shares, | $ | | $ | | ||
Additional paid-in capital |
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Accumulated deficit |
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Accumulated comprehensive loss |
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Total shareholders' equity |
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Total liabilities and shareholders’ equity | $ | | $ | | ||
The accompanying notes are an integral part of these condensed consolidated financial statements
3
Zomedica Corp.
Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2023 and 2022
(Unaudited) (United States Dollars in Thousands, Except for Per Share Data)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Net revenue | $ | | $ | | $ | | $ | | |||||
Cost of revenue |
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Gross profit |
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Expenses |
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General and administrative |
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Research and development |
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Selling and marketing |
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Loss from operations |
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Interest income |
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Interest expense |
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Gain (loss) on disposal of assets | | — | | ( | |||||||||
Other income (loss) |
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Foreign exchange loss |
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Loss before income taxes |
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Income tax benefit |
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Net loss |
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Unrealized gain (loss), change in fair value of available-for-sale securities, net of tax |
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Change in foreign currency translation |
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Net loss and comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
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Weighted average number of common shares - basic and diluted |
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Loss per share - basic and diluted (Note 18) | $ | ( | $ | ( | $ | ( | $ | ( | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements
4
Zomedica Corp.
Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022
(Unaudited) (United States Dollars in Thousands)
| For the Nine Months Ended September 30, 2023 | ||||||||||||||||
Additional | Accumulated | ||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive |
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Shares |
| Amount |
| Capital |
| Deficit |
| (Loss) |
| Total | |||||||
Balance at December 31, 2022 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Stock-based compensation |
| — |
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| — |
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Net loss | — | — | — | ( | — | ( | |||||||||||
Other comprehensive income |
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Balance at September 30, 2023 |
| | $ | | $ | | $ | ( |
| $ | ( | $ | | ||||
| For the Three Months Ended September 30, 2023 | ||||||||||||||||
Additional | Accumulated | ||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive |
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Shares |
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| Capital |
| Deficit |
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| Total | |||||||
Balance at June 30, 2023 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Stock-based compensation |
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Net loss | — | — | — | ( | — | ( | |||||||||||
Other comprehensive income |
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Balance at September 30, 2023 |
| | $ | | $ | | $ | ( |
| $ | ( | $ | | ||||
| For the Nine Months Ended September 30, 2022 | ||||||||||||||||
Additional | Accumulated | ||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive |
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Shares |
| Amount |
| Capital |
| Deficit |
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| Total | |||||||
Balance at December 31, 2021 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Stock-based compensation |
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Warrants issued |
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Stock issuance from warrant exercises |
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APIC reclass for warrants |
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Net loss |
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Other comprehensive income |
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Balance at September 30, 2022 |
| | $ | | $ | | $ | ( |
| $ | ( | $ | | ||||
| For the Three Months Ended September 30, 2022 | ||||||||||||||||
Additional | Accumulated | ||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive |
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Shares |
| Amount |
| Capital |
| Deficit |
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| Total | |||||||
Balance at June 30, 2022 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Stock-based compensation |
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Warrants issued | — |
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Stock issuance from warrant exercises | |
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APIC reclass for warrants | — |
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Net loss |
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Other comprehensive income |
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Balance at September 30, 2022 |
| | $ | | $ | | $ | ( |
| $ | ( | $ | | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements
5
Zomedica Corp.
Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2023 and 2022
(Unaudited) (United States Dollars in Thousands)
| For the Nine Months Ended September 30, | |||||
| 2023 |
| 2022 | |||
Cash flows from operating activities: |
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Net loss | $ | ( | $ | ( | ||
Adjustments for: |
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Depreciation |
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Amortization - intangible assets |
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(Gain) loss on disposal of property and equipment |
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Gain on conversion of notes receivable |
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Stock-based compensation |
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Non cash portion of rent benefit (expense) |
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Accretion/amortization of available-for-sale securities |
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Change in assets and liabilities, net of acquisitions: |
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Purchased inventory |
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Prepaid expenses and deposits |
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Trade receivables |
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Other receivables |
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Accounts payable and accrued liabilities |
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Accrued income tax |
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Deferred tax liabilities |
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Other current liabilities |
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Customer contract liabilities |
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Other liabilities |
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Net cash used in operating activities |
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Cash flows from investing activities: |
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Investment in available-for-sale securities |
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Investment in debt security (at fair value) |
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Investment in property and equipment |
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Acquisition of intangibles |
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Investment in construction in progress | ( | ( | ||||
Investment in acquisitions, net of cash acquired (Assisi, Revo Squared, and SMP) | ( | ( | ||||
Net cash provided by (used in) investing activities |
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Cash flows from financing activities: |
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Cash received from warrant exercises |
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Net cash provided by financing activities |
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Decrease in cash and cash equivalents |
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Effect of exchange rate changes on cash | ( | ( | ||||
Cash and cash equivalents, beginning of year |
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Cash and cash equivalents, end of period | $ | | $ | | ||
Noncash activities: |
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Change in fair value of available-for-sale securities, net of tax | $ | | $ | ( | ||
Transfer of construction in progress into property and equipment and intangibles | $ | | $ | | ||
Transfer of inventory into property and equipment | $ | | $ | | ||
Supplemental cash flow information: |
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Interest received | $ | | $ | | ||
The accompanying notes are an integral part of these condensed consolidated financial statements
6
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
1. Nature of Operations
Zomedica is a veterinary health company creating products for companion animals by focusing on the unmet needs of clinical veterinarians. The Company consists of the parent company, Zomedica Corp., its wholly-owned U.S subsidiary, Zomedica Inc., and the wholly-owned subsidiaries of Zomedica Inc. See Exhibit 21.1 for a listing of all subsidiaries.
Changes in Macroeconomic Conditions
We are currently dealing with the aftermath of global changes in the macro-economic environment including disruptions in supply chain, labor disruptions, challenges in manufacturing, COVID-19 related concerns, challenges selling to customers, declines in customer demand, inflationary pressures, rising interest rates, and an impaired ability to access credit and capital markets, among other things. There are uncertainties as to the outcome of current financial conditions, including recessionary environment or a contraction in the economy, which may impact overall consumer demand and supply requirements.
2. Basis of Preparation
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries. Intercompany transactions and balances between consolidated businesses have been eliminated.
The accounting policies set out below have been applied consistently in the consolidated financial statements. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
3. Significant Accounting Policies
Basis of Measurement
The condensed consolidated financial statements have been prepared on the historical cost basis except as otherwise noted.
Business Combinations
We account for business combinations in accordance with ASC 805, Business Combinations, if the acquired assets assumed and liabilities incurred constitute a business. We consider acquired companies to constitute a business if the acquired net assets and processes have the ability to create outputs in the form of revenue. For acquired companies constituting a business, we recognize the identifiable assets acquired and liabilities assumed at their acquisition-date fair values and recognize any excess of total consideration paid over the fair value of the identifiable net assets as goodwill.
Estimates and Assumptions
In preparing these financial statements, management was required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. These estimates and assumptions are subject to an inherent degree of uncertainty. We are not presently aware of any events or circumstances that would require us to update such estimates and assumptions or revise the carrying value of our assets or liabilities. Our estimates may change, however, as new events occur, and additional information is obtained. As a result, actual results may differ significantly from our estimates, and any such differences may be material to our financial statements.
Functional and Reporting Currencies
The functional currency, as determined by management, for Canada and our subsidiaries in the United States and Switzerland is U.S. dollars, which is also our reporting currency.
7
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
The functional currency, as determined by management, for our Japanese subsidiary is Japanese Yen. Japanese Yen are translated for financial reporting purposes with translation gains and losses recorded as a component of other comprehensive income or loss.
In respect of transactions denominated in currencies other than the Company and its wholly owned operating subsidiaries’ functional currencies, the monetary assets and liabilities are remeasured at the period end rates. Revenue and expenses are measured at rates of exchange prevailing on the transaction dates. All of the exchange gains or losses resulting from these transactions are recognized in the consolidated statements of operations.
Comparative Figures
A portion of depreciation expense for the three and nine months ended September 30, 2023 has been stated as part of cost of revenue for $
To better align with the way in which we measure and track our business, we have changed the categorization of products within our segmentation of revenue. A portion of the products in our Therapeutic Device segment were previously designated as instruments and trodes in our form 10Q for the period ending September 30, 2022. These products have since been renamed to be capital and consumables to better align with our other platforms and to provide a more consistent baseline for comparison of the product lines within. Capital refers to the devices we sell within our PulseVet®, Revo Squared®, TRUVIEW™ and VetGuardian® product lines. Consumables continues to include our TRUFORMA® cartridges as it did last year and now includes our PulseVet trodes as well as our Assisi® products. There have been no changes to the overall sales numbers for our Diagnostics and Therapeutic Device segments, only the product names making up the total.
To provide further clarity on the way in which we present our operating expenses, we have broken up our SG&A spend into distinct and separate General and Administrative and Selling and Marketing line items on the consolidated statements of income and comprehensive loss for the three and nine months ended September 30, 2023. The consolidated statements of income and comprehensive loss for the three and nine months ended September 30, 2022 have been adjusted to conform to the current year presentation of operating expenses. The change in presentation had no effect on the reported results of operations and does not affect previously reported cash flows from operating activities in the consolidated statements of cash flows.
Segment Reporting
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. The Company’s reportable segments consist of Diagnostics and Therapeutic Devices.
Cash and Cash Equivalents
The Company considers all highly liquid securities with an original maturity of three months or less to be cash equivalents.
Investment Securities
Our investment securities, which are comprised of corporate bonds/notes and US treasuries, are accounted for in accordance with ASC 320, “Investments – Debt and Equity Securities” (“ASC 320”). The Company considers all of its securities for which there is a determinable fair market value, and there are no restrictions on the Company’s ability to sell within the next twelve months, as available for sale. We classify these securities as both current and non-current depending on their time to maturity. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a component of comprehensive income (loss).
8
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recorded net of an allowance for credit losses and have payment terms of
Inventories
Inventories are stated at the lower of cost or net realizable value. The Company utilizes the specific identification and First in, First out ("FIFO") method to track inventory costs. The Company records reserves, when necessary, to reduce the carrying value of inventory to its net realizable value. Management considers forecast demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining excess and obsolescence and net realizable value adjustments. At the point of loss recognition, a new, lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Property and Equipment
Property and equipment are carried at historical cost less accumulated depreciation and any accumulated impairment losses. Property and equipment acquired in a business combination are recorded at fair value as of the date of acquisition. Maintenance and repair expenditures that do not improve or extend the life are expensed in the period incurred.
Depreciation is recognized so as to write off the cost less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation methods are reviewed at the end of each year, with the effect of any changes in estimate accounted for on a prospective basis.
An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.
Intangible Assets
Expenditures related to the planning and operation of the Company’s website are expensed as incurred. Expenditures related to the website application and infrastructure development are capitalized and amortized over the website’s estimated useful life.
Costs related to acquired customer relationships, developed technology, licenses, trademarks, and tradenames have been capitalized and amortized over the estimated useful life.
Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful lives and amortization methods are reviewed at the end of each year, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset may not be recoverable. For assets that are to be held and used, impairment is recognized when the sum of estimated undiscounted future cash flows associated with the asset or group of assets is less than its carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value.
9
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
Revenue Recognition
The Company enters into agreements which may contain multiple promises where customers purchase products, services, or a combination thereof. Determining whether products and services are considered distinct performance obligations that should be accounted for separately requires judgment. We determine the transaction price for a contract based on the total consideration we expect to receive in exchange for the transferred goods or services.
The Company allocates revenue to each performance obligation in proportion to the relative standalone selling prices and recognizes revenue when control of the related goods or services is transferred for each obligation. We utilize the observable standalone selling price when available, which represents the price charged for the performance obligation when sold separately.
The Company's contracts with customers are generally comprised of purchase orders for the sale of the point of care instrument, consumable products, and extended warranties, or some variation thereof. The instrument and consumables each represent a single performance obligation when sold separately, that is satisfied at a point in time upon transfer of control of the product to the customer which is typically upon receipt of the goods by the customer. The extended warranties are also a separate performance obligation, whereby revenue is recognized over time.
The nature of the Company’s PulseVet® business gives rise to variable consideration, including discounts and applicator (“trode”) returns for refurbishment. Credits are issued for unused shocks on returned trodes, which can be used toward the purchase of replacement trodes. Discounts and the estimated unused shock credits decrease the transaction price, which reduces revenue. Variable consideration related to unused shock credits is estimated using the expected value method, which estimates the amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are based upon historical experience and known trends. These estimated credits are nonrefundable and may only be used towards the purchase of future trode refurbishments. This practice encourages refurbishment purchase prior to complete utilization of the previous trode, so the customer will always have a trode on hand with ample capacity to perform treatments.
At times the Company receives consideration prior to when the performance obligation is completed, giving rise to a contract liability. Sales are recorded net of sales tax. Sales tax is charged on sales to end users and remitted to the appropriate state authority.
Disaggregated revenue for the three and nine months ended September 30, 2023 and 2022 is as follows:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
Diagnostics | Therapeutic | Consolidated | Diagnostics | Therapeutic | Consolidated | |||||||||||||||||||||||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||||||||||
Capital | $ | | $ | - | $ | | $ | | $ | | $ | | $ | | $ | - | $ | | $ | | $ | | $ | | ||||||||||||
Consumables | | | | | | | | | | | | | ||||||||||||||||||||||||
Other | - | - | | | | | - | - | | | | | ||||||||||||||||||||||||
Total revenue | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Cost of Revenue
Cost of goods sold consists of overhead, materials, labor, shipping costs, and a portion of depreciation incurred internally to produce and receive the products. Shipping and handling costs incurred by the Company are included in cost of revenue.
Research and Development
Research and development costs related to continued research and development programs are expensed as incurred.
10
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
Stock-based Compensation
The Company calculates stock-based compensation using the fair value method, under which the fair value of the options at the grant date is calculated using the Black-Scholes Option Pricing Model, and subsequently expensed over the vesting period of the option using the graded vesting method. The provisions of the Company’s stock-based compensation plans do not require the Company to settle any options by transferring cash or other assets, and therefore the Company classifies the awards as equity. Stock-based compensation expense recognized during the period is based on the value of stock-based payment awards that are ultimately expected to vest.
The Company estimates forfeitures at the time of grant and revises the estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, on a tax jurisdictional basis. The Company files income tax returns in Canada and the province of Alberta and its subsidiaries file income tax returns in Switzerland, Japan, the United States and various states, including in Michigan where the Company’s headquarters are located.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax basis of assets and liabilities and their financial statement reported amounts using enacted tax rates and laws in effect in the year in which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is determined to be more likely than not that the deferred tax asset will not be realized.
The Company assesses the likelihood of the financial statement effect of an uncertain tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date. The Company is subject to examination by taxing authorities in the United States, Canada, Japan, and Switzerland. The Company recognizes tax-related interest and penalties, if any, as a component separate from income tax expense.
Comprehensive Loss
The Company follows ASC topic 220. This statement establishes standards for reporting and display of comprehensive (loss) income and its components. Comprehensive loss is net loss plus certain items that are recorded directly to shareholders’ equity. The Company has recorded a currency translation adjustment associated with the translation of its Japanese subsidiary to the reporting currency.
Loss Per Share
Basic loss per share (“EPS”) is computed by dividing the loss attributable to common shareholders by the weighted average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur from common shares issuable through the exercise or conversion of stock options, restricted stock awards, warrants and convertible securities. In certain circumstances, the conversion of options is excluded from diluted EPS if the effect of such inclusion would be anti-dilutive.
4. Critical Accounting Judgments and Key Sources of Estimation Uncertainty
The preparation of financial statements in accordance with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and further periods if the review affects both current and future periods.
11
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
Critical areas of estimation and judgements in applying accounting policies include the following:
Intangible Assets and Business Combinations
Assets acquired and liabilities assumed as part of a business combination are recognized at their acquisition date fair values. In determining these fair values, we utilize various forms of the income, cost, and market approaches depending on the asset or liability being valued.
We use a discounted cash flow model to measure the customer relationship, developed technology, license, trademark, and tradename assets. The estimation of fair value requires significant judgment related to future net cash flows based on assumptions related to revenue and EBITDA growth rates, discount rates, and attrition factors. Inputs are generally determined by taking into account competitive trends, market comparisons, independent appraisals, and historical data, among other factors, and are supplemented by current and anticipated market conditions.
Impairment Testing
We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change indicating the carrying value may not be recoverable. When testing goodwill for impairment, we may first assess qualitative factors to determine if it is more likely than not the carrying value of a reporting unit exceeds its estimated fair value. During a qualitative analysis, we consider the impact of changes, if any, to the following factors: macroeconomic, industry and market factors; cost factors; changes in overall financial performance; and any other relevant events and uncertainties impacting a reporting unit. If our qualitative assessment indicates a goodwill impairment is more likely than not, we perform additional quantitative analyses. We may also elect to skip the qualitative testing and proceed directly to the quantitative testing. For reporting units where a quantitative analysis is performed, we perform a test measuring the fair values of the reporting units and comparing them to their aggregate carrying values, including goodwill. If the fair value is less than the carrying value of the reporting unit, an impairment is recognized for the difference, up to the carrying amount of goodwill.
We estimate the fair values of our reporting units using a discounted cash flow method or a weighted combination of discounted cash flows and a market-based method. The discounted cash flow method includes assumptions about a wide variety of internal and external factors. Significant assumptions used in the discounted cash flow method include financial projections of free cash flow, including revenue trends, medical costs trends, operating productivity, income taxes and capital levels; long-term growth rates for determining terminal value beyond the discretely forecasted periods; and discount rates. Financial projections and long-term growth rates used for our reporting units will be consistent with, and use inputs from, our internal long-term business plan and strategies.
Discount rates will be determined for each reporting unit and include consideration of the implied risk inherent in their forecasts. Our most significant estimate in the discount rate determinations involves our adjustments to the peer company weighted average costs of capital reflecting reporting unit-specific factors. We do not make any adjustments to decrease a discount rate below the calculated peer company weighted average cost of capital for any reporting unit. Company-specific adjustments to discount rates are subjective and thus are difficult to measure with certainty.
The passage of time and the availability of additional information regarding areas of uncertainty with respect to the reporting units’ operations could cause these assumptions to change in the future. Additionally, as part of our quantitative impairment testing, we perform various sensitivity analyses on certain key assumptions, such as discount rates, cash flow projections, and peer company multiples to analyze the potential for a material impact. The market-based method requires determination of an appropriate peer group whose securities are traded on an active market. The peer group is used to derive market multiples to estimate fair value.
Valuation and Payback of Property and Equipment
Diagnostic based TRUFORMA® capital is placed in fixed assets once purchased or manufactured, where they remain, undepreciated, until they are placed with our customers under the agreement that they will repeatedly purchase consumables or services which are utilized within. Each instance of this placed capital represents an asset that we own. An estimate is made of the anticipated future revenue over its respective life which is ten years. If the payback period of the initial investment in the asset is less than the ten-year life of the asset, we conclude that the assets have been properly recorded, and no write-down is necessary. We rely on third-party data that considers various data points and assumptions, including, but not limited to, the expected volume of consumables which will be sold, anticipated growth rates, and anticipated placements. Realization of the anticipated revenue is dependent on the current assumptions and forecasted models.
12
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
Revenue Recognition and Liabilities Due to Customers
The nature of the Company’s business gives rise to variable consideration, including discounts and applicator (“trode”) returns for refurbishment. Credits are issued for unused shocks on returned trodes, which can be used toward the purchase of replacement trodes. Discounts and the estimated unused shock credits decrease the transaction price, which reduces revenue. Variable consideration related to unused shock credits is estimated using the expected value method, which estimates the amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are estimated based upon historical experience and known trends. These estimated credits are non-refundable and may only be used towards the purchase of future trode refurbishments. This practice encourages refurbishment purchase prior to complete utilization of the previous trode, so the customer will always have a trode at hand with ample capacity to perform treatments.
5. Investment Securities
The following represents the Company’s investment securities as of September 30, 2023 and December 31, 2022 (in thousands):
Balance at September 30, 2023 | Acquisition | Accretion / | Unrealized | Estimated | ||||||||
Commercial paper | $ | | $ | | $ | ( | $ | | ||||
Corporate notes / bonds | | | ( | | ||||||||
Money market funds | | - | - | | ||||||||
U.S. govt. agencies | | | ( | | ||||||||
U.S. treasuries | | | ( | | ||||||||
Total investment securities | $ | | $ | | $ | ( | $ | |
Balance at December 31, 2022 | Acquisition | Accretion / | Unrealized | Estimated | ||||||||
Commercial paper | $ | | $ | | $ | ( | $ | | ||||
Corporate notes / bonds | | | ( | | ||||||||
Debt security | | - | - | | ||||||||
Money market funds | | - | - | | ||||||||
U.S. govt. agencies | | | ( | | ||||||||
U.S. treasuries | | | ( | | ||||||||
Total investment securities | $ | | $ | | $ | ( | $ | |
Accretion / (amortization) refers to the discounts and premiums incurred on bonds and notes purchased and are included within interest income on our consolidated income statement.
Accrued interest receivable related to the above investment securities amounted to $
Contractual maturities of investment securities as of September 30, 2023 are as follows (in thousands):
Acquisition | Estimated | |||||
Original maturities of 90 days or less | $ | | $ | | ||
Original maturities of 91-365 days | | | ||||
Original maturities of 366+ days | | | ||||
Total investment securities | $ | | $ | |
13
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
6. Fair Value Measurements
In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”), the Company measures its cash and cash equivalents and investments at fair value on a recurring basis. The Company also measures certain assets and liabilities at fair value on a non-recurring basis when applying acquisition accounting.
ASC Topic 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
As a basis for considering such assumptions, ASC Topic 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: | Observable inputs that reflect quoted prices (unadjusted) in active markets for identical assets or liabilities. |
Level 2: | Observable inputs other than quoted prices included in Level 1 for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. |
Level 3: | Unobservable data points for the assets or liability, and include situations where there is little, if any, market activity for the asset or liability. Valuations based on inputs that are unobservable and involve management judgement and the reporting entity’s own assumptions about market participants and pricing. |
Cash and cash equivalents, accounts receivable, and accounts payable: The carrying amount of these assets approximate fair value due to the short maturity of these instruments. Cash and cash equivalents include marketable securities with an original maturity within 90 days.
Available-for-sale securities: The Company classifies marketable securities and other highly liquid investments, with a maturity of greater than three months and that can be readily purchased or sold using established markets, as available-for-sale. These investments are reported at fair value on the Company’s consolidated balance sheets and unrealized gains and losses are reported as a component of shareholders’ equity.
Earnout liability: The Company has reported the fair value of the earnout liability within other liabilities on the consolidated balance sheet. See footnote 7 for additional details.
In accordance with the fair value hierarchy described above, the following table shows the fair value of our investments as of September 30, 2023 and December 31, 2022:
Balance at September 30, 2023 | Level 1 | Level 2 | Level 3 | Estimated | ||||||||
Commercial paper | $ | - | $ | | $ | - | $ | | ||||
Corporate notes / bonds | - | | - | | ||||||||
Money market funds | | - | - | | ||||||||
U.S. govt. agencies | | - | - | | ||||||||
U.S. treasuries | | - | - | | ||||||||
Total investment securities | $ | | $ | | $ | - | $ | |
Balance at December 31, 2022 | Level 1 | Level 2 | Level 3 | Estimated | ||||||||
Commercial paper | $ | - | $ | | $ | - | $ | | ||||
Corporate notes / bonds | - | | - | | ||||||||
Debt security | - | - | | | ||||||||
Money market funds | | - | - | | ||||||||
U.S. govt. agencies | | - | - | | ||||||||
U.S. treasuries | | - | - | | ||||||||
Total investment securities | $ | | $ | | $ | | $ | |
14
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
The following table shows our investments as of September 30, 2023 and their respective balance sheet classifications:
Cash & | Available- | Available- | Estimated | |||||||||
Commercial paper | $ | | $ | | $ | - | $ | | ||||
Corporate notes / bonds | - | | | | ||||||||
Money market funds | | - | - | | ||||||||
U.S. govt. agencies | - | | | | ||||||||
U.S. treasuries | - | | - | | ||||||||
Total investment securities | $ | | $ | | $ | | $ | |
Unrealized gains on our investments have not been recorded into income as we do not intend to sell nor is it more likely than not that we will be required to sell these investments prior to recovery of their amortized cost basis. The decline in fair value of our debt securities is largely due to the rising interest rate environment driven by current market conditions that have resulted in higher credit spreads. The credit ratings associated with our debt securities are mostly unchanged, are highly rated, and the debtors continue to make timely principal and interest payments. As a result, there were no credit or non-credit impairment charges recorded through September 30, 2023.
7. Business Combinations
All of the Company’s acquisitions of businesses have been accounted for under ASC 805, Business Combinations. Accordingly, the assets of the acquired companies reflect the fair values and have been included in the Company’s Condensed Financial Statements from their respective dates of acquisition.
The results of operations of Revo Squared LLC, Assisi Animal Health, LLC, and Structured Monitoring Products, Inc have been included in the Company’s Condensed Financial Statements since the dates of acquisition on June 14, 2022, July 15, 2022, and September 4, 2023 respectively.
2022 Acquisitions
Asset Purchase Agreement with Assisi Animal Health LLC
On July 15, 2022, Zomedica Corp. and its wholly owned subsidiary Zomedica Inc. entered into an Asset Purchase Agreement with Assisi Animal Health LLC (“Assisi”), its wholly owned subsidiary, AAH Holdings LLC, and certain of Assisi’s members (collectively the “Seller”) pursuant to which Zomedica Inc. agreed to acquire substantially all of the assets related to the Assisi® product lines. The Sellers were in the business of developing, manufacturing, marketing, distributing and selling animal health products which use targeted Pulsed Electromagnetic Field (PEMF) therapy to decrease pain and inflammation, accelerate healing, and reduce anxiety that include the Assisi Loop®, Assisi Loop Lounge®, Assisi DentaLoop® and Calmer Canine® product lines.
Zomedica Inc. paid Assisi a purchase price of $
As a result of total consideration exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $
The Company finalized the allocation of the purchase price for Assisi as of the acquisition date based on its understanding of the fair value of the acquired assets and assumed liabilities.
15
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
The final allocation of the purchase price to the assets acquired and liabilities assumed, based on their estimated fair values at the acquisition date, is as follows:
| Initial |
| Measurement |
| |||||
Allocation of | Period | Updated | |||||||
| Consideration |
| Adjustments |
| Allocation | ||||
Inventory, net | $ | | $ | — | $ | | |||
Prepaid expenses and deposits |
| |
| — |
| | |||
Other receivables | | ( | | ||||||
Right of use asset | — | | | ||||||
Intangible Assets (estimated useful life) |
| ||||||||
E-commerce technology ( |
| |
| — |
| | |||
Trade name ( |
| |
| — |
| | |||
Developed technology ( |
| |
| — |
| | |||
Customer relationships ( |
| |
| — |
| | |||
Total assets acquired |
| |
| |
| | |||
Current portion of lease obligations | — |
| |
| | ||||
Non current portion of lease obligations | — |
| |
| | ||||
Other non current liabilities | |
| — |
| | ||||
Total liabilities assumed |
| |
| |
| | |||
Net assets acquired, excluding goodwill |
| |
| ( |
| | |||
Goodwill |
| |
| |
| | |||
Net assets acquired | $ | | $ | — | $ | | |||
Purchase price consideration was made up of the following:
Cash | $ | | |
Fair value of warrants | | ||
Total | $ | |
Asset Purchase Agreement with Revo Squared LLC
On June 14, 2022, Zomedica Corp. and its wholly owned subsidiary Zomedica Inc. entered into an Asset Purchase Agreement with Revo Squared LLC (“Revo Squared”) and its majority member pursuant to which Zomedica Inc. agreed to acquire substantially all of the assets of Revo Squared. Revo Squared, based in Marietta, Georgia, was in the business of developing, manufacturing, marketing, distributing, and selling diagnostic imaging products and services for use in animal health, including its SuperView™, Sonoview™ Color ultrasound, Sonoview Mini/Mini Plus ultrasound, and Microview™ product offerings.
On July 1, 2022, the parties consummated the acquisition. At the closing, Zomedica Inc. paid Revo Squared a base purchase price of $
In addition, Zomedica Inc. has agreed to pay Revo Squared aggregate earn-out payments of up to $
16
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
As a result of total consideration exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $
The Company finalized the allocation of the purchase price for Revo Squared as of the acquisition date based on its understanding of the fair value of the acquired assets and assumed liabilities.
The final allocation of the purchase price to the assets acquired and liabilities assumed, based on their estimated fair values at the acquisition date, is as follows:
| Initial |
| Measurement |
| |||||
Allocation of | Period | Updated | |||||||
| Consideration |
| Adjustments |
| Allocation | ||||
Trade receivables, net | $ | | $ | — | $ | | |||
Prepaid expenses and deposits |
| |
| — |
| | |||
Intangible Assets (estimated useful life) |
| ||||||||
Trade name ( |
| |
| — |
| | |||
Developed technology ( |
| |
| — |
| | |||
Customer relationships ( |
| |
| — |
| | |||
Total assets acquired |
| |
| — |
| | |||
Earnout liabilities |
| |
| ( |
| | |||
Total liabilities assumed |
| |
| ( |
| | |||
Net assets acquired, excluding goodwill |
| |
| |
| | |||
Goodwill |
| |
| ( |
| | |||
Net assets acquired | $ | | $ | — | $ | | |||
Purchase price consideration was made up of the following:
Cash | $ | | |
Fair value of warrants | | ||
Total | $ | |
2023 Acquisitions
Stock Purchase Agreement with Structured Monitoring Products, Inc.
On September 4, 2023, Zomedica Inc., a wholly owned subsidiary of Zomedica Corp. (the “Company”), entered into a Stock Purchase Agreement with Structured Monitoring Products, Inc. pursuant to which Zomedica Inc. acquired
In connection with the Acquisition, the Company converted $
17
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
As a result of total consideration exceeding the preliminary fair value of the net assets acquired, goodwill in the amount of $
The previously held equity interests were remeasured to its fair value as of the acquisition date. The Company computed the fair value based upon the SMP’s enterprise value of $
The following table summarizes the fair value amounts of identifiable assets acquired and liabilities assumed at the acquisition date:
| Initial | ||
Allocation of | |||
| Consideration | ||
Cash and cash equivalents | $ | | |
Trade receivables, net(1) |
| | |
Inventory, net |
| | |
Other receivables |
| | |
Intangible assets (estimated useful life) |
| ||
Developed technology ( |
| | |
Non-competition agreement ( |
| | |
Total assets acquired |
| | |
Accounts payable | | ||
Deferred tax liabilities | | ||
Total liabilities assumed |
| | |
Net assets acquired, excluding goodwill |
| | |
Goodwill |
| | |
Net assets acquired | $ | | |
| (1) | The “trade receivables, net” comprise gross contractual amounts due of $ |
The Company evaluated the disclosure requirements under ASC 805 and determined SMP was not considered a material business combination for purposes of disclosing the earnings of SMP since the date of acquisition and supplemental pro forma information.
Purchase price consideration was made up of the following:
Cash | $ | | |
Fair value of previously held interest | | ||
Prepaid deposits | | ||
Net assets acquired | $ | | |
Cash | $ | | |
Less: cash acquired | ( | ||
Investment in acquisitions, net of cash acquired | $ | |
The determination of the final purchase price allocation to specific assets and liabilities assumed is incomplete. The purchase price allocation may change in future periods as the fair value estimates of the assets (including intangibles) and liabilities are adjusted.
18
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
8. Inventory
September 30, 2023 | December 31, 2022 | |||||||||||||||||
Diagnostics |
| Therapeutic |
| Consolidated |
| Diagnostics |
| Therapeutic |
| Consolidated | ||||||||
Raw materials | $ | | $ | | $ | | $ | — | $ | | $ | | ||||||
Finished goods |
| |
| |
| |
| — |
| |
| | ||||||
Purchased inventory |
| |
| |
| |
| |
| |
| | ||||||
Total |
| |
| |
| |
| |
| |
| | ||||||
Reserves |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( | ||||||
Net inventory | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
9. Prepaid Expenses and Deposits
| September 30, |
| December 31, | |||
2023 | 2022 | |||||
Deposits | $ | | $ | | ||
Prepaid marketing |
| |
| | ||
Prepaid insurance |
| |
| | ||
Prepaid taxes |
| — |
| | ||
Other |
| |
| | ||
Total prepaid expenses and deposits | $ | | $ | | ||
10. Property and Equipment
| September 30, |
| December 31, | |||
2023 | 2022 | |||||
Machinery and office equipment | $ | | $ | | ||
Furniture and equipment |
| |
| | ||
Laboratory equipment |
| |
| | ||
Leasehold improvements |
| |
| | ||
| |
| | |||
Accumulated depreciation and amortization |
| |
| | ||
Net property and equipment | $ | | $ | | ||
Depreciation expense for the nine months ended September 30, 2023 and 2022 was $
19
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
11. Intangible Assets
| September 30, |
| December 31, | |||
2023 | 2022 | |||||
Computer software | $ | | $ | | ||
Customer relationships |
| |
| | ||
Licenses |
| |
| | ||
Technology |
| |
| | ||
Trademarks |
| |
| | ||
Tradename |
| |
| | ||
Website |
| |
| | ||
| |
| | |||
Accumulated amortization |
| |
| | ||
Net intangibles | $ | | $ | | ||
Included within intangibles are Qorvo related licenses of $
In addition, included within intangibles are $
The estimated future amortization of intangible assets is as follows:
2023 |
| $ | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 and beyond |
| | |
Total | $ | |
Amortization expense for the nine months ended September 30, 2023 and 2022 was $
12. Leases
On April 1, 2022, the Company entered into an agreement with ULF Northfield Business Center LLC to lease
On July 1, 2022, as part of the Revo Squared Purchase, the Company assumed an agreement with Lebow 1031 Legacy, LLC to lease
20
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
On July 15, 2022, as part of the Assisi asset purchase agreement, the Company assumed a license agreement pursuant to a lease agreement between The Wheelership LLC and The Realty Associates Fund XII portfolio, L.P., whereby Assisi sublet
On May 10, 2023, the Company amended the lease agreement with ULF Northfield Business Center LLC to expand the lease by
September 30, | December 31, | |||||
| 2023 | 2022 | ||||
Right-of-use asset |
|
|
|
|
| |
Cost |
|
|
|
| ||
Aggregate lease commitments | $ | | $ | | ||
Less: impact of present value |
| ( | ( | |||
Balance | $ | | $ | | ||
Reduction in right-of-use asset |
|
|
| |||
Straight line amortization |
| | | |||
Interest |
| ( | ( | |||
Balance | $ | | $ | | ||
Net book value as at: | ||||||
Balance | $ | | $ | | ||
Lease liabilities | ||||||
Additions | $ | | $ | | ||
Payments |
| ( | ( | |||
Interest |
| | | |||
Total lease liabilities | $ | | $ | | ||
Current portion of lease liabilities |
| | | |||
Long term portion of lease liabilities |
| | | |||
Total lease liabilities | $ | | $ | | ||
Total remaining undiscounted lease liabilities related to the above lease are as follows:
| |||
2023 | $ | | |
2024 |
| | |
2025 |
| | |
2026 | | ||
2027 | | ||
2028 | | ||
Total lease payments | $ | | |
Less imputed interest | | ||
Total | $ | |
21
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
Our weighted-average remaining lease term and discount rate are as follows:
Nine Months Ended | ||
Weighted-average remaining lease term | ||
Weighted-average discount rate |
Rent expense for the nine months ended September 30, 2023 and 2022 was $
13. Stock-Based Compensation
During the three and nine months ended September 30, 2023, the Company issued
During the three and nine months ended September 30, 2022, the Company issued
The continuity of stock options are as follows:
Number of | Weighted Avg | |||||
Options | Exercise Price | |||||
Balance at December 31, 2022 |
| |
| $ | |
|
Stock options granted |
| | | |||
Stock options forfeited |
| | | |||
Vested stock options expired |
| | | |||
Balance at September 30, 2023 |
| | $ | | ||
Vested at September 30, 2023 |
| | $ | | ||
As of September 30, 2023, details of the issued and outstanding stock options are as follows:
Grant Year |
| Weighted Avg. |
| Number of Options |
| Number of |
| Number of |
| Weighted Avg. |
2020 | | | | | ||||||
2021 |
| |
| |
| |
| |
| |
2022 |
| |
| |
| |
| |
| |
2023 |
| |
| |
| — |
| |
| |
Balance at September 30, 2023 |
|
| |
| |
| |
|
|
The Company calculates volatility of stock-based compensation using the historical price of the Company’s stock. An increase/decrease in the volatility would have resulted in an increase/decrease in the fair value of the options.
22
Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
The fair value of options granted during the three months ended September 30, 2023 and the twelve months ended December 31, 2022 were estimated using the Black-Scholes option pricing model to determine the fair value of options granted using the following assumptions:
Grant Year |
| Weighted Avg. |
| Weighted Avg. |
| Weighted Avg. | Weighted Avg. | Weighted Avg. | ||||||
2020 | | % | | % | $ | | $ | | ||||||
2021 | | | | | ||||||||||
2022 | | | | | ||||||||||
2023 | | | | |
For the three months and nine months ended September 30, 2023, the Company recorded $
14. Warrants
The Company values warrants issued in equity placements using the Black Scholes model to allocate the fair value of the proceeds from equity financings using a relative fair value approach. Like other stock-based compensation, management uses judgment to determine the inputs to the Black-Scholes option pricing model including the expected life, and underlying share price volatility. Changes in these assumptions will impact the calculation of fair value and the value attributed to the warrants. The Company calculates volatility of warrants based on the historical price of the Company’s stock. An increase/decrease in the volatility would have resulted in an increase/decrease in the fair value of the options.
In connection with the July 1, 2022 asset acquisition of Revo Squared, the Company issued a
In connection with the July 15, 2022 asset acquisition of Assisi, the Company issued a
As of September 30, 2023, details of the outstanding warrants were as follows:
|
|
| Weighted | |||
Average | ||||||
Exercise | Warrants | Remaining | ||||
Original Issue date | Price | Outstanding | Life | |||
February 14, 2020 (Series A) | | | ||||
April 9, 2020 (Series B) | | | ||||
May 29, 2020 (Series C) | | - | - | |||
July 7, 2020 (Series D) | | - | - | |||
July 1, 2022 (Revo Squared) | | | ||||
July 15, 2022 (Assisi) | | | ||||
Balance at September 30, 2023 |
|
|
| |
|
|
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Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
Cumulative warrants exercised and expired as of September 30, 2023 were as follows:
| Warrants |
|
|
| Warrants |
|
| |||
Warrant Series |
| Exercised |
| Amount |
| Expired |
| Amount | ||
February 14, 2020 (Series A) |
| | $ | |
| — | $ | — | ||
April 9, 2020 (Series B) |
| |
| |
| — |
| — | ||
May 29, 2020 (Series C) |
| |
| |
| |
| | ||
July 7, 2020 (Series D) |
| |
| |
| |
| | ||
July 1, 2022 (Revo Squared) |
| — |
| — |
| — |
| — | ||
July 15, 2022 (Assisi) |
| — |
| — |
| — |
| — | ||
Total |
| | $ | |
| | $ | |
15. Income Taxes
The Company is in an overall net deferred tax liability position as of September 30, 2023. Management has assessed that the future taxable income resulting from the deferred tax liability position will result in utilization of the Company’s US federal and state net operating loss carryforwards in future tax periods. The Company is in a net deferred tax asset position in Canada and a full valuation allowance against the Canada deferred tax assets remains necessary as a result of the historical losses and the uncertainty of realizing any future tax benefits related to the Canadian deferred tax assets. The Company’s effective tax rate varies from the statutory federal rate primarily due to the change in valuation allowance.
16. Commitments and Contingencies
From time to time, the Company may be exposed to claims and legal actions in the normal course of business. As of September 30, 2023, and continuing as of November 13, 2023, the Company is not aware of any pending or threatened material litigation claims against the Company.
On May 10, 2018, the Company entered into a Development, Commercialization and Exclusive Distribution Agreement. As part of the agreement, the Company is required to make the following future milestone payments:
| ● | 1st payment: $ |
| ● | 2nd payment: $ |
As of September 30, 2023, none of the future development milestones related to the above agreement have been met. The Company has assessed the probability of meeting the above milestones and has determined that an accrual is not necessary as of September 30, 2023 and December 31, 2022.
On January 17, 2023, the Company entered into a series of agreements with Qorvo Biotechnologies, LLC. Under the terms of these agreements, the Company has the obligation:
| ● | to purchase a minimum quantity of production and development cartridges for the period beginning on the date the parties entered into the agreements and ending on the earlier of the date Zomedica notifies Qorvo to stop production or December 31, 2024; |
| ● | to purchase a minimum quantity of BAW Sensors commencing on the Transition Date and continuing as long as Zomedica has a license from Qorvo to manufacture the cartridges, subject to each party’s rights to early termination including Zomedica’s right to terminate at any time with 90 days prior written notice; and |
| ● | to pay a royalty to Qorvo on the sale of cartridges after the Transition Date |
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Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
See 20. Subsequent Events for additional detail around the October 4th acquisition of Qorvo Biotechnologies, LLC.
17. Segment Information
The Company’s operations are comprised of
| ● | Diagnostics, which consists of TRUFORMA®, VetGuardian®, and TRUVIEW™ products; |
| ● | Therapeutic Devices, which consists of Assisi® and PulseVet® products |
The Company’s Chief Operating Decision Maker (CODM) is its Chief Executive Officer who has ultimate responsibility for enterprise decisions.
Although our reportable segments provide similar products, each one is managed separately to better align with the Company’s customers and distribution / development partners. The CODM determines resource allocation for, and monitors performance of, the consolidated enterprise, the Diagnostics segment, and the Therapeutic Devices segment together. The CODM relies on internal segment reporting that analyzes results on certain key performance indicators, namely, revenues and gross profit. Costs below gross profit are not allocated to the segments.
The following is a reconciliation of consolidated revenue, cost of revenue, and gross profit amongst our reportable segments as of September 30, 2023:
| Diagnostics |
| Therapeutic |
| Consolidated |
| ||||
Net revenue | $ | | $ | | $ | | ||||
Cost of revenue |
| |
| |
| | ||||
Gross profit | $ | ( | $ | | $ | | ||||
18. Loss Per Share
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Numerator |
|
|
|
| ||||||||
Net loss for the period | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Charge to retained earnings for preferred share exchange |
| - |
| - |
| - |
| - | ||||
Loss attributable to common shareholders | ( | ( | ( | ( | ||||||||
Denominator |
|
| ||||||||||
Weighted average shares - basic |
| | | | | |||||||
Loss per share - basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | ||||
As of September 30, 2023, and 2022, the Company had stock options outstanding of
19. Related Party Transactions
No significant related party transactions for the period ending September 30, 2023.
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Zomedica Corp.
Notes to the Consolidated Financial Statements
(United States Dollars in Thousands)
20. Subsequent Events
On October 4, 2023, Zomedica Inc. entered into an LLC membership interest purchase agreement with Qorvo US, Inc., pursuant to which Zomedica Inc. acquired
Qorvo Biotechnologies, LLC developed the TRUFORMA® Platform that utilizes innovative Bulk Acoustic Wave sensor technology to provide a non-optical and fluorescence free system for the detection of disease at the point of care.
Under the acquisition, two of the agreements with Qorvo Biotechnologies, LLC were terminated. As a result of these terminations, Zomedica Inc. is no longer required to purchase a minimum quantity of production and development cartridges, nor is it required to pay a royalty. The obligation to purchase BAW Sensors survives the acquisition, but the obligation to supply the BAW Sensors was transitioned for Qorvo Biotechnologies, LLC to Qorvo US, Inc.
In addition, Zomedica Inc. entered into a Transition Services Agreement which allows Zomedica Inc. and Qorvo Biotechnologies, LLC to obtain administrative services related to IP transfer, IT support and accounting matters for a period of 60- 90 days following the acquisition.
As of November 13, 2023, no estimate is yet available as to the impact this transaction will have on the Company’s financial statements, including any adjustments required to currently held assets and liabilities. We will continue to assess the transaction as part of our normal Purchase Accounting procedures and will include initial allocation values for the purchase price as part of our 2023 Form 10-K filing.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
(All amounts are expressed in thousands unless otherwise indicated)
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and financial condition of the Company. The Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto for the quarter ended September 30, 2023. This report contains forward-looking statements or forward-looking information (collectively, “forward-looking statements”) made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, as well as the safe harbor provisions of applicable Canadian securities legislation, that are based on management’s beliefs and assumptions and involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact.
Forward-looking statements can also be identified by words such as “future”, “anticipates”, “believes”, “projects”, “estimates”, “expects”, “intends”, “plans”, “predicts”, “will”, “should”, “would”, “could”, “can”, “may”, or similar terms. Forward-looking statements are not guarantees of future performance and Zomedica’s actual results may differ significantly from the results discussed in the forward-looking statements. Zomedica cautions that these statements are subject to numerous important risks, uncertainties, assumptions, and other factors, some of which are beyond Zomedica’s control. These risks could cause Zomedica’s actual results to differ materially from those expressed or implied by such forward-looking statements, including, among others, risks related to adverse macroeconomic conditions; changes in consumer confidence and spending in response to economic volatility; adverse consequences of the COVID-19 pandemic; our ability to develop and commercialize our products; our ability to integrate our acquisitions successfully into our business; supply chain disruptions that increase our costs and impair our ability to manufacture our products; our ability to attract and keep senior management and key scientific personnel; our ability to obtain and maintain intellectual property protection; our ability to maintain the listing of our common shares on the NYSE American exchange; the accuracy of our estimates regarding expenses, future revenues, and capital requirements; and the “Risk Factors” described in our Annual Report on Form 10-K for the year ended December 31, 2022, Form 10-Q for the quarters ended March 31, and June 30, 2023, and in this report. The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We undertake no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations, except as required by applicable law.
Overview
We are a veterinary health company creating and marketing products for companion animals by focusing on the unmet needs of clinical veterinarians. Our mission is to enrich the lives of the animals we love and the people that care for them by providing products and technologies that improve patient care and enhance the economic health of veterinary practices. Our product portfolio includes innovative diagnostics and therapeutic medical devices that emphasize patient health and enhancing practice economics.
We currently have six discrete platforms in our product portfolio:
Diagnostic Products
| - | our TRUFORMA® platform, comprising point-of-care diagnostic products for disease states in dogs and cats, providing assays for use at the point-of-care that provide reference lab accuracy, thereby enabling practitioners to diagnose and treat diseases sooner; |
| - | our TRUVIEW™ platform which consists of the TRUVIEW digital cystoscopy instrument providing microscopic images and related pathology services which enable practitioners to receive a Pathologist interpretation of the images; |
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| - | our Revo Squared® imaging platform, comprising diagnostic imaging products and services for use in animal health, including the SONOVIEW™ ultrasound system; and |
| - | our VetGuardian® platform, which provides continuous wireless monitoring of pets’ vital signs and provides them remotely to veterinarian practice staff, along with alert messaging should the vital signs rise or fall out of range, to assist in rapidly diagnosing issues; |
Therapeutic Device Products
| - | our world-leading PulseVet® platform, which provides for non-invasive electro-hydraulic shock wave treatment of a wide variety of conditions in horses and small animals, including osteoarthritis, tendon and ligament healing, bone healing, chronic pain relief and wound healing, to promote healing and reduce the need for surgery and/or medication; and |
| - | our Assisi Loop® platform including a series of products that use targeted Pulsed Electromagnetic Field (tPEMF) therapy to decrease pain and inflammation and accelerate healing or reduce anxiety. |
As a result of an internal strategic review, we have focused our development and commercialization efforts on our TRUFORMA®, Revo Squared, TRUVIEW™, VetGuardian, PulseVet, and Assisi Loop platforms. We believe this narrowed focus will enable us to capitalize on our core strengths and to accelerate the commercialization of these existing platforms.
For the foreseeable future, we expect to continue to incur losses, which we expect will begin to decrease from historical levels as we continue to rapidly grow our Therapeutic Device segment, continue the commercialization of our Diagnostic products, and expand our product development and sales and marketing activities.
Revenue
Our revenue consisted of consumables sold in the U.S. and internationally associated with our Assisi products; capital and consumables sold in the U.S and internationally associated with our PulseVet platform; capital associated with our Revo Squared products; consumables sold in the U.S associated with our TRUFORMA platform; capital and consumables sold in the U.S. associated with our TRUVIEW products; and capital sold in the U.S. associated with our VetGuardian products.
Cost of Revenue
Cost of revenue consisted primarily of the cost of raw materials used in the assembly of PulseVet capital and consumables, the cost of TRUFORMA consumables purchased, and the cost of Assisi parts purchased and related sub-components. We expense all inventory obsolescence provisions related to normal manufacturing changes as cost of revenue.
Operating Expenses
Our current operating expenses consist of three components — general and administrative expenses, research and development expenses, and selling and marketing expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, wages, and overhead costs incurred to support our business as a publicly traded company. The functions involved include Accounting, Business Development, Finance, HR, Information Technology, Investor Relations, Legal, and portions of other functional areas. Included within these support costs are significant public company expenses such as stock exchange fees, annual meeting expenses, and audit, tax, Sarbanes-Oxley and other compliance costs.
Research and Development Expenses
Research and development expenses consist of salaries and related expenses for R&D personnel, fees paid to consultants and outside service providers, travel costs, and materials used in clinical trials and general research and development. These costs are primarily focused on leveraging our recent acquisition of Qorvo into new assay development for our TRUFORMA platform, expanding capabilities and usability within existing products, and exploring new market opportunities.
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Selling and Marketing Expenses
Selling and marketing expenses consist of personnel costs (including salaries, related benefits, and stock-based compensation) and costs associated with sales and marketing activities (including conference and tradeshow attendance, sponsorships, and general advertising and promotional activities).
U.S. Taxes
As of December 31, 2022, we had net operating loss carryforwards for U.S. federal and state income tax purposes of $32,456 and non-capital loss carryforwards for Canada of $46,384, which will begin to expire in fiscal year 2035. We have evaluated the factors bearing upon the realizability of our deferred tax assets, which are comprised principally of net operating loss carryforwards and non-capital loss carryforwards. We concluded that, due to the limitations under Section 382 of the Code, our U.S. federal and state net operating loss carryforwards for the periods prior to February 11, 2021 have been limited to zero. We therefore have derecognized $21,013 of our U.S. deferred tax assets, resulting in a remaining carryforward balance of $11,443.
Inflation Reduction Act
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for a new U.S. federal 1% excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023.
The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions apply to the excise tax, such as repurchases under $1 million.
Any redemption or other repurchase that occurs after December 31, 2022, in connection with a business combination, extension vote or otherwise, may be subject to the excise tax. Whether and to what extent we would be subject to the excise tax in connection with a business combination, extension vote or otherwise would depend on a number of factors, including (i) the fair market value of the redemptions and repurchases in connection with the business combination, extension or otherwise; (ii) the structure of a business combination; (iii) the nature and amount of any equity issuances in connection with a business combination (or otherwise issued not in connection with a business combination but issued within the same taxable year of a business combination); and (iv) the content of regulations and other guidance from the U.S. Department of the Treasury.
The IR Act also included a new 15% Corporate Alternative Minimum Tax (“CAMT”) that acts as a new book minimum tax of at least 15% of consolidated GAAP pre-tax income for corporations with average book income in excess of $1 billion. Any increase in our effective tax rate will depend on a number of factors, including any offsets for general business credits or changes in book income following business combinations. The CAMT is effective for tax years beginning on or after January 1, 2023. Lastly, the IR Act also creates several potentially beneficial tax credits to incentivize investments in certain technologies and industries.
We are in the process of evaluating the potential impacts of the IR Act. While we do not believe the IR Act will have a material negative impact on our business or our financial performance, the effects of the measures are unknown at this time. Our analysis is ongoing and incomplete, and it is possible that the IR Act could ultimately have a material adverse effect on our tax liability. We continue to monitor the IR Act and related regulatory developments to evaluate their potential impact on our business, tax rate and financial results.
Canadian Taxes
In Canada, due to the uncertainty of realizing any tax benefits as of September 30, 2023, we continue to record a full valuation allowance against our Canadian deferred tax assets.
Translation of Foreign Currencies
The functional currency, as determined by management, for our subsidiaries in the United States, Switzerland, and Canada is the U.S. dollar, which is also our reporting currency.
The functional currency, as determined by management, for our Japanese subsidiary is the Japanese Yen. Japanese Yen are translated for financial reporting purposes with translation gains and losses recorded as a component of other comprehensive income or loss.
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Stock-Based Compensation
We measure the cost of equity-settled transactions by reference to the fair value of the equity instruments at the date at which they are granted.
We calculate stock-based compensation using the fair value method, under which the fair value of the options at the grant date is calculated using the Black-Scholes Option Pricing Model, and subsequently expensed over the vesting period of the option using the graded vesting method. The provisions of our stock-based compensation plans do not require us to settle any options by transferring cash or other assets, and therefore we classify the awards as equity. Stock-based compensation expense recognized during the period is based on the value of stock-based payment awards that are ultimately expected to vest. We estimate forfeitures at the time of grant and revise these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The expected term, which represents the period of time that options granted are expected to be outstanding, is estimated based on an average of the term of the options. The risk-free rate assumed in valuing the options is based on the Canadian treasury yield curve in effect at the time of grant for the expected term of the option. The expected dividend yield percentage at the date of grant is zero as we are not expected to pay dividends in the foreseeable future.
Loss Per Share
Basic loss per share, or EPS, is computed by dividing the loss attributable to common shareholders by the weighted average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur from common shares issuable through the exercise or conversion of stock options, restricted stock awards, warrants and convertible securities. In certain circumstances, the conversion of options, warrants and convertible securities are excluded from diluted EPS if the effect of such inclusion would be anti-dilutive.
Comprehensive Loss
We follow FASB ASC topic 220. This statement establishes standards for reporting and display of comprehensive (loss) income and its components. Comprehensive loss is net loss plus certain items that are recorded directly to shareholders’ equity.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue, costs and expenses, and related disclosures during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those described below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 3 of the notes to our consolidated financial statements, management has identified the following as “Critical Accounting Policies and Estimates”: Intangible Assets and Business Combinations; Impairment Testing; Valuation and Payback of Property and Equipment; and Revenue Recognition and Liabilities Due to Customers. We believe that the estimates and assumptions involved in these accounting policies may have the greatest potential impact on our financial statements.
Intangible Assets and Business Combinations
Assets acquired and liabilities assumed as part of a business combination are recognized at their acquisition date fair values. In determining fair values for recent business combinations, we utilize various forms of the income, cost, and market approaches depending on the asset or liability being valued.
We use a discounted cash flow model to measure the customer relationship, developed technology, license, trademark, and tradename assets. The estimation of fair value requires significant judgment related to future net cash flows based on assumptions related to revenue and EBITDA growth rates, discount rates, and attrition factors. Inputs are generally determined by taking into account competitive trends, market comparisons, independent appraisals, and historical data, among other factors, and were supplemented by current and anticipated market conditions. Variances in future cash flows, anticipated growth rates, and revenue could significantly impact the value assigned to intangible assets. Any variance could cause impairment charges upon testing.
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Impairment Testing
We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change indicating the carrying value may not be recoverable. When testing goodwill for impairment, we may first assess qualitative factors to determine if it is more likely than not the carrying value of a reporting unit exceeds its estimated fair value. During a qualitative analysis, we consider the impact of changes, if any, to the following factors: macroeconomic, industry and market factors; cost factors; changes in overall financial performance; and any other relevant events and uncertainties impacting a reporting unit. If our qualitative assessment indicates a goodwill impairment is more likely than not, we perform additional quantitative analyses. We may also elect to skip the qualitative testing and proceed directly to the quantitative testing. For reporting units where a quantitative analysis is performed, we perform a test measuring the fair values of the reporting units and comparing them to their aggregate carrying values, including goodwill. If the fair value is less than the carrying value of the reporting unit, an impairment is recognized for the difference, up to the carrying amount of goodwill.
We estimate the fair values of our reporting units using a discounted cash flow method or a weighted combination of discounted cash flows and a market-based method. The discounted cash flow method includes assumptions about a wide variety of internal and external factors. Significant assumptions used in the discounted cash flow method include financial projections of free cash flow, including revenue trends, medical costs trends, operating productivity, income taxes and capital levels; long-term growth rates for determining terminal value beyond the discretely forecasted periods; and discount rates. Financial projections and long-term growth rates used for our reporting units will be consistent with, and use inputs from, our internal long-term business plan and strategies.
Discount rates will be determined for each reporting unit and include consideration of the implied risk inherent in their forecasts. Our most significant estimate in the discount rate determinations involves our adjustments to the peer company weighted average costs of capital reflecting reporting unit-specific factors. We do not make any adjustments to decrease a discount rate below the calculated peer company weighted average cost of capital for any reporting unit. Company-specific adjustments to discount rates are subjective and thus are difficult to measure with certainty.
The passage of time and the availability of additional information regarding areas of uncertainty with respect to the reporting units’ operations could cause these assumptions to change in the future. Additionally, as part of our quantitative impairment testing, we perform various sensitivity analyses on certain key assumptions, such as discount rates, cash flow projections, and peer company multiples to analyze the potential for a material impact. The market-based method requires determination of an appropriate peer group whose securities are traded on an active market. The peer group is used to derive market multiples to estimate fair value.
Valuation and Payback of Property and Equipment
Diagnostic based TRUFORMA® capital is placed in fixed assets once purchased or manufactured, where they remain, undepreciated, until they are placed with our customers under the agreement that they will repeatedly purchase consumables or services which are utilized within. Each instance of this placed capital represents an asset that we own. An estimate is made of the anticipated future revenue over its respective life which is ten years. If the payback period of the initial investment in the asset is less than the ten-year life of the asset, we conclude that the assets have been properly recorded, and no write-down is necessary. We rely on various data points and assumptions, including, but not limited to, the expected volume of consumables which will be sold, anticipated growth rates, and anticipated placements. Realization of the anticipated revenue is dependent on the current assumptions and forecasted models.
The customer is obligated to purchase consumables during the placement period. However, since the customer is not obligated to purchase the capital, and can return it at any time, we are exposed to a risk of loss to the extent the customer returns the capital and discontinues consumable or related service purchases.
On September 30, 2023, the carrying value of our Diagnostic instruments was $5,683. Significant assumptions included in the realization model are the rate of placement and expected utilization over the life of the instrument.
The effect of a 25% reduction in the estimated revenues associated with annual placements of instruments would increase the payback period on September 30, 2023 from 5.16 years to 7.24 years.
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Revenue Recognition and Liabilities Due to Customers
The nature of our Therapeutic Device business segment gives rise to variable consideration, including discounts and applicator (“trode”) returns for refurbishment. Credits are issued for unused shocks on returned trodes, which can be used toward the purchase of replacement trodes. When revenue is recognized, a simultaneous adjustment for returns is estimated, reducing revenue. Estimated return credits are presented as a reduction to gross sales with the corresponding reserve presented as customer contract liabilities.
Variable consideration related to unused shock credits is calculated using the expected value method, which estimates the amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. Estimates of variable consideration are based upon historical experience and known trends. These estimated credits are non-refundable and may only be used towards the purchase of future trode refurbishments. This practice encourages refurbishment purchase prior to complete utilization of the previous trode, enabling the customer to always have a trode on hand with ample capacity to perform treatments.
The number of trodes returned by year is tracked against the number of trodes sold in that same year, creating a current experience rate. It is assumed that the ultimate return rate for the trodes is 98%. For annual calculations, it is assumed that the expected returns in the current year for each layer increase to the experience rate of the year immediately preceding it. Once the 98% is reached the layer is removed from the calculation. The annual incremental change in expected returns is multiplied by an average return credit amount, generating the current liability due to customers.
The average return credit is calculated by dividing the actual shock credits issued by the actual number of trodes returned. A variance in the assumed return rate compared to the actual rate would impact the estimate and potentially understate net sales (overestimated rate) or overstate net sales (underestimated rate) in any given year and create a corresponding misstatement of the liability due to customers.
On September 30, 2023, the estimated value of our Therapeutic Device customer contract liability was $527. If the expected return rate was increased by 2%, the effect on current year reduction in sales and customer liability would have been approximately $54.
Results of Consolidated Operations
Our results of operations for the three and nine months ended September 30, 2023 and 2022 are as follows:
Revenue
Revenue for the three months ended September 30, 2023 was $6,347, compared to $4,776 for the three months ended September 30, 2022, an increase of $1,571 or 33%. Revenue for the nine months ended September 30, 2023 was $17,849, compared to $12,773 for the nine months ended September 30, 2022, an increase of $5,076 or 40%.
The increase for both comparative periods was primarily due to organic growth and the inclusion of our VetGuardian® and TRUVIEW™ products which were not part of our consolidated figures as of September 30, 2022.
We benefited this quarter from expected seasonality and expect that these seasonality benefits will continue through the balance of the year.
Cost of Revenue
Cost of revenue for the three months ended September 30, 2023 was $1,985, compared to $1,265 for the three months ended September 30, 2022, an increase of $720 or 57%. Cost of revenue for the nine months ended September 30, 2023 was $5,604, compared to $3,516 for the nine months ended September 30, 2022, an increase of $2,088 or 59%.
The increase in cost for both comparative periods was primarily driven by increased manufacturing expense as a result of increased sales and rising input costs.
We anticipate that costs of revenue will increase in subsequent periods in accordance with the increased revenue as described above.
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Gross Profit
Gross profit margin for the three months ended September 30, 2023 was 69%, compared to 74% for the three months ended September 30, 2022. Gross profit margin for the nine months ended September 30, 2023 was 69%, compared to 72% for the nine months ended September 30, 2022.
The decrease in gross profit margin % for both comparative periods was primarily due to the integration and launch of several new products, product mix impacts associated with sales of these new offerings, and price increases of certain component parts. In general, we believe gross margins will return to historic levels in the coming quarters.
General and Administrative
General and administrative expense for the three months ended September 30, 2023 was $6,115, compared to $5,153 for the three months ended September 30, 2022, an increase of $962 or 19%. General and administrative expense for the nine months ended September 30, 2023 was $19,977, compared to $17,691 for the nine months ended September 30, 2022, an increase of $2,286 or 13%.
The increase for the three months ended September 30, 2023 was primarily driven by growth in headcount within our support functions, including creation of a new pathology department to support our TRUVIEW™ digital microscopy system, Qorvo transition and other acquisition related expenses, and infrastructure improvements to build and support our growing suite of products and capabilities.
The increase for the nine months ended September 30, 2023 was primarily driven by salaries and noncash stock option expense associated with increased hiring campaigns, noncash amortization related to our Assisi / Revo acquisitions, recruiting and other related fees associated with creation of a new Pathology department, and our transition to a new Chief Financial Officer.
We expect future general and administrative expense to normalize and grow proportionately with sales and related product expansion.
Research and Development
Research and development expense for the three months ended September 30, 2023 was $867, compared to $1,215 for the three months ended September 30, 2022, a decrease of $348 or 29%. Research and development expense for the nine months ended September 30, 2023 was $2,645, compared to $1,885 for the nine months ended September 30, 2022, an increase of $760 or 40%.
The decrease for the three months ended September 30, 2023 was primarily driven by higher research fees for assay development, in the same period a year ago.
The increase for the nine months ended September 30, 2023 was primarily driven by our continued buildup of internal capabilities to develop, test, and manufacture our next generation of diagnostic products.
We anticipate that R&D costs will increase as we maintain and enhance our current product lines and continue to develop new products.
Selling and Marketing
Selling and marketing expense for the three months ended September 30, 2023 was $3,328, compared to $3,735 for the three months ended September 30, 2022, a decrease of $407 or 11%. Selling and marketing expense for the nine months ended September 30, 2023 was $9,826, compared to $6,468 for the nine months ended September 30, 2022, an increase of $3,358 or 52%.
The decrease for the three months ended September 30, 2023 was primarily driven by synergies now being derived by the PulseVet® acquisition.
The increase for the nine months ended September 30, 2023 was primarily driven by salaries and noncash stock option expense associated with increased hiring campaigns and increased marketing campaigns / attendance at tradeshows to build brand awareness and recognition of our expanding suite of products.
We expect future selling, general and administrative expense to increase in line with product expansion and growth in our commercialization efforts.
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Net Loss
Net loss for the three months ended September 30, 2023 was $491, compared to a loss of $4,995 for the three months ended September 30, 2022, an improvement of $4,504 or 90%. Net loss for the nine months ended September 30, 2023 was $12,123, compared to a loss of $14,206 for the nine months ended September 30, 2022, an improvement of $2,083 or 15%.
The net loss for each comparative period was attributed to the matters described above as well as due to tax related benefits attained as part of the SMP acquisition. We expect to continue to record net losses in future periods until such time as we have sufficient revenue from product sales to offset our operating expenses.
Cash Flows
The following table shows a summary of our cash flows for the periods set forth below:
| Nine Months Ended September 30, | ||||||||||
| 2023 |
| 2022 |
| Change | ||||||
Cash used in operating activities | $ | (10,960) | $ | (9,287) | $ | (1,673) |
| 18% | |||
Cash provided by (used in) investing activities |
| 5,406 |
| (140,529) | 145,935 |
| (104)% | ||||
Cash provided by financing activities |
| — |
| 8 | $ | (8) |
| (100)% | |||
(Decrease) increase in cash and cash equivalents |
| (5,554) |
| (149,808) | 144,254 |
| (96)% | ||||
Effect of exchange rate changes on cash |
| (62) |
| (49) | (13) |
| 27% | ||||
Cash and cash equivalents, beginning of period |
| 27,399 |
| 194,952 | (167,553) |
| (86)% | ||||
Cash and cash equivalents, end of period | $ | 21,783 | $ | 45,095 | $ | (23,312) |
| (52)% | |||
Net cash used in operating activities for the nine months ended September 30, 2023 was $10,960, compared to $9,287 for the nine months ended September 30, 2022, an increase in cash used of $1,673 or 18%. The increase in cash used in operations primarily resulted from SMP related acquisition gains, non-cash accretion on currently held available-for-sale securities, a decrease in non-cash stock based compensation, and an increase in operating spend offset by increases in non-cash depreciation and amortization, lower inventory purchases, and an increase in prepaid expenses and deposits.
Net cash for investing activities for the nine months ended September 30, 2023 was an inflow of $5,406, compared to cash used of $140,529 for the nine months ended September 30, 2022, an increase in cash of $145,935 or 104%. The increase in cash in investing activities primarily resulted from a significant reduction in spend on available for sale securities and acquisitions as compared to 2022 (which showed as a significant outflow) offset by Qorvo and SMP related intangibles and the buildup of construction in progress related to facility expansion, MyZomedica platform development, and production of TRUVIEW™ devices for launch preparation.
There was no cash provided by financing activities for the nine months ended September 30, 2023 as compared to $8 for the nine months ended September 30, 2022.
Liquidity and Capital Resources
We have incurred losses and negative cash flows from operations since our inception in May 2015. As of September 30, 2023, we had an accumulated deficit of $148,526. We have funded our working capital requirements primarily through the sale of our equity and equity-related securities and the exercise of stock options and warrants.
As of September 30, 2023, the Company had working capital (defined as current assets minus current liabilities) of $108,654.
Short-Term Cash Requirements
We believe that our existing cash is sufficient to fund our expected short-term needs. We currently have fixed obligations in association with our building leases and quarterly inventory orders. We also have payment obligations associated with our on-going clinical studies, and we expect that we have sufficient cash to cover these requirements. We do not expect that our operations will require significant increases in our short-term cash needs.
Long-Term Cash Requirements
We believe that our existing cash resources will be sufficient to fund our expected operational requirements for the foreseeable future. We regularly evaluate our business plans and strategy. These evaluations often result in changes to our business plans and strategy,
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some of which may be material and significantly change our cash requirements. Ongoing business development activity may also require us to use some of our liquidity and use of additional capital to fund newly acquired operations. If we raise additional funds by issuing equity securities, our existing security holders will likely experience dilution, and the incurring of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict operations.
Our future capital requirements depend on many factors, including, but not limited to:
| ● | the costs and timing of our development and commercialization activities; |
| ● | the cost of manufacturing our existing and future products; |
| ● | the cost of marketing and selling our existing and future products including marketing, sales, service, customer support and distribution costs; |
| ● | the expenses needed to attract and retain skilled personnel; |
| ● | the costs associated with being a public company; |
| ● | the costs associated with additional business development or mergers and acquisitions activity, including acquisition-related costs, earn-outs or other contingent payments and costs of developing and commercializing any technologies to which we obtain rights; |
| ● | third-party costs associated with the development and commercialization of our existing and future products and the ability of our development partners to satisfy our requirements on a timely basis; |
| ● | the scope and terms of our business plans from time to time, and our ability to realize upon our business plans; and |
| ● | the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing possible patent claims, including litigation costs and the outcome of any such litigation. |
Climate Change
Zomedica is committed to responsible practices regarding the use of natural resources. Increased public awareness and concern about climate change will likely continue to (1) generate more regional and/or national requirements to reduce greenhouse gas emissions; (2) increase energy efficiency and reduce carbon pollution; and (3) cause a shift to cleaner and more sustainable sources of energy which may be more expensive than using fossil fuels as an energy source.
The potential impact of climate change on our operations and the needs of our customers remains uncertain. Scientists have proposed that the impacts of climate change could include changes in rainfall patterns, water shortages, changes to the water levels of lakes and other bodies of water, changing storm patterns, more intense storms and changing temperature levels. These changes could be severe and vary by geographic location. Climate change may also affect the occurrence of certain natural events, the incidence and severity of which are inherently unpredictable.
The effects of climate change also may impact our decisions to construct new buildings or maintain existing facilities in any areas that are or become prone to physical risks, which could similarly increase our operating costs. We could also face indirect financial risks passed through the supply chain that could result in higher prices for resources, such as energy. Additionally, climate change may adversely impact the demand, price and availability of property and casualty insurance that insures our physical assets. Due to significant economic variability associated with future changing climate conditions, we are unable to predict the impact climate change will have on us in the future.
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Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Evaluation of Our Disclosure Controls
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that material information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2023, our disclosure controls and procedures were effective.
Changes in Internal Controls
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Except as set forth below, there have been no material changes in our risk factors from those previously disclosed in our annual report on Form 10-K for the year ended December 31, 2022.
We are subject to the continued listing requirements of the NYSE American. If we are unable to comply with such requirements, our common shares could be delisted from the NYSE American, which will limit investors’ ability to effect transactions in our common shares and subject us to additional trading restrictions.
Our common shares are currently listed on the NYSE American. In order to maintain our listing, we must maintain certain share prices, financial and share distribution targets, including maintaining a minimum amount of shareholders’ equity and a minimum number of public shareholders. In addition to these objective standards, the NYSE American may delist the securities of any issuer if, in its opinion, the issuer’s financial condition and/or operating results appear unsatisfactory; if it appears that the extent of public distribution or the aggregate market value of the security has become so reduced as to make continued listing on the NYSE American inadvisable; if the issuer sells or disposes of principal operating assets or ceases to be an operating company; if an issuer fails to comply with the NYSE American’s listing requirements; if an issuer’s common stock sells at what the NYSE American considers a “low selling price” (generally trading below $0.20 per share for an extended period of time); or if any other event occurs or any condition exists which makes continued listing on the NYSE American, in its opinion, inadvisable.
As disclosed in our Current Report on Form 8-K filed with the SEC on September 14, 2023, we received a deficiency letter (the “Letter”) from the NYSE American on September 12, 2023, indicating that the Company was not in compliance with the NYSE American continued listing standards set forth in Section 1003(f)(v) of the NYSE American Company Guide (the “Company Guide”) because our common shares were selling for a substantial period of time at a low price per share, which the NYSE American determined to be a 30-trading day average of less than $0.20 per share.
Pursuant to Section 1003(f)(v) of the Company Guide, the NYSE American staff determined that our continued listing is predicated on demonstrating sustained price improvement within a reasonable period of time. In accordance with NYSE American procedures, we have submitted a business plan to the NYSE American demonstrating how we intend to regain compliance with the minimum stock price.
The business plan focuses on the following:
| ● | continuing top line growth both organically and through acquisitions; |
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| ● | maintaining industry leading margins, leveraging recent integrations to improve those margins, and accelerate the pathway to profitability; and |
| ● | leveraging the Company’s strong balance sheet and cash position to continue to invest in commercial and R&D activities, as well as remaining opportunistically acquisitive. |
Additionally, we intend to consider available alternatives, including, but not limited to, a reverse stock split, subject to shareholder approval at a special or annual meeting of the shareholders, a share repurchase program or other potential capital table restructuring to cure the share price non-compliance. During this cure period, our common shares will continue to be listed on the NYSE American, subject to its compliance with other continued listing requirements.
If we fail to regain compliance during the cure period, or if we fail to meet material aspects of the plan, then the NYSE American may commence suspension and delisting procedures. If the NYSE American delists our common shares from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect our common shares would qualify to be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including:
| ● | a limited availability of market quotations for our securities; |
| ● | reduced liquidity for our securities; |
| ● | a determination that our common shares are a “penny stock” which will require brokers trading in our common shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities; |
| ● | a limited amount of news and analyst coverage; and |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future |
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Item 6. Exhibits.
The exhibits listed on the accompanying index to exhibits immediately preceding the exhibits are filed as part of, or hereby incorporated by reference into, this Quarterly Report.
EXHIBIT INDEX
Exhibit |
| Description |
|---|---|---|
2.1 | ||
3.1 | ||
3.2 | ||
10.1*** | ||
10.2*** | ||
21.1** | ||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1* | ||
101.INS | Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL (1). | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document (1). | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document (1). | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document (1). | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document (1). | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document (1). | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.1) |
* | This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference. |
** | Filed herewith |
*** | Certain identified information has been excluded from this exhibit because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 13, 2023.
Zomedica Corp. | ||
By: | /s/ Larry Heaton | |
Name: | Larry Heaton | |
Title: | Chief Executive Officer | |
(Principal Executive Officer) | ||
By: | /s/ Peter Donato | |
Name: | Peter Donato | |
Title: | Executive Vice President and Chief Financial Officer | |
(Principal Financial and Accounting Officer) | ||
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