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 August 14, 2024,
ZOMEDICA CORP.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
June 30, 2024
TABLE OF CONTENTS
Page | ||
3 | ||
Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023 | ||
Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2024 and 2023 | ||
Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended June 30, 2024 and 2023 | ||
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023 | ||
Notes to the Consolidated Financial Statements | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 | |
36 | ||
37 | ||
37 | ||
38 | ||
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
Zomedica Corp.
Consolidated Balance Sheets as of June 30, 2024 (Unaudited) and December 31, 2023
(United States Dollars in Thousands)
| June 30, |
| December 31, | |||
| 2024 |
| 2023 | |||
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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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 | $ | | $ | | ||
Accrued income taxes |
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Current portion of lease obligations |
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Customer contract liabilities |
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Accrued expenses and 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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Other liabilities |
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Total liabilities | $ | | $ | | ||
Commitments and contingencies (Note 15) |
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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) income |
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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 Six Months Ended June 30, 2024 and 2023
(Unaudited) (United States Dollars in Thousands, Except for Per Share Data)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||||
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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Impairment expense |
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| — |
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| — | |||||
Loss from operations |
| ( |
| ( |
| ( |
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Interest income |
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Interest expense |
| — |
| ( |
| — |
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(Loss) gain on disposal of assets | ( | | ( | | |||||||||
Other income (loss), net |
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| — |
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Foreign exchange (loss) gain |
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| ( |
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Loss before income taxes |
| ( |
| ( |
| ( |
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Income tax (benefit) expense |
| ( |
| ( |
| ( |
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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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| ( |
| ( |
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Change in foreign currency translation |
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| ( |
| ( |
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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 16) | $ | ( | $ | ( | $ | ( | $ | ( | |||||
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 Six Months Ended June 30, 2024 and 2023
(Unaudited) (United States Dollars in Thousands)
| Three Months Ended June 30, 2024 | ||||||||||||||||
Additional | Accumulated | ||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive |
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Shares |
| Amount |
| Capital |
| Deficit |
| Income (Loss) |
| Total | |||||||
Balance at March 31, 2024 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Stock-based compensation |
| — |
| — |
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| — |
| — |
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Stock issuance costs | — |
| — |
| ( |
| — |
| — |
| ( | ||||||
Net loss | — | — | — | ( | — | ( | |||||||||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Balance at June 30, 2024 |
| | $ | | $ | | $ | ( |
| $ | ( | $ | | ||||
| Six Months Ended June 30, 2024 | ||||||||||||||||
Additional | Accumulated | ||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive |
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Shares |
| Amount |
| Capital |
| Deficit |
| Income (Loss) |
| Total | |||||||
Balance at December 31, 2023 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Stock-based compensation |
| — |
| — |
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| — |
| — |
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Stock issuance costs | — |
| — |
| ( |
| — |
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Net loss | — | — | — | ( | — | ( | |||||||||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
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Balance at June 30, 2024 |
| | $ | | $ | | $ | ( |
| $ | ( | $ | | ||||
| Three Months Ended June 30, 2023 | ||||||||||||||||
Additional | Accumulated | ||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive |
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Shares |
| Amount |
| Capital |
| Deficit |
| Income (Loss) |
| Total | |||||||
Balance at March 31, 2023 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Stock-based compensation |
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Net loss |
| — |
| — |
| — |
| ( |
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Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
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Balance at June 30, 2023 |
| | $ | | $ | | $ | ( |
| $ | ( | $ | | ||||
| Six Months Ended June 30, 2023 | ||||||||||||||||
Additional | Accumulated | ||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive |
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Shares |
| Amount |
| Capital |
| Deficit |
| Income (Loss) |
| Total | |||||||
Balance at December 31, 2022 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Stock-based compensation |
| — |
| — |
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Net loss |
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| ( |
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Other comprehensive income |
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| — |
| — |
| — |
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Balance at June 30, 2023 |
| | $ | | $ | | $ | ( |
| $ | ( | $ | | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Zomedica Corp.
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023
(Unaudited) (United States Dollars in Thousands)
| Six Months Ended June 30, | |||||
| 2024 |
| 2023 | |||
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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Impairment loss |
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Loss on disposal of property and equipment |
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Stock-based compensation |
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Non cash portion of rent benefit |
| ( |
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Accretion/amortization of available-for-sale securities |
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Equity in earnings of nonconsolidated entities | | — | ||||
Deferred tax expense |
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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 |
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Accrued income tax |
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Accrued expenses and 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 | ( | ( | ||||
Cash flows from investing activities: |
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Securities matured | | | ||||
Investment in nonconsolidated entities |
| ( |
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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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Net cash provided by investing activities | | | ||||
(Decrease) Increase in cash and cash equivalents | ( | | ||||
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 | $ | ( | $ | | ||
Property and equipment accrued for in accounts payable | | | ||||
Transfer of property and equipment into intangibles | | | ||||
Transfer of inventory into property and equipment | | | ||||
Supplemental cash flow information: |
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Interest received on available-for-sale securities | $ | | $ | | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
1. Nature of Operations
Zomedica Corp. (“Zomedica” or the “Company”) 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.
2. Basis of Preparation
Principles of Consolidation
The condensed 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 condensed consolidated financial statements.
The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim reports. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. The Company’s management believes the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements and the notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on April 1, 2024 (“2023 Form 10-K”).
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 (“ASC 805”), 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 condensed 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 for Canada and our subsidiaries in the United States and Switzerland is U.S. dollars, which is also our reporting currency. The functional currency, as determined by management, for our Japanese subsidiary is Japanese Yen. Japanese Yen is 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’s and its wholly owned operating subsidiaries’
7
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
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 exchange gains or losses resulting from these transactions are recognized in the consolidated statements of operations.
Comparative Figures
To provide further clarity on how we present our operating expenses, we have broken down our selling, general and administrative spend into distinct and separate “General and administrative” and “Selling and marketing” line items on the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2024. The consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2023 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.
To better align with the way we track our business, we’ve combined construction in progress into property and equipment, net, for the six months ended June 30, 2024. The consolidated balance sheets for the year ended December 31, 2023 have been adjusted to conform to the current year presentation of property and equipment, net. The change in presentation had no effect on the reported results in our balance sheets and does not affect previously reported cash flows from investing activities in the consolidated statements of cash flows.
To further enhance the transparency of our financial reporting, we have reclassified “Accounts payable” as its own line item, separating it from “Accounts payable and accrued liabilities.” Furthermore, we combined the accrued liabilities portion of “Accounts payable and accrued liabilities” with amounts previously included in “Other current liabilities” into a new line item, “Accrued expenses and other current liabilities”, to provide a comprehensive view of these obligations as of June 30, 2024. This presentation is supported by the footnote “Accrued Expenses and Other Current Liabilities” in the “Notes to the Condensed Consolidated Financial Statements.” The consolidated balance sheets for the year ended December 31, 2023, have been adjusted to align with the current presentation. The change in presentation had no impact on the reported results in our balance sheets and does not affect previously reported cash flows from operating activities in the consolidated statements of cash flows. Refer to Note 10 for further details.
Recently Adopted Accounting Pronouncements
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The key amendments include: (a) introducing a new requirement to disclose significant segment expenses regularly provided to the chief operating decision maker (“CODM”), (b) extending certain annual disclosures to interim periods, (c) clarifying that single reportable segment entities must apply ASC 280 in its entirety, (d) permitting more than one measure of segment profit or loss to be reported under certain conditions, and (e) requiring disclosure of the title and position of the CODM. This ASU is effective for public entities with fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is in the process of reviewing the impact of this ASU and has not yet determined the impact of the adoption of this ASU on its consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. This ASU is effective for public entities with fiscal years beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted. The Company is in the process of reviewing the impact of this ASU and has not yet determined the impact of the adoption of this ASU on its consolidated financial statements.
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.
8
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
Cash and Cash Equivalents
The Company considers all highly liquid securities with an original maturity of three months or less to be cash equivalents. As of June 30, 2024 and December 31, 2023, the Company's cash balances exceeded federally insured limits by approximately $
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 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 loss.
Accounts Receivable and Allowance for Credit Losses
Accounts receivables 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 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 are 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.
9
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
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.
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 Company also enters into contracts with customers where it receives payment for the consumable products and does not receive additional or separate consideration for the use of the point of care instrument furnished by the Company for the clinical veterinarian’s use. For these contracts, the Company considers the guidance under ASC 842, Leases (“ASC 842”), in order to determine if the furnishing of the point of care instrument to the customer during the period of use creates an embedded lease. If the point of care instrument is identified as a lease, it is classified as an operating lease as it does not meet any of the finance lease criteria per ASC 842. In these arrangements, the consumable products are classified as non-lease components. The Company allocates revenue to these lease and non-lease components based on standalone selling prices or, if not available, a cost-plus approach. Revenue related to the lease component is recognized ratably over the term of the contract. Revenue related to the non-lease components is recognized when control of the product has been transferred to the customer.
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 six months ended June 30, 2024 and 2023 is as follows:
Three Months Ended June 30, | ||||||||||||||||||
Diagnostics | Therapeutic | Consolidated | ||||||||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||||
Capital | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Consumables | | | | | | | ||||||||||||
Other | - | - | | | | | ||||||||||||
Total revenue | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
10
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
Six Months Ended June 30, | ||||||||||||||||||
Diagnostics | Therapeutic | Consolidated | ||||||||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||||
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.
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 (“ASC 740”), 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 within, 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
Our comprehensive loss is reported in accordance with ASC 220, Income Statement — Reporting Comprehensive Income (“ASC 220”). 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.
11
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
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 revision affects both current and future periods.
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
12
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
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.
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 June 30, 2024 and December 31, 2023 (in thousands):
Balance at June 30, 2024 | 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, 2023 | Acquisition | Accretion / | Unrealized | Estimated | ||||||||
Commercial paper | $ | | $ | | $ | | $ | | ||||
Corporate notes / bonds | | | ( | | ||||||||
Money market funds | | — | — | | ||||||||
U.S. govt. agencies | | | ( | | ||||||||
U.S. treasuries | | | ( | | ||||||||
Total investment securities | $ | | $ | | $ | ( | $ | |
13
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
Accretion / (amortization) refers to the discounts and premiums incurred on bonds and notes purchased and are included within Interest income on our consolidated statements of operations and comprehensive loss.
Accrued interest receivable, related to the above investment securities, as of June 30, 2024 and December 31, 2023 amounted to $
Acquisition | Estimated | |||||
Original maturities of 90 days or less | $ | | $ | | ||
Original maturities of 91-365 days | | | ||||
Original maturities of 366+ days | | | ||||
Total investment securities | $ | | $ | |
6. Fair Value Measurements
In accordance with FASB ASC 820, Fair Value Measurement (“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 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 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.
14
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
In accordance with the fair value hierarchy described above, the following table shows the fair value of our investments as of June 30, 2024 and December 31, 2023:
Balance at June 30, 2024 | 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, 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 | $ | | $ | | $ | — | $ | |
The following tables shows our investments as of June 30, 2024 and December 31, 2023 and their respective balance sheet classifications:
Balance at June 30, 2024 | Cash & | Available- | Available- | Estimated | ||||||||
Commercial paper | $ | — | $ | | $ | — | $ | | ||||
Corporate notes / bonds | — | | | | ||||||||
Money market funds | | — | — | | ||||||||
U.S. govt. agencies | — | | — | | ||||||||
U.S. treasuries | — | | — | | ||||||||
Total investment securities | $ | | $ | | $ | | $ | |
Balance at December 31, 2023 | 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 June 30, 2024.
15
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
7. Business Combinations
All of the Company’s acquisitions of businesses have been accounted for under ASC 805. 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, Structured Monitoring Products, Inc, and Qorvo Biotechnologies, LLC have been included in the Company’s Condensed Financial Statements since the dates of acquisition on June 14, 2022, July 15, 2022, September 4, 2023, and October 4, 2023 respectively.
2022 Acquisitions
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 ranging from $
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.
16
Zomedica Corp.
Notes to the Condensed 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 | ||||
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 | $ | |
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.
17
Zomedica Corp.
Notes to the Condensed 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 | $ | |
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 $
18
Zomedica Corp.
Notes to the Condensed 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, primarily intangibles, is incomplete and may change in future periods.
19
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
LLC Membership Interest Purchase Agreement for the Acquisition of Qorvo Biotechnologies, LLC
On October 4, 2023, Zomedica Inc., a wholly owned subsidiary of Zomedica Corp. (the “Company”), entered into an LLC Membership Interest Purchase Agreement with Qorvo US, Inc. (“Qorvo”) pursuant to which Zomedica Inc. acquired
Zomedica paid Qorvo a purchase price of $
The following table summarizes the fair value amounts of identifiable assets acquired and liabilities assumed at the acquisition date:
| Initial |
| Measurement |
| |||||
Allocation of | Period | Updated | |||||||
| Consideration |
| Adjustments |
| Allocation | ||||
Inventory, net | $ | | $ | ( | $ | | |||
Other receivables |
| |
| — |
| | |||
Property and equipment, net |
| | | | |||||
Right-of-use asset |
| | — | | |||||
Other assets |
| | — | | |||||
Total assets acquired |
| |
| — |
| | |||
Accounts payable and accrued liabilities | | — | | ||||||
Current portion of lease obligations | | — | | ||||||
Lease obligations | | — | | ||||||
Total liabilities assumed |
| |
| — |
| | |||
Net assets acquired, excluding goodwill |
| |
| — |
| | |||
Net assets acquired | $ | | $ | — | $ | | |||
The Company incurred $
The Company evaluated the disclosure requirements under ASC 805 and determined QBT was not considered a material business combination for purposes of disclosing the earnings of QBT since the date of acquisition and supplemental pro forma information.
Purchase price consideration was made up of the following:
Cash | $ | | |
Settlement of pre-existing relationship(1) | ( | ||
Total | $ | |
| (1) | The Company had entered into a Development and Manufacturing License Agreement with QBT on January 17, 2023 and the Company had an intangible asset and liability balance of $ |
The determination of the final purchase price allocation to specific assets, primarily fixed assets, is incomplete and may change in future periods in the event that the intended uses of the assets change as we continue to deploy and integrate operations.
20
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
8. Inventory
June 30, 2024 | December 31, 2023 | |||||||||||||||||
Diagnostics |
| Therapeutic |
| Consolidated |
| Diagnostics |
| Therapeutic |
| Consolidated | ||||||||
Raw materials | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Finished goods |
| |
| |
| |
| |
| |
| | ||||||
Purchased inventory |
| |
| |
| |
| |
| |
| | ||||||
Total |
| |
| |
| |
| |
| |
| | ||||||
Less: reserves |
| ( |
| — |
| ( |
| ( |
| — |
| ( | ||||||
Net inventory | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
9. Prepaid Expenses and Deposits
| June 30, |
| December 31, | |||
2024 | 2023 | |||||
Deposits | $ | | $ | | ||
Prepaid marketing |
| |
| | ||
Prepaid insurance |
| |
| | ||
Other |
| |
| | ||
Total prepaid expenses and deposits | $ | | $ | | ||
10. Accrued Expenses and Other Current Liabilities
| June 30, |
| December 31, | |||
2024 | 2023 | |||||
Accrued employee compensation and benefits | $ | | $ | | ||
Accrued taxes |
| |
| | ||
Accrued professional services |
| |
| | ||
Other |
| |
| | ||
Total accrued expenses and other current liabilties | $ | | $ | | ||
11. Property and Equipment
| June 30, |
| December 31, | |||
2024 | 2023 | |||||
Machinery and office equipment | $ | | $ | | ||
Furniture and equipment |
| |
| | ||
Laboratory equipment |
| |
| | ||
Leasehold improvements |
| |
| | ||
Construction in progress | | | ||||
| |
| | |||
Less: accumulated depreciation and amortization |
| ( |
| ( | ||
Net property and equipment | $ | | $ | | ||
Depreciation expense related to property and equipment is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Depreciation expense | $ | | $ | | $ | | $ | | ||||
21
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
During the three months ended June 30, 2024, in line with ASC 360, Property, Plant, and Equipment (“ASC 360”), the Company conducted a review of its property and equipment for recoverability. This assessment was prompted by broader reviews within our reporting units. It was concluded that the carrying values of our plant and equipment assets were fully recoverable, resulting in no impairment charge being recognized as of June 30, 2024.
12. Goodwill and Intangible Assets
The following table provides a rollforward of the carrying amount of goodwill by segment:
Diagnostics | Therapeutic | Total | |||||||
Goodwill - December 31, 2023 | $ | | $ | | $ | | |||
Acquisitions | — | — | — | ||||||
Adjustment to Purchase Price Allocations | — | — | — | ||||||
Impairment | ( | ( | ( | ||||||
Goodwill - June 30, 2024 | $ | ( | $ | | $ | | |||
During the three months ended June 30, 2024, the Company concluded it was more likely than not that the fair values of certain of its reporting units had declined below their carrying values due to slowed sales growth projections and the allocation of operating expenses. The Company completed an interim goodwill impairment analysis in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). The difference between the reporting units’ carrying values and fair values was recognized as impairment charges.
The Company recognized $
As part of our interim impairment analysis during the second quarter of 2024, the Company also evaluated its amortizable intangible assets for recoverability under ASC 360. The results of the assessment confirmed that the fair values of these assets continued to exceed their carrying amounts. As a result, no impairment charges were recognized.
The following table summarizes our intangible assets, net of accumulated amortization:
| June 30, |
| December 31, | |||
2024 | 2023 | |||||
Computer software | $ | | $ | | ||
Customer relationships |
| |
| | ||
Licenses |
| |
| | ||
Technology |
| |
| | ||
Trademarks |
| |
| | ||
Tradename |
| |
| | ||
Website |
| |
| | ||
| |
| | |||
Less: accumulated amortization |
| ( |
| ( | ||
Net intangibles | $ | | $ | | ||
Included within intangibles are $
22
Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
The estimated future amortization of intangible assets is as follows:
2024 |
| $ | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 | | ||
2029 and thereafter |
| | |
Total | $ | |
Amortization expense associated with intangible assets is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Amortization expense | $ | | $ | | $ | | $ | | ||||
13. Stock-Based Compensation
The Zomedica Amended and Restated Stock Option Plan ( the “Plan”) was amended and restated on June 15, 2022, and provides incentives through the grant of stock options which may be granted to the directors, officers, and employees of the Company. The Plan is administered by the board of directors of the Company, and the aggregate number of shares reserved for issuance under the Plan shall not, at the time of the stock option grant, exceed
During the six months ended June 30, 2024 and 2023, the Company issued
The continuity of stock options for the six months ended June 30, 2024 and 2023 are as follows:
Number of | Weighted Avg | ||||
Options | Exercise Price | ||||
Balance at December 31, 2023 |
| |
| $ | |
Stock options granted |
| | | ||
Stock options forfeited |
| | | ||
Vested stock options expired |
| | | ||
Balance at June 30, 2024 |
| | $ | | |
Vested at June 30, 2024 |
| | $ | | |
Number of | Weighted Avg | ||||
Options | Exercise Price | ||||
Balance at December 31, 2022 |
| |
| $ | |
Stock options granted |
| | | ||
Stock options forfeited |
| | | ||
Vested stock options expired |
| | | ||
Balance at June 30, 2023 |
| | $ | | |
Vested at June 30, 2023 |
| | $ | | |
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Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
The Company recorded the following stock-based compensation expense:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Stock-based compensation expense | $ | | $ | | $ | | $ | | |||
As of June 30, 2024, the total unrecognized compensation cost related to nonvested awards was $
14. Income Taxes
The Company is in an overall domestic net deferred tax liability position for the six months ended June 30, 2024. Management has assessed that the future taxable income resulting from the deferred tax liability position will result in partial utilization of the Company's US federal and state net operating loss carryforwards and has therefore concluded a valuation allowance of $
15. 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 June 30, 2024, and continuing as of August 14, 2024, 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:
| ● | $ |
| ● | $ |
As of June 30, 2024, 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 June 30, 2024 and December 31, 2023.
On January 17, 2023, the Company entered into a series of agreements with Qorvo Biotechnologies, LLC. Other than the obligation to purchase a minimum quantity of BAW sensors during the term of the BAW Sensor Supply Agreement, the obligations under these agreements were terminated upon the acquisition of Qorvo Biotechnologies, LLC on October 4, 2023.
On April 4, 2023, the Company entered into a Development and License Agreement with Brisby Inc. Under the terms of this agreement, Brisby grants the Company a license to use, develop, manufacture, have manufactured, offer for sale, sell, and import certain Brisby products, such as the Smart Pet Pad and the Intelligent Pet Bed, along with any future developments of these products.
As part of this agreement, the Company is required to make the following milestone payments:
| ● | $ |
| ● | $ |
| ● | $ |
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Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
| ● | $ |
As of June 30, 2024, the Company has made $
The Company’s investment in Brisby Inc. is accounted for under the equity-method in accordance with ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”), and is included in “Other assets” on our consolidated balance sheets.
16. Segment Information
The Company’s operations are comprised of
| ● | Diagnostics, which consists of TRUFORMA®, VetGuardian®, and TRUVIEW™ products; and |
| ● | 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 nor are asset groupings except for the purpose of periodic impairment analysis.
The following is a reconciliation of consolidated revenue, cost of revenue, and gross profit amongst our reportable segments for the three and six months ended June 30, 2024 and 2023:
Three Months Ended June 30, | ||||||||||||||||||
| Diagnostics |
| Therapeutic |
| Consolidated | |||||||||||||
2024 | 2023 | 2024 | 2023 | 2024 | 2023 | |||||||||||||
Net revenue | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Cost of revenue |
| | | | |
| |
|
| | ||||||||
Gross (loss) profit | $ | ( | $ | ( | $ | | $ | | $ | | $ | | ||||||
Six Months Ended June 30, | ||||||||||||||||||
| Diagnostics |
| Therapeutic |
| Consolidated | |||||||||||||
2024 | 2023 | 2024 | 2023 | 2024 | 2023 | |||||||||||||
Net revenue | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Cost of revenue |
| |
|
| |
| |
|
| |
| |
|
| | |||
Gross (loss) profit | $ | | $ | ( | $ | | $ | | $ | | $ | | ||||||
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Zomedica Corp.
Notes to the Condensed Consolidated Financial Statements
(United States Dollars in Thousands)
17. Loss Per Share
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Numerator |
|
|
|
| ||||||||
Net loss for the period | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Denominator |
|
| ||||||||||
Weighted average shares - basic |
| | | | | |||||||
Loss per share - basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | ||||
As of June 30, 2024, and 2023, the Company had stock options outstanding of
18. Subsequent Events
We have evaluated events and transactions occurring subsequent to the consolidated balance sheet date of June 30, 2024 for items that could potentially be recognized or disclosed in these financial statements. We did not identify any items which would require disclosure in or adjustment to the consolidated financial statements.
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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 June 30, 2024. 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; 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, 2023 (“2023 Form 10-K”). 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.
Components of Revenue and Costs and Expenses
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; consumables sold in the U.S associated with our TRUFORMA® platform; subscriptions and services sold in the U.S. associated with our TRUVIEW™ products; and capital and service agreements 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; TRUFORMA® capital and consumables; Assisi consumables; TRUVIEW™ capital and consumables; and VetGuardian® capital and services. We expense all inventory obsolescence provisions related to normal manufacturing changes as cost of revenue.
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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.
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).
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, 2023, 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 U.S. 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.
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Canadian Taxes
In Canada, due to the uncertainty of realizing any tax benefits as of June 30, 2024, 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.
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 (earnings per share), 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
Our comprehensive loss is reported in accordance with ASC 220, Income Statement — Reporting Comprehensive Income (“ASC 220”). 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.
29
While our significant accounting policies are more fully described in Note 3 of the notes to our consolidated financial statements included within our 2023 Form 10-K, 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.
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.
During the three months ended June 30, 2024, the Company determined that triggering events occurred, which required interim testing for impairment in accordance with ASC 350. We elected to perform a quantitative analysis as part of our interim goodwill impairment test. As of June 30, 2024, our analysis of the PulseVet reporting unit indicated that its fair value exceeded its carrying amount, including goodwill, by 56%. Our analysis of the Revo Squared, SMP and Assisi reporting units indicated that their respective fair values were below their carrying amounts, including goodwill, by 64%, 80% and 3%, respectively. This was driven by slowed future sales growth projections and the allocation of operating expenses. As a result, a goodwill impairment charge of $16,024 was recorded for the three and six months ended June 30, 2024, as part of the Company’s interim goodwill impairment test.
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The carrying values of goodwill for the PulseVet and Assisi reporting units at June 30, 2024, were $43.4 million and $2.2 million, respectively. Following the impairment recorded in the current period, there are no longer carrying values of goodwill for the Revo Squared or SMP reporting units.
The implied fair value for each reporting unit was calculated on a standalone basis using a weighted combination of the income approach and market approach. The implied fair values of each reporting unit were added together along with our unallocated assets to get an indicated value of total equity. This indicated value was compared to the total market capitalization as of June 30, 2024. This implied a control premium of 52.0%. This control premium is in line with the control premiums observed in the last five years in the Medical, Dental, and Hospital Equipment and Supplies industry, which have historically been significantly higher than the aggregate control premiums across all other industries. As a result, the market capitalization reconciliation analysis provided support for the reasonableness of the fair values estimated for each individual reporting unit.
Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results, an increase in the discount rate, or other underlying assumptions could have a significant impact on the fair value of the reporting units, and we could be required to record an impairment charge. Additionally, future declines in the overall market value of the Company’s equity may also result in a conclusion that the fair value of one or more reporting units has declined below its carrying 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.
As of June 30, 2024, the carrying value of our Diagnostic instruments was $10,330. Significant assumptions included in the realization model are the rate of placement and expected utilization over the life of the instrument. A 25% reduction in the estimated revenues associated with annual placements of instruments would increase the payback period from 2.93 years to 3.81 years as of June 30, 2024.
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.
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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.
As of June 30, 2024, the estimated value of our Therapeutic Device customer contract liability was $553. If the expected return rate had increased by 2%, the effect on current year’s reduction in sales and customer liability would have been approximately $61.
Results of Consolidated Operations
Our results of operations for the three and six months ended June 30, 2024 and 2023 are as follows:
Revenue
Revenue for the three months ended June 30, 2024 was $6,131, compared to $6,020 for the three months ended June 30, 2023, an increase of $111, or 2%. Revenue for the six months ended June 30, 2024 was $12,393, compared to $11,502 for the six months ended June 30, 2023, an increase of $891, or 8%.
The increase in sales for the three months ended June 30, 2024 was primarily due to growth of our TRUFORMA® products, including the impact of launching new assays since the comparative period. The increase in sales for the six months ended June 30, 2024 was primarily due to the growth of our existing PulseVet® and TRUFORMA® products, as well as the continued performance of our VetGuardian® products, which had just recently launched during the six months ended June 30, 2023. In general, we expect revenue to increase in subsequent periods as we increase our sales, marketing, and commercialization efforts.
Cost of Revenue
Cost of revenue for the three months ended June 30, 2024 was $1,769, compared to $1,972 for the three months ended June 30, 2023, a decrease of $203, or 10%. Cost of revenue for the six months ended June 30, 2024 was $3,914, compared to $3,619 for the six months ended June 30, 2023, an increase of $295, or 8%.
The decrease in cost of revenue for the three months ended June 30, 2024 was primarily due to non-recurring manufacturing costs incurred during the prior period, as well as lower costs realized from the further integration of our Minnesota manufacturing facility acquired during the second half of 2023. The increase in cost of revenue for the six months ended June 30, 2024 was driven primarily by increased manufacturing expense resulting from higher unit sales. We anticipate that costs of revenue will continue to increase in subsequent periods in line with increased unit sales as described above.
Gross Profit
Gross profit margin for the three months ended June 30, 2024 was 71%, compared to 67% for the three months ended June 30, 2023. Gross profit margin for the six months ended June 30, 2024 was 68%, compared to 69% for the six months ended June 30, 2023.
The increase in gross profit margin percentage for the three months ended June 30, 2024 was primarily due to non-recurring manufacturing costs incurred during the prior period as well as improvements associated with the integration of our Minnesota manufacturing facility. The decrease in profit margin percentage for the six months ended June 30, 2024 was primarily due to the integration of products and new launches, along with product mix impacts associated with the sales of these new offerings.
General and Administrative
General and administrative expense for the three months ended June 30, 2024 was $7,976, compared to $6,850 for the three months ended June 30, 2023, an increase of $1,126, or 16%. General and administrative expense for the six months ended June 30, 2024 was $16,601, compared to $13,863 for the six months ended June 30, 2023, an increase of $2,738, or 20%.
The increase in general and administrative expenses for both comparative periods was driven primarily by proxy and special meeting costs, professional fees for specialized accounting and development work, as well as increased amortization expense associated with acquisitions made in the second half of 2023. These increases were partially offset by lower stock-based compensation expense in both comparative periods. While we expect future general and administrative expense to increase, we anticipate it to decrease proportionally with sales and related product expansion.
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Research and Development
Research and development expense for the three months ended June 30, 2024 was $1,506, compared to $859 for the three months ended June 30, 2023, an increase of $647, or 75%. Research and development expense for the six months ended June 30, 2024 was $3,277, compared to $1,777 for the six months ended June 30, 2023, an increase of $1,500, or 84%.
The increase in research and development expenses for both comparative periods was driven primarily by the 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 June 30, 2024 was $3,923, compared to $3,081 for the three months ended June 30, 2023, an increase of $842, or 27%. Selling and marketing expense for the six months ended June 30, 2024 was $8,030, compared to $6,497 for the six months ended June 30, 2023, an increase of $1,533, or 24%.
The increase in selling and marketing expenses for both comparative periods was driven primarily by salaries and commissions, 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 and marketing expense to increase in line with product expansion and growth in our commercialization efforts.
Impairment Expense
Impairment expense for the three months ended June 30, 2024 was $16,024, compared to $0 for the three months ended June 30, 2023, an increase of $16,024, or 100%. Impairment expense for the six months ended June 30, 2024 was $16,024, compared to $0 for the six months ended June 30, 2023, an increase of $16,024, or 100%.
The increase in the impairment expense for both comparative periods was attributable to the goodwill impairment recognized during the three months ended June 30, 2024, driven by slowed future sales growth projections and the allocation of operating expenses.
Net Loss
Net loss for the three months ended June 30, 2024 was $23,931 compared to a net loss of $5,249 for the three months ended June 30, 2023, an increase of $18,682, or 356%. Net loss for the six months ended June 30, 2024 was $33,091, compared to a net loss of $11,634 for the six months ended June 30, 2023, an increase of $21,457, or 184%.
The increase in net loss was attributed to the matters described above. 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
| Six Months Ended June 30, | ||||||||||
| 2024 |
| 2023 |
| Change | ||||||
Cash used in operating activities | $ | (14,309) | $ | (7,933) | $ | (6,376) |
| 80% | |||
Cash provided by investing activities |
| 9,397 |
| 8,529 | 868 |
| 10% | ||||
(Decrease) increase in cash and cash equivalents |
| (4,912) |
| 596 | (5,508) |
| (924)% | ||||
Effect of exchange rate changes on cash |
| (101) |
| (44) | (57) |
| 130% | ||||
Cash and cash equivalents, beginning of period |
| 12,952 |
| 27,399 | (14,447) |
| (53)% | ||||
Cash and cash equivalents, end of period | $ | 7,939 | $ | 27,951 | $ | (20,012) |
| (72)% | |||
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Net cash used in operating activities for the six months ended June 30, 2024 was $14,309, compared to $7,933 for the six months ended June 30, 2023, an increase in cash used of $6,376, or 80%. The increase in cash used in operating activities resulted primarily from the losses noted above and lower non-cash stock compensation in the current period compared to the prior period.
Net cash provided by investing activities for the six months ended June 30, 2024 was $9,397, compared to $8,529 for the six months ended June 30, 2023, an increase in cash provided of $868, or 10%. The increase in cash provided by investing activities resulted primarily from non-recurring payments for Qorvo licenses during the six months ended June 30, 2023, partially offset by lower maturity of available-for-sale securities and increased capital expenditures for the six months ended June 30, 2024.
Liquidity, Capital Resources, and Financial Condition
We have incurred losses and negative cash flows from operations since our inception in May 2015. As of June 30, 2024, we had an accumulated deficit of $204,024. 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 June 30, 2024, the Company had working capital (defined as current assets minus current liabilities) of $81,387.
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, and our short-term cash requirements have not changed materially since the 2023 Form 10-K.
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, 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. |
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The Company’s long-term cash requirements have not changed materially since the 2023 Form 10-K.
U.S. Taxes
As of June 30, 2024, we had deferred tax assets for net operating loss carryforwards for U.S. federal income tax purposes of $14,069 and non-capital loss carryforwards for Canada of $9,581, 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. In 2021, we concluded that, due to the limitations under Section 382, our U.S. federal income tax net operating loss carryforwards, as well as R&D credit carryforwards, for the periods prior to February 11, 2021 have been limited to zero. We therefore have derecognized $3,814 of this asset, reducing the carryforward of these amounts to $10,225.
Climate Change
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.
Other Matters: Adoption of Stock Appreciation Rights Plan
On August 12, 2024, the Board of Directors of Zomedica Corp. (the “Company”) adopted the Zomedica Corp. 2024 Stock Appreciation Rights Plan (the “SAR Plan”). The SAR Plan will be administered by the Board of Directors of the Company (the “Board”); the Board may delegate administration of the SAR Plan to a committee of the Board. Up to 10% of the issued and outstanding shares of common stock of the Company (calculated on a non-diluted basis) is available for the grant of stock appreciation rights (“SARs”) under the SAR Plan, subject to adjustment as provided in the SAR Plan. This is a limit on the number of SARs that can be issued under the SAR Plan; however, no shares are issued under the SAR Plan upon the exercise of a SAR and awards are settled solely in cash.
The Board may make SAR awards to employees, consultants and directors of the Company or any affiliate of the Company, including Zomedica Inc. The exercise price of a SAR will be determined by the Board, but will not be less than the fair market value of one share of common stock on the grant date. The Board will also determine the term of the SAR, which may not exceed ten years, and establish the vesting provisions of each SAR. Upon exercise of a SAR, the participant will receive a cash payment equal to the excess of the fair market value of a share of common stock on the exercise date over the exercise price of the SAR.
Following termination of a participant’s service with the Company, the participant may exercise any vested SARs within 90 days or the expiration date of the SAR, if earlier. The exercise period is extended to 12 months if the separation from service is due to death or disability of the participant, or the expiration date of the SAR, if earlier.
The Board also adopted a form of stock appreciation rights agreement for employees, and a form of stock appreciation rights agreement for directors.
The foregoing description of the SAR Plan does not purport to be complete and is qualified in its entirety by reference to the full text of the SAR Plan, the form of stock appreciation rights agreement for employees and the form of stock appreciation rights agreement for directors, copies of which are filed as Exhibit 10.3 and 10.4, respectively, to this Quarterly Report on Form 10-Q and incorporated herein by reference.
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Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Evaluation of our disclosure controls
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized, and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate to allow timely decisions regarding required disclosure. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report was made under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer.
Based upon this evaluation, our principal executive officer and principal financial and accounting officer have concluded that, our disclosure controls and procedures were not effective because of the material weakness in internal control over financial reporting described below and in Part II, Item 9A, "Controls and Procedures" of our 2023 Form 10-K. The material weakness has been remediated as of June 30, 2024.
Management's report on internal control over financial reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, misstatements due to error or fraud may not be prevented or detected on a timely basis.
Our management including our principal executive officer and principal financial and accounting officer, performed an assessment of the effectiveness of our internal control over financial reporting as of June 30, 2024, utilizing the criteria discussed in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The objective of this assessment was to determine whether our internal control over financial reporting was effective as of June 30, 2024. Based on management's assessment, we have concluded that our internal control over financial reporting was effective as of June 30, 2024, due to the remediation of the material weakness described below.
Prior Year Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As disclosed in Part II, Item 9A, "Controls and Procedures" of our 2023 Form 10-K, we identified the following weakness in internal controls:
As of December 31, 2023, there was a material weakness relating to the timeliness and precision of management's review controls around financial projections relevant to the evaluation of goodwill impairment relating to our Assisi product line.
Remediation status for material weakness in internal control over financial reporting
During the three months ended June 30, 2024, we implemented our remediation plan around the previously disclosed material weakness in relation to our annual impairment test of goodwill.
The Company completed a cross-functional review of year-to-date results and revised them as appropriate, including revising our estimates on the allocation of operating expenses not directly attributable to a specific reporting unit. To achieve the revised estimates, the Company and third-party consultants developed modeling that enabled transparent allocations of expenses to each reporting unit. All inputs and assumptions into the valuation model were reviewed with the appropriate responsible Company personnel. The Company ensured that the outputs of the valuation model are consistent and reasonable with known business conditions. The results of the analysis and impacts were appropriately and timely reviewed, ensuring consensus on the accounting conclusions. Based on the actions taken, as well as the evaluation of the design of the control, management concluded that the material weakness was remediated as of June 30, 2024.
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Changes in Internal Control Over Financial Reporting
Other than as discussed above, during the three months ended June 30, 2024 there were no changes to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
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, 2023.
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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 |
|---|---|---|
10.1+ | ||
10.2+ | ||
10.3+ | ||
10.4+ | ||
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) |
+ | Indicates management contract or compensatory plan. |
* | Furnished herewith |
** | Filed herewith |
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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 August 14, 2024.
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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