Zomedica Corp. - Quarter Report: 2021 June (Form 10-Q)

		Series 1 preferred shares								Common shares
For the six months ending June 30, 2021		Shares				Amount				Shares				Amount				Common stock subscribed				Additional paid-in capital				Accumulated deficit				Total
Balance at December 31, 2020			-				-				642,036,228			$	104,783,612			$	459,600			$	14,792,276			$	(68,969,625	)		$	51,065,863
Stock issuance for financing			-				-				105,013,158				199,525,000				-				-				-				199,525,000
Stock issuance costs			-				-				-				(14,280,914	)			-				-				-				(14,280,914	)
Stock-based compensation			-				-				-				-				-				3,064,818								3,064,818
Stock issued from warrant exercises			-				-				200,951,905				44,082,183				(459,600	)			(11,511,046	)			-				32,111,537
Stock issued from stock option exercises			-				-				5,230,601				2,112,210								(744,407	)							1,367,803
Preferred share exchange			-				-				24,719,101				44,000,000								-				(32,038,603	)			11,961,397
Net loss			-				-				-				-				-				-				(8,747,491	)			(8,747,491	)
Balance at June 30, 2021			-				-				977,950,993			$	380,222,091			$	-			$	5,601,641			$	(109,755,719	)		$	276,068,013

		Series 1 preferred shares								Common shares
For the three months ending June 30, 2021		Shares				Amount				Shares				Amount				Common stock subscribed				Additional paid-in capital				Accumulated deficit				Total
Balance at March 31, 2021			-				-				972,092,308			$	377,970,846			$	-			$	4,602,089			$	(105,045,045	)		$	277,527,890
Stock issuance costs			-				-				-				453				-				-				-				453
Stock-based compensation			-				-				-				-				-				1,782,076				-				1,782,076
Stock issued from warrant exercises			-				-				628,084				138,582				-				(38,117	)			-				100,465
Stock issued from stock option exercises			-				-				5,230,601				2,112,210				-				(744,407	)			-				1,367,803
Net loss			-				-				-				-				-				-				(4,710,674	)			(4,710,674	)
Balance at June 30, 2021			-				-				977,950,993			$	380,222,091			$	-			$	5,601,641			$	(109,755,719	)		$	276,068,013

		Series 1 preferred shares								Common shares
For the six months ending June 30, 2020										Shares				Amount				Common stock subscribed				Additional paid-in capital				Accumulated deficit				Total
Balance at December 31, 2019			12			$	11,961,397				108,038,398			$	38,566,820			$	-			$	3,625,083			$	(52,057,841	)		$	2,095,459
Stock, warrants and pre-funded warrants issuance for financing											175,330,001				15,984,325				1,465,500				10,514,458				-				27,964,283
Stock issuance costs											-				(1,755,376	)			-				(1,084,024	)			-				(2,839,400	)
Placement agent warrants											-				(154,767	)			-				154,767				-				-
Stock-based compensation											-				-				-				290,866								290,866
Stock issued from exercise of warrants and prefunded warrants											77,671,547				14,687,920				-				(4,861,560	)			-				9,826,360
Net loss											-				-				-				-				(7,758,607	)			(7,758,607	)
Balance at June 30, 2020			12			$	11,961,397				361,039,946			$	67,328,922			$	1,465,500			$	8,639,590			$	(59,816,448	)		$	29,578,961

		Series 1 preferred shares								Common shares
For the three months ending June 30, 2020										Shares				Amount				Common stock subscribed				Additional paid-in capital				Accumulated deficit				Total
Balance at March 31, 2020			12			$	11,961,397				128,871,732			$	39,998,442			$	-			$	4,500,263			$	(54,508,459	)		$	1,951,643
Stock, warrants and pre-funded warrants issuance for financing											154,496,667				14,278,670				1,465,500				9,720,113				-				25,464,283
Stock issuance costs											-				(1,517,159	)			-				(974,021	)			-				(2,491,180	)
Placement agent warrants											-				(118,951	)			-				118,951				-				-
Stock-based compensation											-				-				-				135,844				-				135,844
Stock issued from exercise of warrants and prefunded warrants											77,671,547				14,687,920								(4,861,560	)							9,826,360
Net loss											-				-								-				(5,307,989	)			(5,307,989	)
Balance at June 30, 2021			12			$	11,961,397				361,039,946			$	67,328,922			$	1,465,500			$	8,639,590			$	(59,816,448	)		$	29,578,961

		Six months ended June 30,
		2021				2020
Cash flows from operating activities:
Net loss		$	(8,747,491	)		$	(7,758,607	)
Adjustments for
Depreciation			114,724				154,275
Amortization - intangible assets			89,468				90,025
Loss on disposal of property and equipment			242,947				69,834
Loss on other assets			5,323				59,097
Gain on extinguishment of debt			(533,414	)			-
Stock-based compensation			3,064,818				290,866
Non-cash portion of rent expense			35,182				52,480
Change in non-cash operating working capital
Purchased inventory			(793,898	)			-
Prepaid expenses and deposits			437,302				(114,878	)
Trade receivable			(4,264	)			67,908
Other receivables			(133,114	)			78,762
Accounts payable and accrued liabilities			1,846,575				(883,414	)
Net cash used in operating activities			(4,375,842	)			(7,893,652	)
Cash flows from investing activities:
Cash from sale of property and equipment			75				5,400
Investment in intangibles			(98,710	)			-
Investment in property and equipment			(42,643	)			-
Cash from lease cancellation or modification			-				1,002,113
Net cash (used in) provided by investing activities			(141,278	)			1,007,513
Cash flows from financing activities:
Proceeds from issuance of common shares, warrants and pre-funded warrants			199,525,000				26,498,783
Cash received from warrant exercises			32,111,536				9,826,359
Cash received from stock option exercises			1,367,802				-
Cash received from shares to be issued			-				1,465,500
Cash paid on stock issuance costs			(14,269,105	)			(2,839,400	)
Cash received for government loan			-				527,360
Net cash provided by financing activities			218,735,233				35,478,602
Increase in cash and cash equivalents			214,218,113				28,592,463
Cash and cash equivalents, beginning of period			61,991,703				510,586
Cash and cash equivalents, end of period		$	276,209,816			$	29,103,049
Supplemental cash flow information:
Interest paid		$	-			$	651
Interest received		$	(111,567	)		$	-

Notes to the condensed consolidated financial statements

For the three and six months ended June 30, 2021 and 2020

(Unaudited) (Stated in United States dollars)

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1. Nature of operations

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for the presentation of interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited financial statements do not include all the information and footnotes necessary for a comprehensive presentation of the financial position, results of operations and cash flows for the periods presented. In the opinion of management, the unaudited financial statements include all the normal recurring adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Operating results for the three and six months ended June 30, 2021, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. These unaudited financial statements should be read in combination with the other Notes in this section; “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Item 2; and the Consolidated Financial Statements, including the Notes to the Consolidated Financial Statements, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The Consolidated Balance Sheet as of December 31, 2020, was derived from audited financial statements.

Estimates and assumptions

In preparing these financial statements, management was required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers and information available from other outside sources, as appropriate. These estimates and assumptions are subject to an inherent degree of uncertainty. We are not presently aware of any events or circumstances that would require us to update such estimates and assumptions or revise the carrying value of our assets or liabilities. Our estimates may change, however, as new events occur, and additional information is obtained. As a result, actual results may differ significantly from our estimates, and any such differences may be material to our financial statements.

Inventories

Inventories are stated at the lower of cost or net realizable value. The Company utilizes specific identification 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.

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 diagnostic instrument, consumable products, and 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 warranties are also a separate performance obligation, whereby revenue is recognized over time.

Sales are recorded net of sales tax. Sales tax is charged on sales to end users and remitted to the appropriate state authority.

Accounts receivable are recorded at net realizable value and have payment terms of 30 days.

Cost of revenue

Cost of goods sold consists of materials, and shipping costs incurred internally to produce and receive the products. Shipping and handling costs incurred by the Company are included in cost of goods sold.

Comparative figures

Certain prior year amounts have been reclassified to conform to the current year presentation. The change in presentation had no effect on the reported results of operations. Adjustments have been made to the consolidated balance sheets and consolidated statements of loss and comprehensive loss for three and six months ended June 30, 2020. These changes in classification do not affect previously reported cash flows from operating activities in the consolidated statements of cash flows.

Depreciation expense for the three months ended June 30, 2021 and 2020 was $55,398 and $77,859, respectively and for the six months ended June 30, 2021 and 2020 was $114,724 and $154,275, respectively.

 

6. Intangible assets

Amortization expense for the three months ended   June 30, 2021 and 2020 was $45,147 and $44,990, respectively and for the six months ended June 30, 2021 and 2020 was $89,468 and $ 90,025, respectively.

On February 1, 2020, the Company cancelled its existing lease with Wickfield Phoenix LLC. and entered a new lease. The new lease period was for 60 months, commencing on February 1, 2020, and ending on January 31, 2025, with a monthly rent payment of $32,452 escalating to $36,525 over the lease period. Upon cancellation of the previous existing lease, the Company received a refund of prepaid rent in the amount of $1,002,113.  The carrying value of the right of use asset was $1,061,210 upon cancellation.  The Company recorded a loss on right-of-use asset of $59,097 in the consolidated statements of comprehensive loss.

 

On February 1, 2020, the Company recorded a right-of-use asset and a corresponding lease liability in the amount of $1,553,611 using the Company’s incremental borrowing rate of 12%.

 

On February 1, 2021, the Company downsized its office space and modified its existing lease with Wickfield Phoenix LLC. The new lease period was for 48 months, commencing on February 1, 2021, and ending on January 31, 2025, with a monthly rent payment of $12,039 for the first two months and escalating to $30,911 over the lease period.  The carrying value of the right of use asset was $1,258,263 upon modification.  The Company recorded a gain on right-of-use asset of $731 in the consolidated statements of comprehensive loss.

On February 1, 2021, the Company recorded a right-of-use asset and a corresponding lease liability in the amount of $1,281,609 using the Company’s incremental borrowing rate of 3.95%.

During the three and six months ended June 30, 2021, the Company recognized $85,269 and $176,154 in rent expense with $17,053 and $37,798 recorded in research and development expenses, respectively and $68,216 and $138,776 recorded in general and administrative expense, respectively in the consolidated statements of comprehensive loss.

 

During the three and six months ended June 30, 2020, the Company recognized $145,823 and $172,291 in rent expense with $21,763 and $38,992 recorded in research and development expenses and $124,060 and $137,630 recorded in general and administrative expense, respectively in the consolidated statements of comprehensive loss.

 

On October 18, 2017, the Company entered into a loan arrangement with a shareholder of the Company, pursuant to which such shareholder has agreed to provide a loan facility to the Company, whereby the Company may borrow up to $5,000,000, with the proceeds to be used for working capital and general corporate purposes. The term of the loan facility is five ( 5) years, with principal and interest payments being due only at the time of maturity. Under the loan agreement, the Company may borrow in one or more advances, provided however that a minimum amount of $250,000 must be borrowed at any one time and not more than two advances may occur per month. Interest shall accrue at a rate of fourteen percent ( 14%) per annum, payable upon maturity. As of June 30, 2021, no amounts have been borrowed.

The Coronavirus Aid, Relief, and Economic Security Act, or (“CARES”) Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID- 19 pandemic. The CARES Act authorized the Small Business Administration to temporarily guarantee loans under a new loan program called the Paycheck Protection Program (the “Program”). The Program provides for 100% federally guaranteed loans to small businesses to allow employers to keep workers employed and maintain payroll during the pandemic and economic downturn. Under the Program, qualified companies are eligible for a loan in an amount equal to the lesser of $10 million or 2.5x the business’s average monthly payroll. Collateral or guarantor support is not required for the loan.

 

Under the Program, the borrower is eligible for loan forgiveness up to the amount the borrower spends on certain eligible costs during the 8-week period beginning on the date the proceeds were received on the loan. Eligible costs under the Program include payroll costs, interest on mortgage obligations incurred before the covered period, rent on leasing agreements and utility services. The amount of loan forgiveness is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Under the Program, proceeds that are not forgiven convert to a loan bearing interest at a fixed rate of 1% payable in 18 equal monthly installments commencing after the forgiveness period. The Program was subsequently amended to allow the borrower to use an extended forgiveness period of 24 weeks beginning on the date the proceeds were received on the loan and to extend the repayment period to 54 months commencing after the 24-week forgiveness period. 

The Company is authorized to issue up to 20 shares of its Series 1 Preferred Shares, all without par value, and each having a stated value of $1,000,000. The Series 1 Preferred Shares do not have voting rights except to the extent required by applicable law and are not convertible into the Company’s common shares. Holders of the Series 1 Preferred Shares will not be entitled to dividends but, in lieu thereof, will receive Net Sales Returns (“Net Sales Returns” is defined as annual payments equal to 9 percent of net sales) until such time as the holders have received total Net Sales Returns equal to 9 times the aggregate stated value of the outstanding Series 1 Preferred Shares. The Company will have the right to redeem the outstanding Series 1 Preferred Shares at any time at a redemption price equal to 9 times the aggregate stated value of the Series 1 Preferred Shares outstanding less the aggregate amount of the Net Sales Returns paid (the “Redemption Amount”).

Upon any dissolution, liquidation or winding up, whether voluntary or involuntary, holders of Series 1 Preferred Shares will be entitled to a liquidation preference equal to the stated value of the Series 1 Preferred Shares less the Net Sales Returns paid on the Series 1 Preferred Shares.

 

In the event of a fundamental transaction (defined to include an amalgamation, merger or other business combination transaction involving our company in which the shareholders do not have the right to cast more than 50% of the votes that may be cast for the election of directors, or a sale, lease or other disposition of the properties and/or assets of our company as an entirety or substantially as an entirety to a third party), the holders of the Series 1 Preferred Shares will be entitled to receive consideration for their Series 1 Preferred Shares equal to a multiple of the stated value of the Series 1 Preferred Shares ranging from 5.0 to 9.0 depending on the timing of the fundamental transaction, subject to a cap equal to the redemption amount.

Issued and outstanding preferred stock:

The Company exchanged the issued and outstanding shares of its Series 1 Preferred Shares on March 7, 2021, for 24,719,101 of common shares valued at $44,000,000. The difference between the carrying value of the preferred shares and the fair value of the common shares exchanged was charged to accumulated deficit.

The Company is authorized to issue an unlimited number of common shares, without par value.

Issued and outstanding common shares:

10.  Common shares (continued)

During the three and six months ended June 30, 2021, the Company issued stock options to purchase an aggregate of 7,800,000 and 9,200,000 common shares.  The options vest over a period of four years and have an expiration period of ten years.  During the three and six months ended June 30, 2021, 5,774,351 options were exercised, and the Company received $1,367,802 in cash receipts.  Of the 5,774,351 options exercised, 5,230,601 shares were issued as of June 30, 2021, and 543,750 shares issued on July 1, 2021.

 

During the three and six months ended June 30, 2020, the Company issued stock options to purchase an aggregate of 5,056,000 common shares.  The options vest over a period of four years and have an expiration period of five years.  During the three and six months ended June 30, 2020, no stock options were exercised.

The continuity of stock options are as follows:

As of June 30, 2021, details of the issued and outstanding stock options were as follows:

The Company calculates volatility of stock-based compensation using the historical price of the Company’s stock. An increase/decrease in the volatility would have resulted in an increase/decrease in the fair value of the options.

11.          Stock-based compensation (continued)

The fair value of options granted during the three and six months ended June 30, 2021, and 2020 was estimated using the Black-Scholes option pricing model to determine the fair value of options granted using the following assumptions

The Company recorded $1,782,076 and $3,064,818 of stock-based compensation for the three and six months ended June 30, 2021.   The Company recorded $135,844 and $290,866 of stock-based compensation for the three and six months ended June 30, 2020.

 

For the three and six months ended June 30, 2021, the Company recorded cash receipts of $1,367,802 and reclassified $744,407 of additional paid in capital to common stock due to the exercise of stock options.  For the three and six months ended June 30, 2020, the Company recorded zero cash receipts due to the exercise of options.

The Company calculates volatility of warrants based on the historical price of the Company’s stock. An increase/decrease in the volatility would have resulted in an increase/decrease in the fair value of the options.

In connection with the February 14, 2020 registered direct offering, the Company issued 20,833,334 five and one half-year Series A warrants to purchase one share of common stock at an exercise price of $.20. The Company also issued 1,041,667 warrants to purchase a share of common stock at an exercise price of $0.15 per share to the placement agents.

In connection with the April 9, 2020 CMPO, the Company issued 16,666,667 five-year Series B Warrants to purchase one common share at an exercise price of $0.15. The Company also issued 1,666,667 Placement Agent Warrants to purchase one common share at an exercise price of $0.15 per share.

In connection with the May 29, 2020 public offering, the Company issued 133,333,333 two-year Series C Warrants to purchase one common share at an exercise price of $0.15. The Company also issued 12,170,000 Series C Pre-Funded Warrants to purchase common shares at an exercise price of $0.0001 on a cashless exercise basis. As of December 31, 2020, all of the Series C Pre-Funded Warrants have been exercised.

In connection with the July 7, 2020 public offering, the Company issued 187,500,000 two-year Series D Warrants to purchase one common share at an exercise price of $0.16. The Company also issued 25,000,000 Series D Pre-Funded Warrants to purchase common shares at an exercise price of $0.0001 on a cashless exercise basis. As of December 31, 2020, all of the Series D Pre-Funded Warrants have been exercised.

As of June 30, 2021, details of the outstanding warrants were as follows:

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:

From time to time, the Company may be exposed to claims and legal actions in the normal course of business. As of June 30, 2021, and continuing as of August 11, 2021, the Company is not aware of any pending or threatened material litigation claims against the Company, other than as described below.

On November 1, 2019, Heska Corporation (“Heska”) filed a complaint for damages and injunctive relief (the “Complaint”) in the United States District Court for the Middle District of North Carolina, Case 1:19-cv-01108-LCB-JLW, against Qorvo US, Inc. (“Qorvo US”), Qorvo Biotechnologies, LLC (“Qorvo Biotech” and, together with Qorvo US, “Qorvo”) and the Company (collectively with Qorvo, the “Defendants”) which was amended on November 22, 2019. The amended Complaint alleges, among other things, that the Defendants improperly obtained Heska’s trade secrets and confidential information and/or conspired to use improper means to misappropriate Heska’s trade secrets related to an instrument and related consumable products for performing immunoassay analysis of biomarkers and other substances. The amended Complaint seeks compensatory and exemplary damages, as well as preliminary and permanent injunctive relief to prevent the Defendants from commercializing our TRUFORMA® diagnostic instrument. On January 21, 2020, the Defendants filed a motion seeking dismissal of the Complaint. On February 11, 2020, Heska filed its response to the Defendants’ motion to dismiss to which the Defendants responded on February 25, 2020. Heska subsequently moved to strike a portion of the Defendants’ response. On September 30, 2020, the court denied the Defendants’ motion to dismiss and granted Heska’s motion to strike. On October 14, 2020, the Defendants filed their answer to the amended Complaint. On May 10, 2021, the Defendants filed an updated answer and counterclaims to Heska’s amended complaint alleging unfair and deceptive trade practices claims against Heska.  Discovery is ongoing.  The Company believes that the allegations in the amended Complaint have no merit and will not have a material adverse effect on our business, results of operations or financial condition.

Under the terms of the Development and Supply Agreement, dated November 26, 2018, by and between Qorvo Biotech and the Company (as amended, the “Qorvo Agreement”), Qorvo Biotech agreed to indemnify the Company and certain related parties against claims alleging infringement or misappropriation of third-party intellectual property rights, subject to certain limitations and exceptions. Qorvo Biotech has notified the Company that Qorvo Biotech has assumed the defense of the amended Complaint and will indemnify the Company for losses arising from the amended Complaint in accordance with the terms of the Qorvo Agreement. Qorvo Biotech has further advised us that it intends to mount a vigorous defense to the claims in the amended Complaint, and that it believes the allegations contained in the amended Complaint are without merit.

 

(a)          Fair values

The Company follows ASC topic 820, “Fair Value Measurements” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC topic 820 apply to other accounting pronouncements that require or permit fair value measurements. ASC topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date; and establishes a three level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refers broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. To increase consistency and comparability in fair value measurements and related disclosures, the fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of the hierarchy are defined as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly for substantially the full term of the financial instrument.

Level 3 inputs are unobservable inputs for asset or liabilities.

The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The carrying values of cash, trade and other receivable, accounts payable and accrued liabilities and shareholder loans payable approximates their fair values because of the short-term nature of these instruments.

The following are the contractual maturities of the undiscounted cash flows of financial liabilities as at March 31, 2021 and December 31, 2020:

The Company's operations comprise a single reportable segment engaged in the research, development targeting health and wellness solutions for the companion animal. As the operations comprise a single reportable segment, amounts disclosed in the financial statements for loss for the period, depreciation and total assets also represent segmented amounts. In addition, all the Company's long-lived assets are in the United States of America (“US”).