Back in 2019, Zomedica (NASDAQ:ZOM) was in enormous trouble. The company was running out of cash, and with the ZOM stock price below 50 cents, it was also running out of options.
Indeed, Zomedica closed 2018 with less than $2 million in cash. It had burned nearly $12 million that year.
The Form 10-K filed with the U.S. Securities and Exchange Commission contained a “going concern” notification warning investors that the company might not make it through 2019 without filing for bankruptcy.
Desperate, the company in May 2019 entered into a financing agreement with heavily onerous terms. In the process, the company raised $12 million which kept it afloat until the market took notice of ZOM stock toward the end of last year.
Then, last month, Zomedica retired those preferred shares. The retirement seems like good news. Indeed, Zomedica itself argued as much, with its chief executive officer saying the deal “removes…a potential overhang” on ZOM stock.
From one perspective, the deal is a positive. From another, however, it highlights the still-core problem here: ZOM stock simply is too expensive.
Preferred Shares and ZOM Stock
The terms of the preferred shares show just how desperate Zomedica was for cash at the time. The company sold 12 shares at $1 million each in a private placement to Wickfield Bridge Fund LLC, an apparent subsidiary of a Michigan-based real estate investment fund.
In return, Wickfield got the rights to a whopping 9% annual royalty, capped at total payments of $108 million — nine times its original investment.
If Zomedica sold itself, Wickfield would get paid $60 million to $108 million (depending on timing), less royalties paid to that point. If Zomedica went under and into a liquidation, Wickfield essentially had claim to all of the company’s assets, given a so-called “liquidation preference,” also $108 million less royalties paid.
Simply put, this was a brutal deal for Zomedica, but it was likely the only deal available, and, of course, it worked.
Zomedica now has a market capitalization above $1 billion. It sold $173.5 million worth of common stock in a single offering in February.
So the company’s financial condition is far better now, but until last month, the preferred stock remained.
The Retirement Deal
Now, it’s gone. Wickfield took $44 million in ZOM stock in exchange for its preferred shares.
This is good news for Zomedica, but the question from Wickfield’s perspective is: why?
It bears repeating: Wickfield had multiple paths to earning $108 million from Zomedica.
It would have hit that bogey at $1.2 billion in revenue. That’s cumulative revenue, not in a single year. Given Zomedica’s market cap of $1.26 billion, bulls have to believe the company would hit that figure in relatively short order. Wickfield apparently didn’t.
If Zomedica was acquired, Wickfield again would have earned $108 million. At this valuation, the preferred stock wouldn’t have presented a massive roadblock to a sale; a company willing to pay $2 billion for Zomedica would have been able to manage the extra payment to Wickfield.
Again, in a worst-case scenario, Wickfield has first claim on the assets in a liquidation or at least the first claim on the first $108 million in assets. So if the Truforma rollout stumbled or something else went wrong, Wickfield’s downside was protected.
The Valuation Problem for ZOM Stock
Yet the fund took 40 cents on the dollar.
It’s possible Wickfield wanted — or needed — the capital for other efforts, but one would imagine that if Zomedica has such promise, it could have borrowed against its preferred stock.
This sale is a sign that even a major secured holder doesn’t see the same promise in the company that so many ZOM bulls do. And as I’ve written before, I’m inclined to agree.
The competition will be stiff. Industry leader IDEXX Laboratories (NASDAQ:IDXX) already offers similar assays. Zomedica’s technology isn’t owned, but instead licensed from Qorvo (NASDAQ:QRVO). Qorvo sold that license for total consideration of about $15 million.
There is a narrative around ZOM stock that suggests this is some innovative company with an enormously bright future. It can be the next big winner in the pet industry, after names like Zoetis (NYSE:ZTS) and Chewy (NYSE:CHWY),
That’s not necessarily the case. Rather, this is a business targeting niche markets with another company’s technology.
Everyone around Zomedica seems to understand that. The company itself was selling stock at 16 cents a share last year (plus warrants with an exercise price of 16 cents). Qorvo was happy to do a deal for a relative pittance. Now Wickfield is showing little long-term confidence.
These facts don’t mean Zomedica has no shot. They don’t mean ZOM stock is worth zero. But they do mean that an awful lot of important entities don’t believe Zomedica really should be worth well over $1 billion. The market may soon come to the same conclusion.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.