The last time I wrote about Zomedica (NYSEAMERICAN:ZOM) was on March 22. At the time, I said ZOM stock was an excellent long-term buy for speculative investors.
Since then, ZOM stock has lost 57% of its value. As I write this, it’s trading well below $1.
While a change in its sales approach hasn’t helped boost investor confidence, the reality is that ZOM stock has been on a downhill slide since it launched its Truforma diagnostic platform two weeks early in mid-March.
Unless I’ve missed something, the opportunity to profit off Zomedica has only gotten better. Here’s why.
ZOM Stock and Selling Direct
On April 15, Zomedica announced it was moving to a direct sales organization, phasing out its distributor-based sales efforts.
“As TRUFORMA ®’s market presence grew, we intended to transition from a distributor-based sales model to a direct sales organization. However, due to anticipated changes at our current distributor that we believe have impacted its ability to market our products effectively, we will be accelerating that transition and the building of a direct sales organization,” CEO Robert Cohen stated in its press release.
In the same press release, the company’s vice president of sales and chief commercial officer, Brük Herbst, said that his experience running Idexx Laboratories’ (NASDAQ:IDXX) direct sales efforts proved to be invaluable to his team, both growing sales and servicing its customers. The move by its distributor forced its hand in a good way.
With $200 million in cash raised in February from a share offering, Zomedica will have the money to make the transition a seamless one.
Early in my adult work life, I worked in sales for a beverage distributor that also manufactured its own line of seltzers. There was always a tug-of-war between serving our customers and doing what was best for our own products. By the nature of the beast, the distributor is always conflicted.
Zomedica having eliminated the conflict gives it the green light to go after a chunk of the $3 billion diagnostics market for companion animals. That’s excellent news if you’re a long-time shareholder.
In my opinion, selling direct is always the preferred option.
What Else Might Be Hampering Zomedica’s Share Price?
InvestorPlace’s Vince Martin wrote an article on April 9 that points to the company’s past financial troubles and what it had to do to extricate itself from the mess.
Zomedica, close to bankruptcy in 2019, entered into a financial arrangement with a Michigan-based real estate investment fund. The deal gave Wickfield Bridge Fund LLC $12 million in preferred shares that paid a 9% annual royalty payment.
According to page F-16 of Zomedica’s 2019 10-K, this meant that Wickfield would get 9% of the company’s sales each year until the investor received $108 million. Alternatively, Zomedica could redeem the preferred shares for $108 million less any sales it paid out to Wickfield.
As my colleague points out, the company remedied the situation in early March, exchanging the preferred shares for 24.72 million shares of ZOM stock, or $0.49 each. At the time of the agreement announced on March 8, the shares were trading at $1.78.
Martin believes Wickfield took the deal because it knew Zomedica’s sales weren’t going to be nearly as robust as bulls projected. So, a bird in the hand is worth two in the bush.
Another Viewpoint
I look at the situation from a slightly different perspective.
What if Wickfield got wind of the possibility Zomedica would switch to a direct sales model, which meant a slightly slower sales ramp up? It then approached the company about some kind of agreement where both sides win something, and both sides lose something.
In the case of Zomedica, it wins termination of the onerous agreement. Still, it gives up 24.72 million shares of its common stock, worth approximately 2.5% of its 971.9 million shares outstanding (based on 947.2 million shares outstanding as of Feb. 26 plus 24.72 million shares issued in the agreement).
In the case of Wickfield, it wins 24.72 million shares that it can sell at any time, while it loses the noose around Zomedica’s neck.
I’ve always thought that the best deals are those where both parties lose something of value. I don’t think there’s any doubt this is the case with Zomedica and Wickfield.
The Bottom Line
When a stock trades below $1, there’s often a reason. In the case of Zomedica, I don’t think there’s any question investors are wondering about the true potential of its Truforma point-of-care diagnostic platform.
We won’t know for several quarters if the total break from its distribution partner was a good idea. In the meantime, Zomedica has lots of expenses and little to show on the top line.
I thought it was a speculative buy at a little more than $2. At 83 cents, it’s an even better buy.
But let me set you straight about one thing. If you think this is a slam dunk, you’ve got another thing coming. It’s under $1 for a reason. It is CEO Robert Cohen’s job to prove it’s worth much, much, more.
If you’ve got some fun money, this is one of the best penny-stock opportunities I can think of.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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