Zomedica Corp.: Form 10-Q for the period ended Sep 30, 2024

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATION

(All amounts are expressed in thousands unless otherwise indicated)

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and financial condition of the Company. The Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto for the quarter ended September 30, 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. and internationally 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.

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, stock-based compensation, 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 and related benefits) 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.

Canadian Taxes

In Canada, due to the uncertainty of realizing any tax benefits as of September 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.

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 nine months ended September 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. 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 nine months ended September 30, 2024, as part of the Company’s interim goodwill impairment test.

The carrying values of goodwill for the PulseVet and Assisi reporting units at September 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 September 30, 2024. This implied a control premium of 59.3%. 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.

While the Company continues to believe its estimates of fair value are reasonable, changes in assumptions concerning future financial results, an increase in the discount rate, or other underlying assumptions could significantly impact the fair value of the reporting units. The Company could be required to record an impairment charge in future periods. Additionally, future declines in the overall market value of the Company’s equity may 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 September 30, 2024, the carrying value of our Diagnostic instruments was $10,268. 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 2.66 years to 3.53 years as of September 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.

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 September 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 $90.

Results of Consolidated Operations

Our results of operations for the three and nine months ended September 30, 2024 and 2023 are as follows:

Revenue

Revenue for the three months ended September 30, 2024 was $6,997, compared to $6,347 for the three months ended September 30, 2023, an increase of $650, or 10%. Revenue for the nine months ended September 30, 2024 was $19,390, compared to $17,849 for the nine months ended September 30, 2023, an increase of $1,541, or 9%.

The increase in sales for the three months ended September 30, 2024, was primarily due to growth in both consumables and capital sales in our existing PulseVet® products, as well as growth in TRUFORMA® products, including the impact of launching new assays during the comparative period. The increase in sales for the nine months ended September 30, 2024, was primarily due to growth in both consumables and capital sales in our PulseVet® products, as well as growth in TRUFORMA® products, partially attributable to the launch of new assays during the comparative period, and the continued performance of VetGuardian®, which had only recently launched during the nine months ended September 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 September 30, 2024 was $1,937, compared to $1,985 for the three months ended September 30, 2023, a decrease of $48, or 2%. Cost of revenue for the nine months ended September 30, 2024 was $5,851, compared to $5,604 for the nine months ended September 30, 2023, an increase of $247, or 4%.

The decrease in cost of revenue for the three months ended September 30, 2024, was primarily due to lower costs realized from the further integration of our Minnesota manufacturing facility, acquired in the second half of 2023, partially offset by increased manufacturing expenses driven by higher unit sales. The increase in cost of revenue for the nine months ended September 30, 2024, was primarily driven by increased manufacturing expenses resulting from higher unit sales. We anticipate that cost of revenue will continue to increase in future periods in line with the expected growth in unit sales, as described above.

Gross Profit

Gross profit margin for the three months ended September 30, 2024 was 72%, compared to 69% for the three months ended September 30, 2023. Gross profit margin for the nine months ended September 30, 2024 was 70%, compared to 69% for the nine months ended September 30, 2023.

The increase in gross profit margin percentage for both the three and nine months ended September 30, 2024, was primarily due to improvements associated with the integration of our Minnesota manufacturing facility, as well as the further absorption of fixed costs driven by increased unit sales.

General and Administrative

General and administrative expense for the three months ended September 30, 2024 was $6,765, compared to $6,115 for the three months ended September 30, 2023, an increase of $650, or 11%. General and administrative expense for the nine months ended September 30, 2024 was $23,366, compared to $19,977 for the nine months ended September 30, 2023, an increase of $3,389, or 17%.

The increase in general and administrative expenses for the three months ended September 30, 2024, was primarily driven by professional fees for specialized accounting and development work, higher than usual adjustments to the Revo Squared earnout liability in the prior comparative period, and increased amortization expense associated with acquisitions made in the second half of 2023. These increases were partially offset by lower stock-based compensation expense, including the impact of forfeitures related to the departure of our former Chief Financial Officer during the current period. The increase in general and administrative expenses for the nine months ended September 30, 2024, was primarily driven by professional fees for specialized accounting and development work, increased amortization expense associated with acquisitions made in the second half of 2023, proxy and special meeting costs, and higher than usual adjustments to the Revo Squared earnout liability in the prior comparative period. These increases were partially offset by lower stock-based compensation expense. While we expect future general and administrative expenses to increase, we anticipate they will decrease proportionally relative to sales and related product expansion.

Research and Development

Research and development expense for the three months ended September 30, 2024 was $1,845, compared to $867 for the three months ended September 30, 2023, an increase of $978, or 113%. Research and development expense for the nine months ended September 30, 2024 was $5,122, compared to $2,645 for the nine months ended September 30, 2023, an increase of $2,477, or 94%.

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 September 30, 2024 was $3,890, compared to $3,328 for the three months ended September 30, 2023, an increase of $562, or 17%. Selling and marketing expense for the nine months ended September 30, 2024 was $11,920, compared to $9,826 for the nine months ended September 30, 2023, an increase of $2,094, or 21%.

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

No impairment expense was recognized for either the three months ended September 30, 2024, or the three months ended September 30, 2023. For the nine months ended September 30, 2024, impairment expense was $16,024, compared to $0 for the nine months ended September 30, 2023. The increase was due to the goodwill impairment recognized earlier in the year, driven by slowed future sales growth projections and the allocation of operating expenses.

Other (Loss) Income

Other expense for the three months ended September 30, 2024 was $111, compared to Other income of $2,195 for the three months ended September 30, 2023, a net change of $2,306. Other income for the nine months ended September 30, 2024 was $25, compared to $2,195 for the nine months ended September 30, 2023, a decrease of $2,170, or 99%. The change in both comparative periods was primarily due to a gain of $2,174 on the fair valuation of the Company’s previously held equity interest in SMP, which was recognized during the three and nine months ended September 30, 2023.

Net Loss

Net loss for the three months ended September 30, 2024 was $6,697 compared to a net loss of $491 for the three months ended September 30, 2023, an increase of $6,206, or 1264%. Net loss for the nine months ended September 30, 2024 was $39,788, compared to a net loss of $12,123 for the nine months ended September 30, 2023, an increase of $27,665, or 228%.

The net loss for each comparative period was attributed to the matters described above, as well as to tax-related benefits recognized during the three and nine months ended September 30, 2023, which were attained as part of the SMP acquisition. We expect to continue recording net losses in future periods until 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:

Net cash used in operating activities for the nine months ended September 30, 2024 was $19,105, compared to $10,960 for the nine months ended September 30, 2023, an increase in cash used of $8,145, or 74%. The increase in cash used in operating activities resulted primarily from the increase in net loss noted above, excluding the impact of non-cash charges, including stock-based compensation, impairment expense, and amortization of intangible assets.

Net cash provided by investing activities for the nine months ended September 30, 2024 was $15,938, compared to $5,406 for the nine months ended September 30, 2023, an increase in cash provided of $10,532, or 195%. The increase in cash provided by investing activities resulted primarily from cash paid as a part of the SMP acquisition during the prior period, which did not recur and decreased capital expenditures for the nine months ended September 30, 2024, partially offset by lower maturity of available-for-sale securities.

Net cash used in financing activities for the nine months ended September 30, 2024, was $70, compared to $0 for the nine months ended September 30, 2023, an increase of $70. The increase was attributable to stock option issuance costs paid during the third quarter of 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 September 30, 2024, we had an accumulated deficit of $210,721. We have funded our working capital requirements primarily through the sale of our equity and equity-related securities and the exercise of stock options and warrants.

As of September 30, 2024, the Company had working capital (defined as current assets minus current liabilities) of $79,206.

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 believe 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.

The Company’s long-term cash requirements have not changed materially since the 2023 Form 10-K.

U.S. Taxes

As of September 30, 2024, we had deferred tax assets for net operating loss carryforwards for U.S. federal income tax purposes of $15,214 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 $11,400.

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.

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 the evaluation as of December 31, 2023, our principal executive officer and principal financial and accounting officer 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 September 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 September 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 September 30, 2024. Based on management's assessment, we have concluded that our internal control over financial reporting was effective as of September 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 second quarter of 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.

For the three months ended September 30, 2024, management continued to monitor the effectiveness of the revised internal controls and confirmed that no further issues or material weaknesses have arisen. Based on this ongoing assessment, management concluded that our disclosure controls and procedures over financial reporting were effective as of September 30, 2024.

Changes in Internal Control Over Financial Reporting

Other than as discussed above, during the three months ended September 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.

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.