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HSKA Heska Corp.

Filed: 6 May 21, 12:20pm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________________
Commission file number: 000-22427
hska-20210331_g1.jpg
HESKA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware77-0192527
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

3760 Rocky Mountain Avenue
Loveland, Colorado


80538
(Address of principal executive offices)(Zip Code)

Registrant's telephone number, including area code: (970) 493-7272

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock, $0.01 par valueHSKAThe Nasdaq Stock Market LLC

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.  Yes    No
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).  Yes   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
Non-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 Act).  Yes   No 
10,424,924 shares of the Registrant's Public Common Stock, $.01 par value, were outstanding at May 4, 2021.





TABLE OF CONTENTS 
   Page
PART I - FINANCIAL INFORMATION
 Item 1.
       Note 2, Revenue
       Note 5, Income Taxes
       Note 6, Leases
       Note 10, Inventories
Item 2.
 Item 3.
 Item 4.
PART II - OTHER INFORMATION
 Item 1.
 Item 1A.
Item 2.
 Item 6.
 
HESKA, scil, ALLERCEPT, HemaTrue, Solo Step, Element DC, Element HT5, Element POC, Element i, Element i+, Element COAG, Element DC5X and Element RC, Element RCX, Element RCX3 and scil vet, scil academy, scil vIP, scil ABC are registered trademarks of Heska Corporation and/or it's affiliates. DRI-CHEM is a registered trademark of FUJIFILM Corporation. TRI-HEART is a registered trademark of Intervet Inc., d/b/a Merck Animal Health, formerly known as Schering-Plough Animal Health Corporation ("Merck Animal Health"), which is a unit of Merck & Co., Inc., in the United States and is a registered trademark of Heska Corporation in other countries. This quarterly report on Form 10-Q also refers to trademarks and trade names of other organizations.
-i-



Our Certificate of Incorporation, as amended (the “Charter”), authorizes three classes of stock: Original Common Stock, Public Common Stock, and Preferred Stock. Pursuant to an NOL Protective Amendment to the Charter adopted in 2010, all shares of Original Common Stock then outstanding were automatically reclassified into shares of Public Common Stock. Our Public Common Stock trades on the Nasdaq Stock Market LLC. In this Quarterly Report on Form 10-Q, references to “Public Common Stock” and “Common Stock” are references to our Public Common Stock, unless the context otherwise requires.
-ii-




Statement Regarding Forward Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For this purpose, any statements contained herein that are not statements of current or historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "scheduled," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ materially from those expressed or forecasted in any such forward-looking statements as a result of certain factors. Such factors are set forth in "Risk Factors," in this Form 10-Q and in our Annual Report on Form 10-K, as well as in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q and include, among others, risks and uncertainties related to:

the impact of the COVID-19 pandemic on consumer demand, our global supply chain and our financial and operational results;
the success of third parties in marketing our products;
outside business interests of our Chief Executive Officer;
our reliance on third party suppliers and collaborative partners;
our dependence on key personnel;
our dependence upon a number of significant customers;
competitive conditions in our industry;
our dependence on third parties to successfully develop new products;
our ability to market and sell our products successfully;
expansion of our international operations;
the impact of regulation on our business;
the success of our acquisitions and other strategic development opportunities;
our ability to develop, commercialize and gain market acceptance of our products;
cybersecurity incidents and related disruptions and our ability to protect our stakeholders’ privacy;
product returns or liabilities;
volatility of our stock price;
our ability to service our convertible notes and comply with their terms.

Readers are cautioned not to place undue reliance on these forward-looking statements.

Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect the passage of time, any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based, except as otherwise required by applicable securities laws. These forward-looking statements apply only as of the date of this Form 10-Q.
-iii-



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
 March 31,December 31,
 20212020
ASSETS
Current assets:  
Cash and cash equivalents$238,455 $86,334 
Accounts receivable, net of allowance for losses of $760 and $769, respectively29,891 31,080 
Inventories39,357 40,037 
Net investment in leases, current, net of allowance for losses of $209 and $192, respectively4,933 4,794 
Prepaid expenses4,485 3,875 
Other current assets5,641 5,155 
Total current assets322,762 171,275 
Property and equipment, net34,863 35,542 
Operating lease right-of-use assets5,089 5,457 
Goodwill89,968 88,276 
Other intangible assets, net53,879 55,992 
Deferred tax asset, net16,758 5,694 
Net investment in leases, non-current15,939 15,789 
Investments in unconsolidated affiliates6,518 6,704 
Related party convertible note receivable, net6,709 6,671 
Promissory note receivable from investee, net8,743 — 
Other non-current assets8,345 8,439 
Total assets$569,573 $399,839 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:  
Accounts payable$14,958 $15,119 
Accrued liabilities14,920 18,055 
Operating lease liabilities, current2,015 2,087 
Deferred revenue, current, and other5,893 6,854 
Total current liabilities37,786 42,115 
Convertible note, non-current, net83,721 48,459 
Deferred revenue, non-current4,483 4,667 
Other long-term borrowings566 554 
Operating lease liabilities, non-current3,571 3,858 
Deferred tax liability11,432 11,856 
Other liabilities2,741 1,277 
Total liabilities144,300 112,786 
Stockholders' equity:  
Preferred stock, $.01 par value, 2,500,000 shares authorized, none issued or outstanding
Common stock, $.01 par value, 13,250,000 shares authorized, respectively, none issued or outstanding
Public common stock, $.01 par value, 13,250,000 shares authorized, 10,417,964 and 9,475,845 shares issued and outstanding, respectively104 95 
Additional paid-in capital562,008 423,650 
Accumulated other comprehensive income8,786 14,169 
Accumulated deficit(145,625)(150,861)
Total stockholders' equity425,273 287,053 
Total liabilities and stockholders' equity$569,573 $399,839 

See accompanying notes to condensed consolidated financial statements.
-1-



HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in thousands, except per share amounts)
(unaudited)
 Three Months Ended March 31,
 20212020
Revenue, net$60,503 $30,654 
Cost of revenue35,033 17,206 
Gross profit25,470 13,448 
Operating expenses: 
Selling and marketing10,907 7,380 
Research and development1,186 2,128 
General and administrative12,359 8,558 
Total operating expenses24,452 18,066 
Operating income (loss)1,018 (4,618)
Interest and other expense, net526 2,199 
Income (loss) before income taxes and equity in losses of unconsolidated affiliates492 (6,817)
Income tax expense (benefit): 
Current income tax expense641 25 
Deferred income tax benefit(2,206)(1,533)
Total income tax benefit(1,565)(1,508)
Net income (loss) before equity in losses of unconsolidated affiliates2,057 (5,309)
Equity in losses of unconsolidated affiliates(186)(130)
Net income (loss) after equity in losses of unconsolidated affiliates1,871 (5,439)
Net loss attributable to redeemable non-controlling interest(151)
Net income (loss) attributable to Heska Corporation$1,871 $(5,288)
Basic earnings (loss) per share attributable to Heska Corporation$0.20 $(0.70)
Diluted earnings (loss) per share attributable to Heska Corporation$0.19 $(0.70)
Weighted average outstanding shares used to compute basic earnings (loss) per share attributable to Heska Corporation9,478 7,568 
Weighted average outstanding shares used to compute diluted earnings (loss) per share attributable to Heska Corporation9,844 7,568 
 
See accompanying notes to condensed consolidated financial statements.
-2-



HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands) 
(unaudited)
Three Months Ended March 31,
 20212020
Net income (loss) after equity in losses of unconsolidated affiliates$1,871 $(5,439)
Other comprehensive loss: 
Translation adjustments and losses from intra-entity transactions(5,383)(356)
Comprehensive loss(3,512)(5,795)
Comprehensive loss attributable to redeemable non-controlling interest(151)
Comprehensive loss attributable to Heska Corporation$(3,512)$(5,644)
 
See accompanying notes to condensed consolidated financial statements.






-3-



HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands) 
(unaudited)
 Preferred StockCommon Stock 
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
 
 
Accumulated
Deficit
 
Total
Stockholders'
Equity
Three Months Ended March 31, 2020 and 2021SharesAmountSharesAmount
Balances, December 31, 2019$7,882 $79 $290,216 $513 $(136,444)$154,364 
Adoption of accounting standards— — — — — — (18)(18)
Balances, January 1, 2020, as adjusted7,882 79 290,216 513 (136,462)154,346 
Net loss attributable to Heska Corporation— — — — — — (5,288)(5,288)
Issuance of common stock, net of shares withheld for employee taxes— — (39)(1)(201)— — (202)
Issuance of preferred stock, net of issuance costs122 — — 121,784 — — 121,785 
Stock-based compensation— — — — 353 — — 353 
Other comprehensive loss— — — — — (356)— (356)
Balances, March 31, 2020122 $7,843 $78 $412,152 $157 $(141,750)$270,638 
Balances, December 31, 2020$9,476 $95 $423,650 $14,169 $(150,861)$287,053 
Adoption of accounting standards— — — — (29,834)— 3,365 (26,469)
Balances, January 1, 2021, as adjusted9,476 95 393,816 14,169 (147,496)260,584 
Net income attributable to Heska Corporation— — — — — — 1,871 1,871 
Issuance of common stock, net of forfeitures and shares withheld for employee taxes— — 178 — — 178 
Equity offering, net of issuance costs— — 941 164,177 — — 164,186 
Stock-based compensation— — — — 3,837 — — 3,837 
Other comprehensive loss— — — — — (5,383)— (5,383)
Balances, March 31, 2021$10,418 $104 $562,008 $8,786 $(145,625)$425,273 
Note: The quarter ended March 31, 2020 excludes amounts related to redeemable non-controlling interests recorded in mezzanine equity.
See accompanying notes to condensed consolidated financial statements.
-4-



HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Three Months Ended
March 31,
 20212020
Cash flows from operating activities:  
Net income (loss) after equity in losses from unconsolidated affiliates$1,871 $(5,439)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:  
Depreciation and amortization3,571 1,374 
Non-cash impact of operating leases526 408 
Deferred income tax benefit(2,206)(1,533)
Stock-based compensation3,837 353 
Equity in losses of unconsolidated affiliates186 130 
Accretion of discounts and issuance costs22 1,524 
Other losses207 42 
Changes in operating assets and liabilities (net of the effect of acquisitions):  
Accounts receivable858 (1,092)
Inventories(1,818)(3,081)
Other assets(893)(429)
Accounts payable153 837 
Other liabilities(4,977)2,145 
Net cash provided by (used in) operating activities1,337 (4,761)
Cash flows from investing activities:  
Acquisition of CVM(14,420)
Acquisition of Lacuna, net of cash acquired(3,882)
Promissory note receivable issuance(9,000)
Purchases of property and equipment(262)(210)
Proceeds from disposition of property and equipment13 
Net cash used in investing activities(13,131)(14,630)
Cash flows from financing activities:  
Payment of stock issuance costs(217)(158)
Preferred stock proceeds122,000 
Proceeds from issuance of common stock165,357 336 
Repurchase of common stock(679)(538)
Repayments of other debt(106)(10)
Net cash provided by financing activities164,355 121,630 
Foreign exchange effect on cash and cash equivalents(440)(24)
Net increase (decrease) in cash and cash equivalents152,121 102,215 
Cash and cash equivalents, beginning of period86,334 89,030 
Cash and cash equivalents, end of period$238,455 $191,245 
Supplemental disclosure of cash flow information:
Non-cash transfers of equipment between inventory and property and equipment, net$1,549 $553 
Accrued stock issuance costs$97 $56 
Contingent consideration for acquisition$1,700 $
Indemnity holdback for acquisition$370 $

See accompanying notes to condensed consolidated financial statements.
-5-


HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Heska Corporation and its wholly-owned subsidiaries ("Heska", the "Company", "we" or "our") sell veterinary and animal health diagnostic and specialty products. Our offerings include Point of Care diagnostic laboratory instruments and supplies; digital imaging diagnostic products, software and services; digital cytology services; vaccines; local and cloud-based data services; allergy testing and immunotherapy; and single-use offerings such as in-clinic diagnostic tests and heartworm preventive products. Our core focus is on supporting veterinarians in the canine and feline healthcare space.
Basis of Presentation and Consolidation
The accompanying interim Condensed Consolidated Financial Statements are unaudited. The interim unaudited Condensed Consolidated Financial Statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include normal, recurring adjustments, necessary to present fairly the financial position of the Company as of March 31, 2021, and the results of our operations, statements of stockholders' equity, and cash flows for the three months ended March 31, 2021 and 2020.
The unaudited Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. Our unaudited Condensed Consolidated Financial Statements include our accounts and the accounts of our wholly-owned subsidiaries since their respective dates of acquisitions. All intercompany accounts and transactions have been eliminated in consolidation. Where our ownership of a subsidiary is less than 100%, the non-controlling interest is reported on our Condensed Consolidated Balance Sheets. The non-controlling interest in our consolidated net income is reported as "Net loss attributable to redeemable non-controlling interest" on our Condensed Consolidated Statements of Income (Loss). The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year or any future period, particularly in light of the COVID-19 pandemic and its effects on the domestic and global economies as described below. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and other financial information filed with the SEC.
Beginning in the first quarter of 2020, to limit the spread of COVID-19, governments took various actions including the issuance of stay-at-home policies and social distancing procedures and guidelines, causing some businesses to adjust, reduce or suspend business and operating activities. Veterinary care is widely recognized as an "essential" service for pet owners, and veterinarians continued to deliver essential medical care for sick and injured pets. The stay-at-home policies deployed early in 2020 to combat the spread of COVID-19 resulted in a decrease in companion animal clinical visits, including delay of elective procedures and wellness visits and as a result lowers demand for diagnostic testing services. Beginning in the second quarter of 2020, certain local, state and federal governments began to ease the stay-at-home policies and allowed more businesses and facilities to re-open, leading to a recovery in companion animal clinical visits and associated demand for our diagnostic products. During the fourth quarter of 2020 and into the first quarter of 2021, increased restrictions, mainly in the European Union, certain parts of Canada and Australia, in which we operate, re-emerged. The extent to which the continuation, or another wave outbreak of COVID-19, or an outbreak of other health epidemics could impact our business, results of operations and financial condition, including the potential for write-offs or impairments of assets and suspension of capital investments, will depend on future developments. We are unable to predict with certainty the effects of the COVID-19
-6-


HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


pandemic on our customers, suppliers and vendors, as well as the actions of governments, and when and to what extent normal economic and operating conditions can resume; these effects may differ from those assumed in our projected estimates. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business, mainly in our ability to place new capital equipment, as a result of any economic impact that has occurred or may occur in the future.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are required when establishing the allowance for credit losses and the net realizable value of inventory; determining future costs associated with warranties provided; determining the period over which our obligations are fulfilled under agreements to license product rights and/or technology rights; evaluating long-lived and intangible assets and investments for estimated useful lives and impairment; estimating the useful lives and standalone selling prices of instruments under leasing arrangements; determining the allocation of purchase price under purchase accounting; estimating the expense associated with the granting of stock; determining the need for, and the amount of a valuation allowance on deferred tax assets; determining the fair value of our embedded derivatives; and determining the value of the non-controlling interest in a business combination. Our actual results may differ from these estimates and there may be changes to those estimates in future periods.
Critical Accounting Policies
Our accounting policies are described in our audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2020, and other than the recently adopted accounting pronouncements described below have not changed materially since such filing.
Adoption of New Accounting Pronouncements

Effective January 1, 2021, we adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740, and also clarifies and amends existing guidance to improve consistent application. We evaluated the impact of the standard on our consolidated financial statements and the adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures.

Effective January 1, 2021, we adopted ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The amendments in this ASU clarify the interaction between the accounting for investments in equity securities, investments in equity method and certain derivatives instruments. The ASU is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. We evaluated the impact of the standard on our consolidated financial statements and the adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures.
Effective January 1, 2021, we early adopted ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), which simplifies the accounting for certain convertible instruments. The update reduces the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible debt will be accounted for as a single liability measured at its amortized cost and convertible preferred stock will be accounted for as
-7-


HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. The update also requires the if-converted method to be used for convertible instruments and the effect of potential share settlement be included in the diluted earnings per share calculation when an instrument may be settled in cash or shares.

The Company's 3.75% Convertible Senior Notes due 2026 (the "Notes") are a convertible instrument with a cash-conversion feature that is accounted for within the scope of ASC 470-20 and impacted by the adoption of ASU 2020-06. The Company has elected to apply the modified retrospective method wherein the Company recognized a cumulative-effect adjustment to the opening balance of retained earnings (January 1, 2021). Further, the Company will not restate EPS in prior periods. The Company calculated the cumulative-effect adjustment as of January 1, 2021 by comparing (i) the historical amortization schedule for the Notes through December 31, 2020 and (ii) an updated amortization schedule wherein the conversion feature within the Notes would not be separated as an equity component and subsequently recognized as non-cash interest expense under ASC 835-30. As a result of ASU 2020-06, while cash interest expense is not impacted, non-cash interest accretion is limited to the amortization of debt issuance costs under ASC 835-30. Therefore, the Company prepared its transition journal entries by (i) reversing the conversion feature amount recorded in APIC and (ii) reversing the difference in non-cash interest expense via retained earnings. The adoption resulted in a decrease to accumulated deficit of $3.4 million, a decrease to additional paid-in capital of $29.8 million, and an increase to convertible note, non-current, net of $35.2 million. Additionally, due to the adoption, the Company reversed the remaining balance of the net deferred tax liability of $8.8 million, which was initially recorded in connection with the Notes.

Effective January 1, 2021, we adopted ASU 2020-10, Codification Improvements, which updates various codification topics by clarifying or improving disclosure requirements to align with the SEC's regulations. We evaluated the impact of the standard on our consolidated financial statements and the adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures.

2.     REVENUE

We separate our goods and services among 2 reportable segments, North America and International. The two segments consist of revenue originating from:

North America: including the United States, Canada and Mexico
International: all geographies outside North America, currently consisting primarily of Australia, France, Germany, Italy, Malaysia, Spain and Switzerland

Refer to Note 18 for further detail regarding the change in reportable segments which required recast of prior period presentation.

-8-


HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The following table summarizes our segment revenue (in thousands):
Three Months Ended March 31,
20212020
North America Revenue:
POC Lab Instruments & Other$1,970 $1,372 
     POC Sales-type leases1,018 1,244 
POC Lab Consumables16,951 13,686 
POC Imaging6,688 3,496 
PVD6,864 4,504 
OVP3,781 3,348 
Total North America Revenue$37,272 $27,650 
International Revenue:
POC Lab Instruments & Other$1,766 $235 
POC Sales-type leases640 
POC Operating Leases608 
POC Lab Consumables12,225 560 
POC Imaging6,658 1,358 
PVD1,334 851 
Total International Revenue$23,231 $3,004 
Total Revenue$60,503 $30,654 

Remaining Performance Obligations

Remaining performance obligations represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year which are fully or partially unsatisfied at the end of the period. Remaining performance obligations include noncancelable purchase orders, the non-lease portion of minimum purchase commitments under long-term supply arrangements, extended warranty, service and other long-term contracts. Remaining performance obligations do not include revenue from contracts with customers with an original term of one year or less, revenue from long-term supply arrangements with no minimum purchase requirements, revenue expected from purchases made in excess of the minimum purchase requirements, or revenue from instruments leased to customers. While the remaining performance obligation disclosure is similar in concept to backlog, the definition of remaining performance obligations excludes leases and contracts that provide the customer with the right to cancel or terminate for convenience with no substantial penalty, even if historical experience indicates the likelihood of cancellation or termination is remote. Additionally, the Company has elected to exclude contracts with customers with an original term of one year or less from remaining performance obligations.

-9-


HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


As of March 31, 2021, the aggregate amount of the transaction price allocated to remaining minimum performance obligations was approximately $148.8 million. As of March 31, 2021, the Company expects to recognize revenue as follows (in thousands):
Year Ending December 31,Revenue
2021 (remaining)$26,196 
202232,891 
202329,476 
202424,369 
202518,276 
Thereafter17,580 
$148,788 

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled contract assets, deferred revenue, and customer deposits and billings in excess of revenue recognized. In addition, the Company defers certain costs incurred to obtain contracts.

Contract Assets

Certain unbilled amounts related to long-term contracts for which we provide a free term to the customer are recorded in "Other current assets" and "Other non-current assets" on the accompanying Condensed Consolidated Balance Sheets. The collection of these balances occurs over the term of the underlying contract. The balances as of March 31, 2021 were $1.2 million and $4.1 million for current and non-current assets, respectively, shown net of related unearned interest. The balances as of December 31, 2020 were $1.2 million and $4.1 million for current and non-current assets, respectively, shown net of related unearned interest.

Contract Liabilities

The Company receives cash payments from customers for licensing fees or other arrangements that extend for a specified term. These contract liabilities are classified as either current or long-term in the Condensed Consolidated Balance Sheets based on the timing of when the Company expects to recognize revenue. As of March 31, 2021 and December 31, 2020, contract liabilities were $8.4 million and $8.9 million, respectively, and are included within "Deferred revenue, current, and other" and "Deferred revenue, non-current" in the accompanying Condensed Consolidated Balance Sheets. The decrease in the contract liability balance during the three-month period ended March 31, 2021 is approximately $1.7 million of revenue recognized during the period, offset by approximately $1.2 million of additional deferred sales in 2021. Contract liabilities are reported on the accompanying Condensed Consolidated Balance Sheets on a contract-by-contract basis.
-10-


HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



3.    ACQUISITIONS AND RELATED PARTY ITEMS
Lacuna Acquisition
On February 1, 2021, the Company completed the acquisition of Lacuna Diagnostics, Inc. ("Lacuna"), a veterinary digital cytology company, to broaden the Company's point of care diagnostic offerings. The Company acquired 100% of the issued and outstanding shares of Lacuna for a purchase price of $4.3 million. The Company then dissolved Lacuna on February 1, 2021. In accordance with the purchase agreement, the Company is required to hold a $0.4 million general indemnity holdback that is intended to provide a non-exclusive source of funds for the payment of any losses identified and shall be released within 18 months of closing. As additional consideration for the shares, the Company agreed to a contingent earn-out of an additional $2.0 million based on the achievement of certain performance metrics within a twelve month period ("Initial Earn Out Period"), reducing to $1.0 million if such metrics were met in a twelve month period subsequent to the Initial Earn Out Period. The fair value of the contingent consideration as of the acquisition date was $1.7 million.
The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in $3.9 million of goodwill, primarily related to expanded opportunities with our offerings. All of the goodwill is allocated to the North America segment and is not tax deductible for income tax purposes.
The acquisition was accounted for as a business combination in accordance with ASC 805. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of February 1, 2021.
The information below represents the preliminary purchase price allocation as of the acquisition date (in thousands):
February 1, 2021
Purchase price$4,255 
Fair value of contingent consideration1,700 
Total purchase consideration$5,955 
Cash and cash equivalents
Accounts receivable170 
Property and equipment, net530 
Other intangible assets, net1,185 
Deferred tax asset167 
Total assets acquired2,055 
Goodwill3,900 
Total fair value of consideration transferred$5,955 

The Company's preliminary estimates of fair values of the net assets acquired are based on the information that was available at the date of the acquisition, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the date of the acquisition.

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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Intangible assets acquired, amortization method and estimated useful life as of February 1, 2021, was as follows (dollars in thousands):
Useful LifeAmortization
Method
Fair Value
Developed technology3 yearsStraight-line$1,000 
Customer relationships6 monthsStraight-line150 
Trade name11 monthsStraight-line35 
Total intangible assets acquired$1,185 
Pro forma financial information related to the acquisition of Lacuna has not been provided as it is not material to our consolidated results of operations.
scil Acquisition
On April 1, 2020, the Company completed the acquisition of scil animal care company GmbH (“scil”) from Covetrus, Inc. The Company purchased 100% of the capital stock of scil for an aggregate price of $110.3 million in cash. The acquisition represents a key milestone in the Company's long-term strategic plan, creating a global veterinary diagnostics company with leadership positions in key geographic markets. The purchase price exceeded the identifiable net assets, resulting in goodwill of $46.0 million, primarily attributable to the synergies expected from the expanded market opportunities with our offerings and the experienced workforce acquired. Of the goodwill acquired, $37.3 million is allocated to our International segment and $8.7 million is allocated to our North America segment. All of the goodwill is tax deductible for purposes of calculating Controlled Foreign Corporation ("CFC") tested income, which may result in a decrease to the Company's future U.S. federal tax liability.

The acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of April 1, 2020. As of March 31, 2021, the Company has finalized the accounting for the acquisition.

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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The information below represents the final purchase price allocation of scil (in thousands):
April 1, 2020
Total purchase consideration$110,290 
Cash and cash equivalents5,889 
Accounts receivable10,707 
Inventories11,278 
Net investment in leases, current311 
Prepaid expenses1,692 
Other current assets1,338 
Property and equipment, net19,320 
Operating lease right-of-use assets877 
Other intangible assets, net44,517 
Net investment in leases, non-current1,027 
Investments in unconsolidated affiliates55 
Other non-current assets291 
Total assets acquired97,302 
Accounts payable8,221 
Accrued liabilities7,067 
Operating lease liabilities, current356 
Deferred revenue, current, and other3,220 
Deferred revenue, non-current94 
Operating lease liabilities, non-current529 
Deferred tax liability13,249 
Other liabilities276 
Net assets acquired64,290 
Goodwill46,000 
Total fair value of consideration transferred$110,290 

Per the tax indemnification included in the purchase agreement of scil, the seller has indemnified the Company for $1.1 million related to uncertain tax positions taken in prior years. The outcome of this arrangement will either be settled or expire due to lapse of statute of limitations by 2027. As of March 31, 2021, approximately $0.7 million of the indemnification agreement remains outstanding.

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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Intangible assets acquired, amortization method and estimated useful life as of April 1, 2020, was as follows (dollars in thousands):
Useful LifeAmortization
Method
Fair Value
Customer relationships10 yearsStraight-line$36,272 
Internally developed software7 yearsStraight-line353 
Backlog0.2 yearsStraight-line210 
Non-compete agreements2 yearsStraight-line60 
Trade name subject to amortization0.8 yearsStraight-line66 
Trademarks and trade names not subject to amortizationn/aIndefinite7,556 
Total intangible assets acquired$44,517 

Unaudited Pro Forma Financial Information
The following tables present unaudited supplemental pro forma financial information as if the acquisition had occurred on January 1, 2019 (in thousands):
Three Months Ended March 31, 2020
Revenue, net$49,205 
Net (loss) income before equity in losses of unconsolidated affiliates$(6,125)
Net (loss) income attributable to Heska Corporation$(6,104)

The pro forma financial information presented above has been prepared by combining our historical results and the historical results of scil and further reflects the effect of purchase accounting adjustments, including: (i) amortization of acquired intangible assets, (ii) the impact of certain fair value adjustments such as depreciation on the acquired property, plant and equipment, and (iii) historical intercompany sales between the Company and scil. The unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what actual results of operations would have been if the acquisition had occurred as the beginning of the period presented, nor are they indicative of future results of operations.
Other Related Party Activities
CVM Diagnostico Veternario S.L. and CVM Ecografia S.L. (“CVM”, collectively) conduct related party activities with Practice Clinicas Veterinarias Moviles, S.L. ("CVM Practice"), which is owned by CVM's management. CVM leases 2 warehouses from CVM Practice. CVM Practice charged CVM $8 thousand and $0 during the three months ended March 31, 2021 and 2020, respectively, all of which is related to lease payments. The right-of-use asset and lease liability amounts related to the warehouse leases were approximately $0.2 million as of both March 31, 2021 and December 31, 2020.

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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


4.    INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The carrying values of investments in unconsolidated affiliates, categorized by type of investment, is as follows (in thousands):
March 31, 2021December 31, 2020
Equity method investment$3,500 $3,686 
Non-marketable equity security investment3,018 3,018 
Investment in Unconsolidated Affiliates$6,518 $6,704 
Equity Method Investment
On September 24, 2018, the Company invested approximately $5.1 million, including costs, to acquire an equity interest in a business as part of its product development strategy. As of March 31, 2021, the Company's ownership interest in the business was 29.1%. In connection with the investment, the Company entered into a Manufacturing Supply Agreement that grants the Company global exclusivity to specified products to be delivered under the agreement for a 15-year period that begins upon the Company's receipt and acceptance of an initial order under the agreement. The Company accounts for this investment using the equity method of accounting. Under the equity method, the carrying value of the investment is adjusted for the Company's proportionate share of the investee's reported earnings or losses with the corresponding share of earnings or losses reported as Equity in losses of unconsolidated affiliates, listed below Net income before equity in losses of unconsolidated affiliates within the Condensed Consolidated Statements of Income (Loss).
Non-Marketable Equity Security Investment

On August 8, 2018, the Company invested approximately $3.0 million, including costs, in exchange for preferred stock. The Company’s investment is a non-marketable equity security, recorded using the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes.

As part of the agreement, the Company entered into a Supply and License Agreement, which provides that the investee produce and commercialize products that will enhance the Company's diagnostic portfolio. As part of this agreement, the Company made an upfront payment of $1.0 million related to a worldwide exclusive license agreement over a 20-year period, recorded in both short and long-term other assets. In addition, the agreement provides for an additional contingent payment of $10.0 million, relating to the successful achievement of sales milestones. This potential future milestone payment has not yet been accrued as it is not deemed by the Company to be probable at this time.

Both parties in this arrangement are active participants and are exposed to significant risks and rewards dependent on the commercial success of the activities of the collaboration. The parties are actively working on developing and testing the product as well as funding the research and development. Heska classifies the amounts paid for research and development work within the North America segment research and development operating expenses. Expense is recognized ratably when incurred and in accordance with the development plan.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


5.    INCOME TAXES

The Company's total income tax expense (benefit) for our income (loss) before income taxes were as follows (in thousands):
 Three Months Ended March 31,
 20212020
Income (loss) before income taxes and equity in losses of unconsolidated affiliates$492 $(6,817)
Total income tax benefit$(1,565)$(1,508)
        
There were cash payments for income taxes, net of refunds, of $496 thousand for the three months ended March 31, 2021 and there were cash payments of $7 thousand for income taxes for the three months ended March 31, 2020. The Company’s tax benefit was $1.6 million for the three months ended March 31, 2021 compared to the tax benefit of $1.5 million for the three months ended March 31, 2020. The increase in tax benefit in the three-month period is due to the tax benefit received from the partial release of the valuation allowance and excess tax benefits from employee stock compensation. The Company recognized $0.5 million in excess tax benefits related to employee share-based compensation for the three months ended March 31, 2021, compared to $0.3 million recognized for the three months ended March 31, 2020.

As of March 31, 2021, the Company had a deferred tax asset of approximately $9.4 million from net operating losses and tax credits and a net partial valuation allowance of approximately $4.4 million recorded against these deferred tax assets. In the first quarter, the Company released approximately $1.1 million of the partial valuation allowance against tax credits expiring in years after December 31, 2021. The release was due to future financial income forecasts showing the utilization of these credits.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


6.    LEASES

Lessee Accounting

The Company leases buildings, office equipment, and vehicles. The following table summarizes the Company's operating and finance lease balances (in thousands):

LeasesBalance Sheet LocationMarch 31, 2021December 31, 2020
Assets
OperatingOperating lease right-of-use assets$5,089 $5,457 
FinanceProperty and equipment, net1,745 1,907 
Total Leased Assets$6,834 $7,364 
Liabilities
OperatingOperating lease liabilities, current$2,015 $2,087 
Operating lease liabilities, non-current3,571 3,858 
FinanceDeferred revenue, current, and other229 295 
Other liabilities224 261 
Total Lease Liabilities$6,039 $6,501 


Lessor Accounting
The following table summarizes the profit recognized on the commencement date for sales-type leases and lease income for equipment-only operating leases (in thousands):

Three Months Ended
March 31,
20212020
Sales-type lease revenue$1,658 $1,244 
Sales-type lease cost of revenue1,264 869 
Profit recognized at commencement for sales-type leases$394 $375 
Operating lease income$608 $
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


7.    EARNINGS PER SHARE
The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted earnings per share ("EPS") for the three months ended March 31, 2021 and 2020 (in thousands, except per share data):
Three Months Ended March 31,
20212020
Net income (loss) attributable to Heska Corporation$1,871 $(5,288)
Basic weighted-average common shares outstanding9,478 7,568 
Dilutive effect of stock options and restricted stock awards366 
Diluted weighted-average common shares outstanding9,844 7,568 
Basic earnings (loss) per share attributable to Heska Corporation$0.20 $(0.70)
Diluted earnings (loss) per share attributable to Heska Corporation$0.19 $(0.70)

The following potentially outstanding common shares from convertible preferred stock, convertible senior notes, stock options and restricted stock awards were excluded from the computation of diluted EPS because the effect would have been antidilutive (in thousands):
Three Months Ended March 31,
20212020
Convertible preferred stock1,509 
Convertible Senior Notes996 43 
Stock options and restricted stock135 
996 1,687 

As more fully described in Note 16, the Company's Notes are convertible under certain circumstances, as defined in the indenture, into a combination of cash and shares of the Company's common stock. As discussed in Note 1, the Company adopted ASU 2020-06, effective January 1, 2021, which amends certain guidance on the computation of EPS for convertible instruments. Prior to the adoption of ASU 2020-06, the Company used the treasury stock method when calculating the potential dilutive effect of the conversion feature of the Notes on earnings per share, if any. Under ASU 2020-06, the treasury stock method is no longer available, and entities must apply the if-converted method for convertible instruments and the effect of potential share settlement must be included in the diluted earnings per share calculation when an instrument may be settled in cash or shares. To determine the dilutive effect to earnings per share using the if-converted method, interest expense on the outstanding Notes is added back to the diluted earnings per share numerator and all of the potentially dilutive shares are included in the diluted earnings per share denominator. For the three months ended March 31, 2021, all of the potentially issuable shares with respect to the Notes were excluded from the calculation of diluted net earnings per share because the effect was anti-dilutive. The Company has elected to apply the modified retrospective method of adoption and will not restate EPS for the prior period.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


8.    GOODWILL AND OTHER INTANGIBLES

The following summarizes the change in goodwill during the three months ended March 31, 2021 (in thousands):
North AmericaInternationalTotal
Carrying amount, December 31, 2020$35,414 $52,862 $88,276 
Goodwill attributable to acquisitions (subject to change)3,900 3,900 
Foreign currency adjustments(2,208)(2,208)
Carrying amount, March 31, 2021$39,314 $50,654 $89,968 

Other intangibles consisted of the following (in thousands):
March 31, 2021December 31, 2020
Gross Carrying AmountAccum. Amortiz.Net Carrying AmountGross Carrying AmountAccum. Amortiz.Net Carrying Amount
Intangible assets subject to amortization:
Customer relationships and other$45,636 $(7,551)$38,085 $46,989 $(6,436)$40,553 
Developed technology9,647 (1,971)7,676 8,669 (1,696)6,973 
Trade names227 (118)109 197 (105)92 
Intangible assets not subject to amortization:
Trade names8,009 — 8,009 8,374 — 8,374 
Total intangible assets$63,519 $(9,640)$53,879 $64,229 $(8,237)$55,992 

Amortization expense relating to other intangibles was as follows (in thousands):
Three Months Ended March 31,
20212020
Amortization expense$1,404 $428 

The remaining weighted-average amortization period for intangible assets is approximately 8.3 years.

Estimated amortization expense related to intangibles for each of the five years from 2021 (remaining) through 2025 and thereafter is as follows (in thousands):
Year Ending December 31,
2021 (remaining)$4,683 
20226,038 
20235,677 
20245,245 
20255,190 
Thereafter19,037 
Total amortization related to finite-lived intangible assets$45,870 
Indefinite-lived intangible assets8,009 
Net intangible assets$53,879 
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



No triggering events were identified in the first quarter of 2021 to require additional impairment testing.

9.    PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following (in thousands):
 March 31, 2021December 31, 2020
Land$2,493 $2,590 
Building12,310 12,737 
Machinery and equipment41,559 40,411 
Office furniture and equipment2,033 2,047 
Computer hardware and software4,885 4,773 
Leasehold and building improvements10,728 10,728 
Construction in progress49 
Property and equipment, gross74,057 73,290 
Less accumulated depreciation(39,194)(37,748)
Total property and equipment, net$34,863 $35,542 
The Company has subscription agreements whereby its instruments in inventory may be placed at a customer's location on a rental basis. For instruments classified as operating leases, the cost of these instruments is transferred to machinery and equipment and depreciated, typically over a 5 to 7 year period depending on the circumstance under which the instrument is placed with the customer. Our cost of instruments under operating leases as of March 31, 2021 and December 31, 2020, was $14.4 million and $13.6 million, respectively, before accumulated depreciation of $5.0 million and $4.7 million, respectively.
Depreciation expense was $1.9 million and $0.9 million for the three months ended March 31, 2021 and 2020, respectively.
10.    INVENTORIES

Inventories consisted of the following (in thousands):
March 31, 2021December 31, 2020
Raw materials$13,028 $14,454 
Work in process4,204 4,262 
Finished goods22,125 21,321 
Total inventories$39,357 $40,037 

Inventories are measured on a first-in, first-out basis and stated at lower of cost or net realizable value.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


11.    ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
March 31, 2021December 31, 2020
Accrued payroll and employee benefits$5,961 $7,949 
Accrued property taxes547 659 
Accrued purchase orders1,126 1,549 
Accrued taxes3,882 3,731 
Other3,404 4,167 
Total accrued liabilities$14,920 $18,055 
Other accrued liabilities consist of items that are individually less than 5% of total current liabilities.
12.    CAPITAL STOCK
During the three months ended March 31, 2021, the Company granted the following stock options and restricted stock awards:
 Three Months Ended March 31, 2021
 Options/Awards
Granted
Weighted-Average Grant Date Fair Value
(per option/award)
Stock options$
Restricted stock awards235 $154.48 
The restricted stock awards granted during the three months ended March 31, 2021 contain only time-based vesting terms. The fair value was measured based on the number of shares granted and the closing market price of our common stock on the date of grant and will be expensed over the corresponding requisite service period.

2021 Equity Offering

On March 5, 2021, the Company completed a public offering of 940,860 shares of common stock, $0.01 par value per share, at a public offering price of $186.00 per share. The Company received net proceeds of approximately $164.2 million after deducting underwriting discounts and commissions and issuance costs. The Company granted the underwriters an option to purchase up to an additional 141,129 shares of common stock from the Company at the offering price of $186.00 per share (less the underwriting discounts and commissions), within 30 days of the Prospectus Supplement dated March 2, 2021. The Company evaluated the accounting treatment of the option under ASC 815-40, Derivatives and Hedging - Contracts on an Entity's Own Equity, and determined that it meets the criteria for equity treatment thereunder. The underwriters’ option was not exercised and expired on April 1, 2021. The Company anticipates using the net proceeds of the offering for general corporate purposes, including working capital, further development and potential commercialization of current and future product initiatives, collaborations, and capital expenditures. The Company may also use a portion of the net proceeds of this offering to fund possible investments in or acquisitions of complementary businesses, products or technologies, or to repay indebtedness.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


13.    ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) consisted of the following (in thousands):
Pension Adjustments
Foreign Currency Translation1
Foreign Currency Gain (Loss)
on Intra-Entity
Transactions2
Total Accumulated Other Comprehensive Income
Balances at December 31, 2020$(386)$5,872 $8,683 $14,169 
Current period other comprehensive loss(2,271)(3,112)(5,383)
Balances at March 31, 2021$(386)$3,601 $5,571 $8,786 
1 Foreign currency gains and losses related to translation of foreign subsidiary financial statements.
2 The Company has intercompany loans of a long-term investment nature that are denominated in a foreign currency. These transactions are considered to be of a long-term nature if settlement is not planned or anticipated in the foreseeable future.
14.    COMMITMENTS AND CONTINGENCIES
Warranties

The Company's current terms and conditions of sale include a limited warranty that its products and services will conform to published specifications at the time of shipment and a more extensive warranty related to certain products. The Company also sells a renewal warranty for certain of its products. The typical remedy for breach of warranty is to repair or replace any defective product, and if not possible or practical, the Company will accept the return of the defective product and refund the amount paid. Historically, the Company has incurred minimal warranty costs. The Company's warranty reserve was $0.5 million and $0.5 million as of March 31, 2021 and December 31, 2020, respectively.

Litigation
From time to time, the Company may be involved in litigation relating to claims arising out of its operations. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred, and the amount can be reasonably estimated.

On February 18, 2020, a former managing director of scil filed a claim disputing the effective date of the termination of his management service agreement and the validity of the Company´s waiver of his two-year post-contractual non-compete obligation. The Company intends to defend itself against the claim. Whether or not this will be successful depends on complex facts and circumstances. The Company is, based on the advice of its legal counsel, confident that it will be successful in evidencing the effective date of the termination of the management service agreement and as such, no accrual has been recorded for this ongoing litigation. Additionally, the Company is indemnified by the scil acquisition agreement for this claim.

As of March 31, 2021, the Company was not a party to any other legal proceedings that were expected, individually or in the aggregate, to have a material adverse effect on its business, financial condition, or operating results.

Off-Balance Sheet Commitments

We have no off-balance sheet arrangements or variable interest entities.

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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Purchase Obligations

The Company has contractual obligations with suppliers for unconditional annual minimum inventory purchases in the amounts of $50.1 million as of March 31, 2021.
15.    INTEREST AND OTHER EXPENSE (INCOME), NET
Interest and other expense (income), net, consisted of the following (in thousands):
 Three Months Ended March 31,
 20212020
Interest income$(389)$(233)
Interest expense920 2,346 
Other (income) expense, net(5)86 
Total interest and other expense, net$526 $2,199 
Cash paid for interest for the three months ended March 31, 2021 and 2020 was $1.6 million and $1.6 million, respectively.
16.    CONVERTIBLE NOTES

Convertible Notes

On September 17, 2019, the Company issued $86.25 million aggregate principal amount of 3.750% Convertible Senior Notes due 2026 (the "Notes"), which included the exercise in full of an $11.25 million purchase option, to certain financial institutions as the initial purchasers of the Notes (the "Initial Purchasers"). The Company pays interest on the Notes semiannually in arrears at a rate of 3.750% per annum on March 15 and September 15 of each year. The Notes are senior unsecured obligations of the Company. The Notes were issued pursuant to an Indenture, dated September 17, 2019 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The net proceeds from the sale of the Notes were approximately $83.7 million after deducting the Initial Purchasers' discounts and the offering expenses payable by the Company.

Refer to Note 16, Convertible Notes, in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company's 2020 Form 10-K for further information on the Notes.

No portion of the Notes was converted during the three months ended March 31, 2021 and the liability component was classified as long-term debt on the Company's Condensed Consolidated Balance Sheet as of March 31, 2021.
As discussed in Note 1, the Company early adopted ASU 2020-06, effective January 1, 2021, which simplifies the accounting for certain convertible instruments. Under the new standard, qualifying convertible debt is accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. As a result of ASU 2020-06, the Company's cash interest expense is not impacted, however, the Company's non-cash interest accretion is limited to the amortization of debt issuance costs under ASC 835-30. The new effective interest rate of the Notes post-adoption is 4.35%. The Company also reversed the conversion feature amount recorded in APIC and reversed the difference in non-cash interest expense via retained earnings.

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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The following table summarizes the net carrying amount of the Notes (in thousands):
March 31, 2021December 31, 2020
Principal amount of the Notes$86,250 $86,250 
Unamortized debt discount(2,529)(37,791)
Net carrying amount$83,721 $48,459 
Interest expense related to the Notes is comprised of the amortization of the debt discount and debt issuance costs and the contractual coupon interest as follows (in thousands):
Three Months Ended March 31,
20212020
Interest expense related to contractual coupon interest$809 $809 
Interest expense related to amortization of the debt discount102 1,524 
$911 $2,333 

As of March 31, 2021, the remaining period over which the unamortized discount will be amortized is 66.0 months.

The estimated fair value of the Notes was $180.4 million and $156.9 million as of March 31, 2021 and December 31, 2020, respectively, determined through consideration of quoted market prices in less active markets. The fair value measurement is classified as Level 2 in the fair value hierarchy, which is defined in ASC 820 as inputs other than quoted prices in active markets that are either directly or indirectly observable. Based on our closing stock price of $168.46 on March 31, 2021, the if-converted value exceeded the aggregate principal amount of the Notes by $81.5 million.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


17.    NOTE RECEIVABLES
Convertible Promissory Note
On December 9, 2020, the Company's equity method investee (the “Investee”), issued a Convertible Promissory Note to the Company (the “Convertible Promissory Note”) with a principal amount of $6.65 million and a stated interest rate of 3.0% per annum that is payable monthly. The Convertible Promissory Note has a maturity date of December 9, 2023, or otherwise upon qualified redemption event or in the event of a default. Refer to Note 4 for additional information on our equity method investment.

The conversion of the Convertible Promissory Note is contingent upon certain events. Due to the convertible debt features included in the Convertible Promissory Note, it is not an equity security and is therefore not considered an additional investment in our equity method investee. The Company accounted for the transaction as a note receivable, included in Related party convertible note receivable, net on the Consolidated Balance Sheets. The note receivable will be measured at amortized cost and evaluated for credit losses each reporting period. The Company determined that the redemption features described above met the definition of an embedded derivative that requires bifurcation from the note receivable host. The Company measured the redemption features at fair value, with the residual proceeds paid allocated to the note receivable host, creating a discount to the note receivable. The discount will be amortized over the contractual term of the Convertible Promissory Note using the effective interest method. The effective interest rate of the Convertible Promissory Note is 8.69%, and the amortization of the discount will be included as interest income within Interest and other expense (income), net on the Consolidated Statements of Income.
The carrying value of the note receivable, included in Related party convertible note receivable, net on the Consolidated Balance Sheets, is as follows (in thousands):
March 31, 2021December 31, 2020
Principal amount$6,650 $6,650 
Unamortized discount(903)(977)
Net carrying amount$5,747 $5,673 

The fair value of the embedded derivative was $1.0 million as of March 31, 2021 and December 31, 2020, and is included in Related party convertible note receivable, net on the Consolidated Balance Sheets. The fair value of the derivative will be remeasured each reporting period, with the mark-to-market adjustment to be included in other expense (income) on the Consolidated Statements of Income. In addition, the Company recorded an allowance for expected credit losses on the promissory note of $33 thousand as of March 31, 2021.

Promissory Note

On February 1, 2021, one of the Company's equity investees (the "Investee"), which the Company accounts for as a nonmarketable equity security, issued a Promissory Note to the Company (the “Promissory Note”) with a principal amount of $9.0 million and a stated interest rate of 10.0% per annum that is payable monthly. The Promissory Note has a maturity date of December 1, 2024 and provides for interest only payments through December 1, 2023. Beginning on January 1, 2024, the Promissory Note requires repayment of the principal and interest over twelve consecutive monthly payments. As additional consideration, the Company



HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


was also issued a warrant to acquire securities of the Investee that expires December 31, 2034. Refer to Note 4 for additional information on our equity investments.

The Company evaluated the accounting treatment of the warrant to acquire securities and determined is a freestanding instrument that meets the definition of an embedded derivative under ASC 815 and requires bifurcation from the note receivable host. The Company measured the warrant at fair value, with the residual proceeds paid allocated to the note receivable host, creating a discount to the note receivable. The discount will be amortized over the contractual term of the Promissory Note using the effective interest method. The effective interest rate of the Promissory Note is 10.99%, and the amortization of the discount will be included as interest income within Interest and other expense (income), net on the Consolidated Statements of Income.
The carrying value of the note receivable, included in Other non-current assets on the Consolidated Balance Sheets, is as follows (in thousands):
March 31, 2021December 31, 2020
Principal amount$9,000 $
Unamortized discount(298)
Net carrying amount$8,702 $

The fair value of the embedded derivative was $0.3 million at issuance and as of March 31, 2021, and is included in Other non-current assets on our Consolidated Balance Sheets. The fair value of the derivative will be remeasured each reporting period, with the mark-to-market adjustment to be included in other expense (income) on the Consolidated Statements of Income. In addition, the Company recorded an allowance for expected credit losses on the note receivable of $0.3 million as of March 31, 2021.
18.    SEGMENT REPORTING
On April 1, 2020, Heska completed the acquisition of scil. Following this acquisition, the Company restructured its operating segments based on how the Chief Operating Decision Maker (“CODM”) manages the business, allocates resources, makes operating decisions and evaluates operating performance. The CODM changed how he assesses performance and allocates resources based on geographic regions in order to better align with the global operations of the Company. Based on this change, the Company determined it has 2 reportable segments and revised prior comparative periods to conform to the current period segment presentation. The Company’s two segments are North America and International.
The North America segment is comprised of the Company's operations in the United States, Canada and Mexico and the International segment is comprised of geographies outside of North America, which are the Company's operations primarily in Australia, France, Germany, Italy, Malaysia, Spain and Switzerland. Certain expenses incurred at the Company’s headquarters located in the North America segment are allocated to each segment in a manner consistent with where the benefits from the expenses are derived. However, there are certain corporate expenses included in the North America segment that the Company does not allocate. Such expenses include research and development, certain selling, marketing, general, and administrative costs that support the global organization. Sales and transfers between operating segments are accounted for at market-based transaction prices and are eliminated in consolidation. The Company's sales are determined by the country of origin where the sale occurred. For a description of Heska's previous operating segments, refer to Note 17 to the consolidated financial statements included in Part II. Item 8 of Heska's Annual Report on Form 10-K for the year ended December 31, 2019.
Our CODM continues to evaluate segment performance and allocate resources based on Revenue, Cost of Revenue, Gross Profit, Gross Margin and Operating Income. The CODM does not evaluate operating



HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


segments using asset information; however, we have included total asset information by segment below as there was a material change in total assets by segment as of March 31, 2021 due to the acquisition of scil.
Summarized financial information concerning the Company's reportable segments is shown in the following tables (in thousands):
Three Months Ended March 31, 2021North AmericaInternationalTotal
Total revenue$37,272 $23,231 $60,503 
Cost of revenue19,763 15,270 35,033 
Gross profit17,509 7,961 25,470 
Gross margin47 %34 %42 %
Operating income (loss)1,033 (15)1,018 

Three Months Ended March 31, 2020North AmericaInternationalTotal
Total revenue$27,650 $3,004 $30,654 
Cost of revenue15,146 2,060 17,206 
Gross profit12,504 944 13,448 
Gross margin45 %31 %44 %
Operating loss(4,093)(525)(4,618)



Asset information by reportable segment as of March 31, 2021 is as follows (in thousands):
As of March 31, 2021North AmericaInternationalTotal
Total assets$413,913 $155,660 $569,573 

Asset information by reportable segment as of December 31, 2020 is as follows (in thousands):
As of December 31, 2020North AmericaInternationalTotal
Total assets$238,550 $161,289 $399,839 


Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and related Notes included in Part I Item 1 of this Form 10-Q.
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This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, that involve risks and uncertainties, and can generally be identified by our use of the words "scheduled," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions. Such statements, which include statements concerning future revenue sources and concentration, international market expansion, gross profit margins, selling and marketing expenses, remaining minimum performance obligations, research and development expenses, general and administrative expenses, capital resources, financings or borrowings and additional losses, are subject to risks and uncertainties, including, but not limited to, those discussed under the caption "Risk Factors" contained in Part I, Item 1A of our Annual Report on Form 10-K that could cause actual results to differ materially from those projected. The Risk Factors and others described in the Company’s periodic and current reports filed with the SEC from time to time are not necessarily all of the important factors that could cause the Company’s actual results to differ materially from those projected. The forward-looking statements set forth in this Form 10-Q are as of the close of business on May 5, 2021 and we undertake no duty and do not intend to update this information, except as required by applicable laws. If we updated one or more forward looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. See “Statement Regarding Forward Looking Statements.”
Overview
We sell advanced veterinary diagnostic and specialty products. Our offerings include Point of Care laboratory instruments and consumables; Point of Care digital imaging diagnostic instruments; digital cytology services; vaccines; local and cloud-based data services; allergy testing and immunotherapy; and single-use offerings such as in-clinic diagnostic tests and heartworm preventive products. Our core focus is on supporting veterinarians in the canine and feline healthcare space.
Point of Care laboratory instruments and other sales include outright instrument sales, revenue recognized from sales-type lease treatment, and other revenue sources, such as charges for repairs. Revenue from Point of Care laboratory consumables primarily involves placing an instrument under contract in the field and generating future revenue from testing consumables, such as cartridges and reagents, as that instrument is used. Instruments placed under subscription agreements are considered operating or sales-type
leases, depending on the duration and other factors of the underlying agreement. A loss of, or disruption in, the supply of consumables we are selling to an installed base of instruments could substantially harm our business. All of our Point of Care laboratory and other non-imaging instruments and consumables are supplied by third parties, who typically own the product rights and supply the product to
us under marketing and/or distribution agreements. In many cases, we have collaborated with a third party to adapt a human instrument for veterinary use. Major products in this area include our instruments for chemistry, hematology, blood gas and immunodiagnostic testing and their affiliated operating consumable.
Radiography is the largest product offering in Point of Care imaging, which includes digital and computed radiography and ultrasound instruments. Radiography solutions typically consist of a combination of hardware and software placed with a customer, often combined with an ongoing service and support contract. Our experience has been that most of the revenue is generated at the time of sale in this area, in contrast to the Point of Care diagnostic laboratory placements discussed above where ongoing consumable revenue is often a larger component of economic value as a given instrument is used.
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Pharmaceuticals, Vaccines and Diagnostic ("PVD") revenue, includes single use diagnostic and other tests, pharmaceuticals and biologicals as well as research and development, licensing and royalty revenue. Since items in this area are often single use by their nature, our typical aim is to build customer satisfaction and loyalty for each product, generate repeat annual sales from existing customers and expand our customer base in the future. Products in this area are both supplied by third parties and provided by us. Major products and services in this area include heartworm diagnostic tests and preventives, and allergy test kits, allergy
immunotherapy and testing.
Other Vaccines and Pharmaceuticals ("OVP") revenue is generated in our USDA, FDA and DEA licensed production facility in Des Moines, Iowa. We view this facility as an asset which could allow us to control our cost of goods on any pharmaceuticals and vaccines that we may commercialize in the future. We have increased integration of this facility with our operations elsewhere. For example, virtually all of our U.S. inventory, excluding our imaging products, is stored at this facility and related fulfillment logistics are managed there. Our OVP revenue includes vaccines and pharmaceuticals produced for third parties. OVP is attributable only to the North America segment.
All of our products are ultimately sold primarily to or through veterinarians. In many cases, veterinarians will mark up their costs to their customers. The acceptance of our products by veterinarians is critical to our success. These products are sold directly to end users by us as well as through distribution relationships, such as the sale of kits to conduct blood testing to third-party veterinary diagnostic laboratories and sales to independent third-party distributors. Revenue from direct sales and distribution relationships represented 70% and 30%, respectively, of revenue for the three months ended March 31, 2021 and 67% and 33%, respectively, for the three months ended March 31, 2020.
Segment Change
During the second quarter of 2020, following the scil acquisition, the chief operating decision maker (“CODM”) changed how he assesses performance and allocates resources based on geographic regions. As a result, the Company determined it has two operating and reportable segments: North America and International. North America consists of the United States, Canada and Mexico. International consists of geographies outside of North America, primarily our operations in Australia, France, Germany, Italy, Malaysia, Spain and Switzerland. The Company's core strategic focus on point of care laboratory and imaging products is included in both segments. The North America segment also includes the contract manufacturing
of vaccines and pharmaceutical products. The Company revised prior comparative periods to conform to the current period segment presentation. Refer to Note 18 - Segment Reporting to the consolidated financial statements included in Part II. Item 8 of our 2020 Annual Report on Form 10-K for further information.
Impact of COVID-19 Pandemic and Current Economic Environment

Beginning in the first quarter of 2020, to limit the spread of COVID-19, governments took various actions including the issuance of stay-at-home policies and social distancing procedures and guidelines, causing some businesses to adjust, reduce or suspend business and operating activities. Veterinary care is widely recognized as an "essential" service for pet owners, and veterinarians continued to deliver essential medical care for sick and injured pets. The stay-at-home policies deployed early in 2020 to combat the spread of COVID-19 resulted in a decrease in companion animal clinical visits, including delay of elective procedures and wellness visits and as a result lower demand for diagnostic testing services. Beginning in the second quarter of 2020, certain local, state and federal governments began to ease the stay-at-home policies and allowed more businesses and facilities to re-open, leading to a recovery in companion animal clinical visits and associated demand for our diagnostic products. During the fourth quarter of 2020 and into the first quarter of 2021, increased restrictions, mainly in the European Union, certain parts of Canada and Australia, in which we operate, re-emerged. The extent to which the continuation, or another wave outbreak of COVID-19, or an
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outbreak of other health epidemics could impact our business, results of operations and financial condition, including the potential for write-offs or impairments of assets and suspension of capital investments, will depend on future developments. We are unable to predict with certainty the effects of the COVID-19 pandemic on our customers, suppliers and vendors, as well as the actions of governments, and when and to what extent normal economic and operating conditions can resume; these effects may differ from those assumed in our projected estimates. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business, mainly in our ability to place new capital equipment, primarily under long-term contracts, as a result of any economic impact that has occurred or may occur in the future.

As a result of social distancing measures, on-site installations of POC Lab and Imaging equipment continue to experience intermittent delays. While not significant to the overall results of the of the year, on-site installations of equipment have been impacted since March 2020. However, our financial position remains strong. On March 5, 2021, we completed a public offering of shares of common stock. As a result, we have sufficient liquidity to sustain our operations and do not anticipate a need to access additional capital outside of the various programs available to our overseas subsidiaries.

While we have experienced some intermittent delays in receiving supply and a slight increase in shipping costs, our supply chain has not been significantly impacted. Our major research and development projects are continuing to progress substantially as planned but we have experienced sporadic delays in receiving validation samples and device components as well as inefficiencies in remote collaboration and field-testing.

We do not know how long COVID-19 related challenges will continue. The ultimate impact on our business will depend on many factors substantially beyond our control and difficult to predict. In the near-term and with asynchronous variation across geographies, we anticipate veterinary hospitals may temporarily delay capital equipment investments as a result of heightened conservatism and the effects of social distancing on in-clinic demonstrations and installations. Despite these headwinds, we believe we are well positioned because: (1) our customers and products are essential, (2) our main Point of Care laboratory business continues to show healthy consumables use and margin, (3) our subscriptions model metrics continue to show solid performance, (4) our vaccines and pharmaceuticals business continues to perform with minimal disruption, (5) our balance sheet is strong, and (6) our employees, logistics, supply chain, and operations continue to operate well in the current environment and they are fully prepared for both a phased return and an instant return to full capacity.
Results of Operations
Our analysis presented below is organized to provide the information we believe will facilitate an understanding of our historical performance and relevant trends going forward.
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The following table sets forth, for the periods indicated, certain data derived from our unaudited Condensed Consolidated Statements of Income (Loss) (in thousands, except per share):
Three Months Ended March 31,
20212020
Revenue, net$60,503 $30,654 
Gross profit25,470 13,448 
Operating expenses24,452 18,066 
Operating income (loss)1,018 (4,618)
Interest and other expense, net526 2,199 
Income (loss) before income taxes and equity in losses of unconsolidated affiliates492 (6,817)
Income tax benefit(1,565)(1,508)
Net income (loss) before equity in losses of unconsolidated affiliates2,057 (5,309)
Equity in losses of unconsolidated affiliates(186)(130)
Net income (loss) after equity in losses of unconsolidated affiliates1,871 (5,439)
Net loss attributable to redeemable non-controlling interest— (151)
Net income (loss) attributable to Heska Corporation$1,871 $(5,288)
Diluted earnings (loss) per share attributable to Heska Corporation$0.19 $(0.70)
Non-GAAP net income (loss) per diluted share1 2
$0.59 $(0.14)
Adjusted EBITDA1
$8,400 $918 
Net income (loss) margin1
3.4 %(17.3)%
Adjusted EBITDA margin1
13.9 %3.0 %
1 See “Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA to net income and Non-GAAP net income (loss) per diluted share to diluted earnings (loss) per share attributable to Heska Corporation, the closest comparable GAAP measures, for each of the periods presented. Net income (loss) margin and adjusted EBITDA margin are calculated as the ratio of net income (loss) and adjusted EBITDA, respectively, to revenue.

2 Shares used in the diluted per share calculation for non-GAAP net income per diluted share are (in thousands): 9,844 for the three months ended March 31, 2021 compared to 7,568 for the three months ended March 31, 2020.
Revenue
Total revenue increased 97.4% to $60.5 million for the three months ended March 31, 2021, compared to $30.7 million for the three months ended March 31, 2020. The significant increase in revenue is driven mainly by the acquisition of scil, which represented $22.3 million in the three months ended March 31, 2021 that was not included in the prior year period.
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Gross Profit
Gross profit increased 89.4% to $25.5 million in the three months ended March 31, 2021, compared to $13.4 million in the three months ended March 31, 2020. Gross margin decreased to 42.1% in the three months ended March 31, 2021, compared to 43.9% in the three months ended March 31, 2020. The increase in gross profit was due mainly to the scil acquisition. The decrease in gross margin percentage was due to lower margin in the scil business.
Operating Expenses
Selling and marketing expenses increased 47.8% to $10.9 million in the three months ended March 31, 2021, compared to $7.4 million in the three months ended March 31, 2020. The increase is a direct result of international expansion related to recent acquisitions and is in line with management expectations.
Research and development expenses decreased 44.3% to $1.2 million in the three months ended March 31, 2021, compared to $2.1 million in the three months ended March 31, 2020. The decrease is related to timing of spending on product development for the urine and fecal diagnostic analyzer and enhanced immunodiagnostic offerings in the current year. As we invest in future growth of the Company, management anticipates continued research and development costs throughout 2021, which is consistent with strategic initiatives.
General and administrative expenses increased 44.4% to $12.4 million in the three months ended March 31, 2021, compared to $8.6 million in the three months ended March 31, 2020. The increase is driven by $4.4 million related to additional expenses related to the impact of international acquisitions compared to the prior year, increased stock-based compensation expenses of $2.1 million, and increased other general and administrative costs. These increases are partially offset by $3.7 million in lower one-time costs that we incurred in the first quarter of 2020 related to the acquisition or scil that did not repeat in the first quarter of 2021.
Interest and Other Expense (Income), net
Interest and other expense, net, was $0.5 million in the three months ended March 31, 2021, compared to $2.2 million in the three months ended March 31, 2020. The decrease in interest and other expense was primarily driven by a change in accounting treatment related to non-cash interest expense as a result of the Notes. Refer to Note 16, Convertible Notes, in the Notes to Consolidated Financial Statements further information on the change in accounting treatment and its impact on interest expense.
Income Tax Benefit
For the three months ended March 31, 2021, we had a total income tax benefit of $1.6 million, including $2.2 million of domestic deferred income tax benefit and $0.6 million current income tax expense. In the three months ended March 31, 2020, we had a total income tax benefit of $1.5 million, including $1.5 million of domestic deferred income tax benefit and $25 thousand of current income tax expense. The increase in tax benefit is due to pretax income reported in the first quarter of 2021 compared to pretax loss reported in the first quarter of 2020 and the tax benefit received from the release of the valuation allowance based on a realizability assessment of deferred tax assets relating to expiring tax credit carry-forwards. The Company recognized $0.5 million in excess tax benefits related to employee share-based compensation in the three months ended March 31, 2021, compared to $0.3 million recognized in the three months ended March 31, 2020.
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Net Income (Loss) Attributable to Heska Corporation
Net income attributable to Heska was $1.9 million in the three months ended March 31, 2021, compared to net loss attributable to Heska of $5.3 million in the three months ended March 31, 2020. The difference between this line item and "Net income (loss) after equity in losses of unconsolidated affiliates" is the net income or loss attributable to our minority interest in our French subsidiary (Optomed), which we purchased in February 2019. In October 2020, the Company acquired the remaining 30% minority interest in Optomed. Net income is higher in the first quarter of 2021 due to increased revenue and profit, as discussed above, and the change in non-cash interest charges relating to the Notes.
Adjusted EBITDA
Adjusted EBITDA in the three months ended March 31, 2021 was $8.4 million (13.9% adjusted EBITDA margin), compared to $0.9 million (3.0% adjusted EBITDA margin) in the three months ended March 31, 2020. The increase is driven by increased revenue and gross profit, partially offset by increased operating expenses, as discussed above. Increased stock based compensation expenses and depreciation and amortization associated with the acquisition of scil are excluded from adjusted EBITDA. See “Non-GAAP Financial Measures” for a reconciliation of adjusted EBITDA to net income, the closest comparable GAAP measure, for each of the periods presented.
Earnings Per Share
Earnings per share attributable to Heska was $0.19 per diluted share in the three months ended March 31, 2021 compared to loss of $0.70 per diluted share in the three months ended March 31, 2020. The increase is primarily due to increases in revenue and profit and lower interest and amortization charges relating to the Notes, partially offset by increased operating expenses, as discussed above.
Non-GAAP Earnings Per Share
Non-GAAP EPS was income of $0.59 per diluted share in the three months ended March 31, 2021 compared to loss of $0.14 per diluted share in the three months ended March 31, 2020. The increase is primarily due to increased revenue and profit, partially offset by increased operating expenses. See “Non-GAAP Financial Measures" for a reconciliation of non-GAAP EPS to net income (loss) attributable to Heska per diluted share, the closest comparable U.S. GAAP measure, in each of the periods presented.
Non-GAAP Financial Measures

In addition to financial measures presented on the basis of accounting principles generally accepted in the U.S. (“U.S. GAAP”), we also present EBITDA, adjusted EBITDA, adjusted EBITDA margin, and non-GAAP net income (loss) per diluted share, which are non-GAAP measures.
These measures should be viewed as a supplement to, not substitute for, our results of operations presented under U.S. GAAP. The non-GAAP financial measures presented may not be comparable to similarly titled measures of other companies because they may not calculate their measures in the same manner. Management uses EBITDA, adjusted EBITDA, adjusted EBITDA margin and non-GAAP net income (loss) per diluted share as key profitability measures, which are included in monthly or quarterly analyses of our operating results to our senior management team, our annual budget and related goal setting and other performance measurements. We believe these non-GAAP measures enhance our investors' understanding of our business performance and that not adjusting for the items included in the reconciliations below would hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses.
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The following tables reconcile our most directly comparable as-reported financial measures calculated in accordance with GAAP to our non-GAAP financial measures (in thousands, except percentages and per share amounts):
 Three Months Ended
March 31,
 20212020
Net income (loss)1
$2,057 $(5,309)
Income tax benefit(1,565)(1,508)
Interest expense, net531 2,113 
Depreciation and amortization3,571 1,374 
EBITDA$4,594 $(3,330)
Acquisition-related and other one-time costs2
155 3,874 
Stock-based compensation3,837 353 
Equity in losses of unconsolidated affiliates(186)(130)
Net loss attributable to non-controlling interest— 151 
Adjusted EBITDA$8,400 $918 
Net income (loss) margin3
3.4 %(17.3)%
Adjusted EBITDA margin3
13.9 %3.0 %
1 Net income (loss) used for reconciliation represents the "Net income (loss) before equity in losses of unconsolidated affiliates."

2 To exclude the effect of one-time charges of $0.2 million for the three months ending March 31, 2021, and $3.9 million for the three months ending March 31, 2020 incurred as part of acquisition and other related costs.

3 Net income (loss) margin and adjusted EBITDA margin are calculated as the ratio of net income (loss) and adjusted EBITDA, respectively, to revenue.


 Three Months Ended
March 31,
 20212020
GAAP net income (loss) attributable to Heska per diluted share$0.19 $(0.70)
Acquisition-related and other one-time costs1
0.02 0.51 
Amortization of acquired intangibles2
0.14 0.02 
Purchase accounting adjustments related to inventory and fixed asset step-up3
0.02 — 
Amortization of debt discount and issuance costs— 0.20 
Stock-based compensation0.39 0.05 
Loss on equity investee transactions0.02 0.02 
Estimated income tax effect of above non-GAAP adjustments4
(0.19)(0.24)
Non-GAAP net income (loss) per diluted share$0.59 $(0.14)
Shares used in diluted per share calculations9,844 7,568 
1 To exclude the effect of one-time charges of $0.2 million for the three months ending March 31, 2021, and $3.9 million for the three months ending March 31, 2020 incurred as part of acquisition and other related costs.

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2 To exclude the effect of amortization of acquired intangibles of $1.4 million in the three months ended March 31, 2021, compared to $0.1 million in the three months ended March 31, 2020. These costs were incurred as part of the purchase accounting adjustments for the acquisitions of scil, Optomed and CVM.

3 To exclude the effect of purchase accounting adjustments for inventory and fixed asset step up amortization of $0.2 million for the three months ended March 31, 2021, which we did not have in the three months ended March 31, 2020.

4 Represents income tax expense utilizing an estimated effective tax rate that adjusts for non-GAAP measures including: acquisition-related and other one-time costs (excluding items which are not deductible for tax of $60 thousand cost for the three months ended March 31, 2021), amortization of acquired intangibles, purchase accounting adjustments, amortization of debt discount and issuance costs, and stock-based compensation. This incorporates the discrete tax benefits related to stock-based compensation of $0.5 million for the three months ended March 31, 2021 and to $0.3 million for the three months ended March 31, 2020. Adjusted effective tax rates are approximately 25% for both periods presented.
Impact of Inflation
In recent years, inflation has not had a significant impact on our operations.
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Analysis by Segment
The North America segment includes sales and costs from the United States, Canada and Mexico. The International segment includes sales and costs from Australia, France, Germany, Italy, Malaysia, Spain and Switzerland.
The North America segment represented approximately 61.6% of our revenue for the three months ended March 31, 2021 and the International segment represented approximately 38.4% of our revenue for the three months ended March 31, 2021.
The following sections and tables set forth, for the periods indicated, certain data derived from our unaudited Condensed Consolidated Statements of Income (Loss) (in thousands).

North America Segment
Three Months Ended March 31,Change
20212020Dollar Change% Change
Point of Care laboratory:$19,939 $16,302 $3,637 22.3 %
Instruments & Other2,988 2,616 372 14.2 %
Consumables16,951 13,686 3,265 23.9 %
Point of Care imaging6,688 3,496 3,192 91.3 %
PVD6,864 4,504 2,360 52.4 %
OVP3,781 3,348 433 12.9 %
Total North America revenue$37,272 $27,650 $9,622 34.8 %
North America Gross Profit$17,509 $12,504 $5,005 40.0 %
North America Gross Margin47.0 %45.2 %
North America Operating Income (Loss)$1,033 $(4,093)$5,126 (125.2)%
North America Operating Margin2.8 %(14.8)%
North America segment revenue increased 34.8% to $37.3 million for the three months ended March 31, 2021, compared to $27.7 million for the three months ended March 31, 2020. The $9.6 million increase was driven by a 23.9% increase in POC Lab Consumables driven by utliziation and price increases, an increase of $3.2 million in Point of Care Imaging, which benefited from $3.0 million in sales from Canada not included in the comparative period as a result of the scil acquisition, and a $2.4 million increase in PVD related to an increase of $1.9 million for the contract manufactured heartworm preventive, Tri-Heart®, and increased allergy sales of $0.6 million.
Gross profit for the North America segment was $17.5 million compared to $12.5 million for the three months ended March 31, 2021 and 2020, respectively. The increase in gross profit is primarily driven by increased revenue mix in the current year period. Gross margin was 47.0% for the three months ended March 31, 2021, compared to 45.2% in the three months ended March 31, 2020. The increase is due to increased revenue and margins for consumables, which tend to be our highest margin products, and OVP, which experienced greater productivity in the period.
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North America operating income increased $5.1 million for the three months ended March 31, 2021 compared to the prior period. The increase is driven by increased revenue and profit as discussed above. Increases in operating expenses related to stock-based compensation of $3.2 million and expenses related to Canada of $1.0 million were offset by timing of research and development costs of $1.0 million and reduced one-time transaction related costs for the acquisition of scil in the prior year of $3.8 million.

International Segment
Three Months Ended March 31,Change
20212020Dollar
 Change
%
 Change
Point of Care laboratory:$15,239 $795 $14,444 1,816.9 %
Instruments & Other3,014 235 2,779 1,182.6 %
Consumables12,225 560 11,665 2,083.0 %
Point of Care imaging6,658 1,358 5,300 390.3 %
PVD1,334 851 483 56.8 %
Total International revenue$23,231 $3,004 $20,227 673.3 %
International Gross Profit$7,961 $944 $7,017 743.3 %
International Gross Margin34.3 %31.4 %
International Operating Loss$(15)$(525)$510 97.1 %
International Operating Margin(0.1)%(17.5)%

International segment revenue was $23.2 million compared to $3.0 million for the three months ended March 31, 2021 and 2020, respectively. The increase is due to the acquisition of scil, which contributed approximately $18.0 million of revenue in the three months ended March 31, 2021 that was not included in the comparable period.
Gross profit for the International segment was $8.0 million compared to $0.9 million for the three months ended March 31, 2021 and 2020, respectively. Gross margin for the International segment was 34.3% for the three months ended March 31, 2021 compared to 31.4% for the three months ended March 31, 2020. The increase in gross profit and gross margin is driven by increased revenue from acquisitions.
International operating loss decreased $0.5 million for the three months ended March 31, 2021 compared to the prior year period. The decrease in operating loss for the three months ended March 31, 2021 is driven by increased International revenue and gross profit from the scil acquisition.

Liquidity, Capital Resources and Financial Condition
We believe that adequate liquidity and cash generation is important to the execution of our strategic initiatives. Our ability to fund our operations, acquisitions, capital expenditures, and product development efforts may depend on our ability to access other forms of capital as well as our ability to generate cash from operating activities, which is subject to future operating performance, as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control, including but not limited to effects of the COVID-19 pandemic. Our primary source of liquidity is our available cash of $238.5 million, which includes net proceeds from the issuance of common stock of approximately $165 million on March 5, 2021.
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A summary of our cash from operating, investing and financing activities is as follows (in thousands):
Three Months Ended
March 31,
Change
20212020Dollar
Change
%
Change
Net cash provided by (used in) operating activities$1,337 $(4,761)$6,098 (128.1)%
Net cash used in investing activities(13,131)(14,630)1,499 (10.2)%
Net cash provided by financing activities164,355 121,630 42,725 35.1 %
Foreign exchange effect on cash and cash equivalents(440)(24)(416)1,733.3 %
Increase (decrease) in cash and cash equivalents152,121 102,215 49,906 48.8 %
Cash and cash equivalents, beginning of the period86,334 89,030 (2,696)(3.0)%
Cash and cash equivalents, end of the period$238,455 $191,245 $47,210 24.7 %
For the three months ended March 31, 2021 and March 31, 2020, cash flow provided by (used in) operations was $1.3 million and $4.8 million, respectively, which was primarily the result of (used for) (in thousands):
Three Months Ended
March 31,
Change
20212020Dollar
Change
%
Change
Net income (loss)$1,871 $(5,439)$7,310 (134.4)%
Non cash expenses and other adjustments6,143 2,298 3,845 167.3 %
Change in accounts receivable858 (1,092)1,950 (178.6)%
Change in inventories, net(1,818)(3,081)1,263 (41.0)%
Change in other assets(893)(429)(464)108.2 %
Change in accounts payable153 837 (684)(81.7)%
Change in other liabilities(4,977)2,145 (7,122)(332.0)%
Net cash provided by (used in) operating activities$1,337 $(4,761)$6,098 (128.1)%
For the three months ended March 31, 2021 and March 31, 2020, cash flow used in investing activities was $13.1 million and $14.6 million, respectively, which was primarily used for (in thousands):
Three Months Ended
March 31,
Change
20212020Dollar
Change
%
Change
Acquisition of CVM$— $(14,420)$14,420 (100.0)%
Acquisition of Lacuna, net of cash acquired(3,882)— (3,882)— %
Promissory note receivable issuance(9,000)— (9,000)— %
Purchases of property and equipment(262)(210)(52)24.8 %
Proceeds from disposition of property13 — 13 — %
Net cash provided by (used in) investing activities$(13,131)$(14,630)$1,499 (10.2)%


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For the three months ended March 31, 2021 and March 31, 2020, cash flow from financing activities was $164.4 million and $121.6 million, respectively, which was the result of (in thousands):
Three Months Ended
March 31,
Change
20212020Dollar
Change
%
Change
Payment of stock issuance costs$(217)$(158)$(59)37.3 %
Preferred stock proceeds— 122,000 (122,000)(100.0)%
Proceeds from issuance of common stock165,357 336 165,021 49,113.4 %
Repurchase of common stock(679)(538)(141)26.2 %
Repayments of other debt(106)(10)(96)960.0 %
Net cash provided by (used in) financing activities$164,355 $121,630 $42,725 35.1 %
We believe that our cash, cash equivalents and marketable securities balances, as well as the cash flows generated by our operations, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures, including selling and marketing team expansion and product development initiatives, for at least the next 12 months. Our belief may prove to be incorrect, however, and we could utilize our available financial resources sooner than we currently expect. For example, we actively seek opportunities that are consistent with our strategic direction, which may require additional capital. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020. We may be required to seek additional equity or debt financing in order to meet these future capital requirements, even in the absence of any acquisitions. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.
Effect of currency translation on cash
Net effect of foreign currency translations on cash was a $440 thousand negative impact for the three months ended March 31, 2021, compared to a $24 thousand negative impact for the three months ended March 31, 2020, an decrease of $416 thousand. These effects are related to changes in exchange rates between the U.S. Dollar and the Swiss Franc, Euro, Australian Dollar, Canadian Dollar, and Malaysian Ringgit, which are the functional currencies of our subsidiaries.
Off-Balance Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements or variable interest entities.
Purchase Obligations
Purchase obligations represent contractual agreements to purchase goods or services that are legally binding; specify a fixed, minimum or range of quantities; specify a fixed, minimum, variable, or indexed price provision; and specify approximate timing of the transaction. As of March 31, 2021, the Company had purchase obligations for inventory of $50.1 million.
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Critical Accounting Policies and Estimates
Our accounting policies are described in our audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2020, other than the recently adopted accounting pronouncements described in Note 1. Operations and Summary of Significant Accounting Policies in our Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q, have not changed significantly since such filing.

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about other market risk affecting us, see the section under the heading “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2020, which is incorporated by reference herein. As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the market risks described in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 4.     Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined by Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures.


PART II. OTHER INFORMATION
Item 1.    Legal Proceedings

We are involved in various legal proceedings that arise from time to time in the ordinary course of our business. We believe that the outcome of any of the proceedings should not have a material adverse effect on our financial position or long-term results of operations or cash flows.
Item 1A.Risk Factors
For a discussion of our risk factors, see Item 1A. Risk Factors in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020 (the "Annual Report").

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Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information about our purchases of our outstanding Public Common Stock during the quarter ended March 31, 2021:
PeriodTotal Number of Shares Purchased (1)Average Price Paid per Share (1)Total Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsApproximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs
January 20212,368 $158.44 — $— 
February 2021— $— — $— 
March 20211,313 $171.68 — $— 
3,681 $163.17 — $— 
 (1) Shares of Public Common Stock we purchased between January 1, 2021 and March 31, 2021 were solely for the cancellation of shares of stock withheld for related tax obligations.

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Item 6.    Exhibits
Exhibit Number 
Notes
 
Description of Document
2.1#++(1)
2.2#(2)
3.1(3)
3.2(3)
3.3(3)
3.4(4)
3.5(5)
3.6(6)
3.7(7)
3.8(8)
3.9(9)
3.10(7)
10.1#++
10.2(10)
31.1 
31.2 
32.1*
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
104.0Cover Page Interactive Data File (embedded within the Inline XBRL document contained in Exhibit 101)
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Notes 
*Furnished and not filed herewith.
++Certain confidential information contained in this exhibit has been omitted because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed.
#Certain personally identifiable information has been omitted from this exhibit pursuant to Item 601(a)(6) under Regulation S-K.
(1)Filed with the Registrant's Form 10-K for the year ended December 31, 2019.
(2)Filed with the Registrant's Form 8-K on April 1, 2020.
(3)Filed with the Registrant's Form 10-K for the year ended December 31, 2012.
(4)Filed with the Registrant's Form 10-K for the year ended December 31, 2016.
(5)Filed with the Registrant's Form 10-Q for the quarter ended March 31, 2017.
(6)Filed with the Registrant's Form 8-K on May 9, 2018.
(7)Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2019.
(8)Filed with the Registrant’s Form 10-Q for the quarter ended March 31, 2020.
(9)Filed with the Registrant’s Form 8-K on April 1, 2020.
(10)Filed with the Registrant's Form 10-K for the year ended December 31, 2020.
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SIGNATURES
Pursuant to the requirements 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 May 6, 2021.

 
HESKA CORPORATION
By: /s/ KEVIN S. WILSON  
Kevin S. Wilson
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ CATHERINE GRASSMAN
Catherine Grassman
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
 

 

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