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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
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: (970493-7272

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 adjusted  7,882 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 1 — — 121,784 — — 121,785 
Stock-based compensation— — — — 353 — — 353 
Other comprehensive loss— — — — — (356)— (356)
Balances, March 31, 2020122 $1 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 adjusted  9,476 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— — 1  178 — — 178 
Equity offering, net of issuance costs— — 941 9 164,177 — — 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 proceeds 122,000 
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 two 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 equivalents3 
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.

-11-


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.

-12-


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.

-13-


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 two 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.

-14-


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.
-15-


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 $ 
-17-


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 outstanding 9,844 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 stock 1,509 
Convertible Senior Notes996 43 
Stock options and restricted stock 135 
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 
-19-


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 4 
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