
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~~2022


☐			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)


Delaware			77-0192527
(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 class	Trading Symbol	Name of each exchange on which registered
Common stock, $0.01 par value	HSKA	The 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~~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~~10,790,622 shares of the Registrant's Public Common Stock, ~~$.01~~$0.01 par value, were outstanding at May ~~4, 2021.~~5, 2022.

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION
	Item 1.	Financial Statements	1
		Condensed Consolidated Balance Sheets	1
		Condensed Consolidated Statements of (Loss) Income ~~(Loss)~~	2
		Condensed Consolidated Statements of Comprehensive Loss	3
		Condensed Consolidated Statements of Stockholders' Equity	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6
		Note 1, Operations and Summary of Significant Accounting Policies	6
		Note 2, Revenue	810
		Note 3, Acquisitions and Related Party Items	1112
		Note 4, Investments in Unconsolidated Affiliates	1519
		Note 5, Income Taxes	1620
		Note 6, Leases	1721
		Note 7, Earnings Per Share	1822
		Note 8, Goodwill and Other Intangibles	1923
		Note 9, Property and Equipment, Net	2024
		Note 10, Inventories	2024
		Note 11, Accrued Liabilities	2125
		Note 12, Capital Stock	2125
		Note 13, Accumulated Other Comprehensive Income	2225
		Note 14, Commitments and Contingencies	2226
		Note 15, Interest and Other (Income) Expense, ~~(Income),~~ Net	2327
		Note 16, Convertible Notes	2327
		Note 17, Notes Receivable	2529
		Note 1 8 ,18, Segment Reporting	2630

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2731
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4043
	Item 4.	Controls and Procedures	4043
PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings	4043
	Item 1A.	Risk Factors	4044
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4144
	Item 6.	Exhibits	4144
		Signatures	4447

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, Element AIM, and scil vet, scil academy, scil vIP, scil ABC are registered trademarks of Heska Corporation and/or ~~it's~~its 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. Nu.Q is a registered trademark of Belgian Volition SPRL. 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 for the year ended December 31, 2021, 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~~business, results of operations and ~~our~~ financial ~~and operational results;~~condition;

•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,			March 31,		December 31,
		2021		2020			2022		2021
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	238,455	$	86,334	Cash and cash equivalents	$	172,744	$	223,574
Accounts receivable, net of allowance for losses of $760 and $769, respectively		29,891		31,080
Accounts receivable, net of allowance for losses of $858 and $874, respectively						Accounts receivable, net of allowance for losses of $858 and $874, respectively	26,541		27,995
Inventories	Inventories	39,357		40,037		Inventories	55,222		49,361
Net investment in leases, current, net of allowance for losses of $209 and $192, respectively		4,933		4,794
Net investment in leases, current, net of allowance for losses of $119 and $137, respectively						Net investment in leases, current, net of allowance for losses of $119 and $137, respectively	6,544		6,175
Prepaid expenses	Prepaid expenses	4,485		3,875		Prepaid expenses	5,389		5,244
Other current assets	Other current assets	5,641		5,155		Other current assets	6,309		7,206
Total current assets	Total current assets	322,762		171,275		Total current assets	272,749		319,555

Property and equipment, net	Property and equipment, net	34,863		35,542		Property and equipment, net	33,818		33,413
Operating lease right-of-use assets	Operating lease right-of-use assets	5,089		5,457		Operating lease right-of-use assets	8,154		5,198
Goodwill	Goodwill	89,968		88,276		Goodwill	139,990		118,826
Other intangible assets, net	Other intangible assets, net	53,879		55,992		Other intangible assets, net	71,839		56,705
Deferred tax asset, net	Deferred tax asset, net	16,758		5,694		Deferred tax asset, net	21,503		19,429
Net investment in leases, non-current	Net investment in leases, non-current	15,939		15,789		Net investment in leases, non-current	21,972		20,128
Investments in unconsolidated affiliates	Investments in unconsolidated affiliates	6,518		6,704		Investments in unconsolidated affiliates	5,043		5,424
Related party convertible note receivable, net	Related party convertible note receivable, net	6,709		6,671		Related party convertible note receivable, net	6,880		6,800
Promissory note receivable from investee, net	Promissory note receivable from investee, net	8,743		—		Promissory note receivable from investee, net	8,464		8,448
Other non-current assets	Other non-current assets	8,345		8,439		Other non-current assets	11,259		10,146
Total assets	Total assets	$	569,573	$	399,839	Total assets	$	601,671	$	604,072

LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	14,958	$	15,119	Accounts payable	$	12,375	$	15,374
Accrued liabilities	Accrued liabilities	14,920		18,055		Accrued liabilities	19,774		19,424
Operating lease liabilities, current	Operating lease liabilities, current	2,015		2,087		Operating lease liabilities, current	2,504		2,227
Deferred revenue, current, and other	Deferred revenue, current, and other	5,893		6,854		Deferred revenue, current, and other	5,878		6,901
Total current liabilities	Total current liabilities	37,786		42,115		Total current liabilities	40,531		43,926

Convertible note, non-current, net	Convertible note, non-current, net	83,721		48,459		Convertible note, non-current, net	84,140		84,034
Notes payable						Notes payable	15,900		15,900
Deferred revenue, non-current	Deferred revenue, non-current	4,483		4,667		Deferred revenue, non-current	3,711		3,854
Other long-term borrowings		566		554

Operating lease liabilities, non-current	Operating lease liabilities, non-current	3,571		3,858		Operating lease liabilities, non-current	6,211		3,509
Deferred tax liability	Deferred tax liability	11,432		11,856		Deferred tax liability	17,461		12,667
Other liabilities	Other liabilities	2,741		1,277		Other liabilities	5,122		4,328
Total liabilities	Total liabilities	144,300		112,786		Total liabilities	173,076		168,218

Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Preferred stock, $.01 par value, 2,500,000 shares authorized, none issued or outstanding		0		0
Common stock, $.01 par value, 13,250,000 shares authorized, respectively, none issued or outstanding		0		0
Public common stock, $.01 par value, 13,250,000 shares authorized, 10,417,964 and 9,475,845 shares issued and outstanding, respectively		104		95
Preferred stock, $0.01 par value, 2,500,000 shares authorized, none issued or outstanding						Preferred stock, $0.01 par value, 2,500,000 shares authorized, none issued or outstanding	—		—
Common stock, $0.01 par value, 20,000,000 shares authorized, respectively, none issued or outstanding						Common stock, $0.01 par value, 20,000,000 shares authorized, respectively, none issued or outstanding	—		—
Public common stock, $0.01 par value, 20,000,000 shares authorized, 10,785,620 and 10,712,347 shares issued and outstanding, respectively						Public common stock, $0.01 par value, 20,000,000 shares authorized, 10,785,620 and 10,712,347 shares issued and outstanding, respectively	108		107
Additional paid-in capital	Additional paid-in capital	562,008		423,650		Additional paid-in capital	585,123		579,354
Accumulated other comprehensive income	Accumulated other comprehensive income	8,786		14,169		Accumulated other comprehensive income	1,994		5,037
Accumulated deficit	Accumulated deficit	(145,625)		(150,861)		Accumulated deficit	(158,630)		(148,644)
Total stockholders' equity	Total stockholders' equity	425,273		287,053		Total stockholders' equity	428,595		435,854
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	569,573	$	399,839	Total liabilities and stockholders' equity	$	601,671	$	604,072

See accompanying notes to condensed consolidated financial statements.

-1-

HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME ~~(LOSS)~~

(in thousands, except per share amounts)

(unaudited)


		Three Months Ended March 31,				Three Months Ended March 31,
		2021		2020				2022		2021
Revenue, net	Revenue, net	$	60,503	$	30,654		Revenue, net	$	64,800	$	60,503
Cost of revenue	Cost of revenue	35,033		17,206			Cost of revenue	35,655		35,033
Gross profit	Gross profit	25,470		13,448			Gross profit	29,145		25,470

Operating expenses:	Operating expenses:						Operating expenses:
Selling and marketing	Selling and marketing	10,907		7,380			Selling and marketing	11,997		10,907
Research and development	Research and development	1,186		2,128			Research and development	12,456		1,186
General and administrative	General and administrative	12,359		8,558			General and administrative	16,146		12,359
Total operating expenses	Total operating expenses	24,452		18,066			Total operating expenses	40,599		24,452
Operating income (loss)		1,018		(4,618)
Operating (loss) income							Operating (loss) income	(11,454)		1,018
Interest and other expense, net	Interest and other expense, net	526		2,199			Interest and other expense, net	359		526
Income (loss) before income taxes and equity in losses of unconsolidated affiliates		492		(6,817)
Income tax expense (benefit):
Net (loss) income before taxes and equity in losses of unconsolidated affiliates							Net (loss) income before taxes and equity in losses of unconsolidated affiliates	(11,813)		492
Income tax (benefit) expense:							Income tax (benefit) expense:
Current income tax expense	Current income tax expense	641		25			Current income tax expense	158		641
Deferred income tax benefit	Deferred income tax benefit	(2,206)		(1,533)			Deferred income tax benefit	(2,366)		(2,206)
Total income tax benefit	Total income tax benefit	(1,565)		(1,508)			Total income tax benefit	(2,208)		(1,565)

Net income (loss) before equity in losses of unconsolidated affiliates		2,057		(5,309)
Net (loss) income before equity in losses of unconsolidated affiliates							Net (loss) income before equity in losses of unconsolidated affiliates	(9,605)		2,057
Equity in losses of unconsolidated affiliates	Equity in losses of unconsolidated affiliates	(186)		(130)			Equity in losses of unconsolidated affiliates	(381)		(186)
Net income (loss) after equity in losses of unconsolidated affiliates		1,871		(5,439)
Net loss attributable to redeemable non-controlling interest		0		(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 Corporation		9,478		7,568
Weighted average outstanding shares used to compute diluted earnings (loss) per share attributable to Heska Corporation		9,844		7,568
Net (loss) income attributable to Heska Corporation							Net (loss) income attributable to Heska Corporation	$	(9,986)	$	1,871

Basic (loss) earnings per share attributable to Heska Corporation							Basic (loss) earnings per share attributable to Heska Corporation	$	(0.97)	$	0.20
Diluted (loss) earnings per share attributable to Heska Corporation							Diluted (loss) earnings per share attributable to Heska Corporation	$	(0.97)	$	0.19

Weighted average outstanding shares used to compute basic (loss) earnings per share attributable to Heska Corporation							Weighted average outstanding shares used to compute basic (loss) earnings per share attributable to Heska Corporation	10,273		9,478
Weighted average outstanding shares used to compute diluted (loss) earnings per share attributable to Heska Corporation							Weighted average outstanding shares used to compute diluted (loss) earnings per share attributable to Heska Corporation	10,273		9,844

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,				Three Months Ended March 31,
		2021		2020				2022		2021
Net income (loss) after equity in losses of unconsolidated affiliates		$	1,871	$	(5,439)
Net (loss) income attributable to Heska Corporation							Net (loss) income attributable to Heska Corporation	$	(9,986)	$	1,871
Other comprehensive loss:	Other comprehensive loss:						Other comprehensive loss:
Translation adjustments and losses from intra-entity transactions							Translation adjustments and losses from intra-entity transactions	(3,043)		(5,383)

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		0		(151)

Comprehensive loss attributable to Heska Corporation	Comprehensive loss attributable to Heska Corporation	$	(3,512)	$	(5,644)		Comprehensive loss attributable to Heska Corporation	$	(13,029)	$	(3,512)

See accompanying notes to condensed consolidated financial statements.

-3-

HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

(unaudited)


		Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders' Equity			Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders' Equity
Three Months Ended March 31, 2020 and 2021		Shares	Amount		Shares	Amount
Balances, December 31, 2019		0	$	0	7,882	$	79	$	290,216	$	513	$	(136,444)	$	154,364
Adoption of accounting standards		—	—		—	—		—		—		(18)		(18)
Balances, January 1, 2020, as adjusted		0	0		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 costs		122	1		—	—		121,784		—		—		121,785
Stock-based compensation		—	—		—	—		353		—		—		353
Other comprehensive loss		—	—		—	—		—		(356)		—		(356)
Balances, March 31, 2020		122	$	1	7,843	$	78	$	412,152	$	157	$	(141,750)	$	270,638

Three Months Ended March 31, 2022 and 2021																Three Months Ended March 31, 2022 and 2021	Shares	Amount		Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders' Equity
Balances, December 31, 2020	Balances, December 31, 2020	0	$	0	9,476	$	95	$	423,650	$	14,169	$	(150,861)	$	287,053	Balances, December 31, 2020	—	$	—	9,476	$	95
Adoption of accounting standards	Adoption of accounting standards	—	—		—	—		(29,834)		—		3,365		(26,469)		Adoption of accounting standards	—	—		—	—		(29,834)		—		3,365		(26,469)
Balances, January 1, 2021, as adjusted	Balances, January 1, 2021, as adjusted	0	0		9,476	95		393,816		14,169		(147,496)		260,584		Balances, January 1, 2021, as adjusted	—	—		9,476	95		393,816		14,169		(147,496)		260,584
Net income attributable to Heska Corporation	Net income attributable to Heska Corporation	—	—		—	—		—		—		1,871		1,871		Net income attributable to Heska Corporation	—	—		—	—		—		—		1,871		1,871
Issuance of common stock, net of forfeitures and shares withheld for employee taxes	Issuance of common stock, net of forfeitures and shares withheld for employee taxes	—	—		1	0		178		—		—		178		Issuance of common stock, net of forfeitures and shares withheld for employee taxes	—	—		1	—		178		—		—		178
Equity offering, net of issuance costs	Equity offering, net of issuance costs	—	—		941	9		164,177		—		—		164,186		Equity offering, net of issuance costs	—	—		941	9		164,177		—		—		164,186
Stock-based compensation	Stock-based compensation	—	—		—	—		3,837		—		—		3,837		Stock-based compensation	—	—		—	—		3,837		—		—		3,837
Other comprehensive loss	Other comprehensive loss	—	—		—	—		—		(5,383)		—		(5,383)		Other comprehensive loss	—	—		—	—		—		(5,383)		—		(5,383)
Balances, March 31, 2021	Balances, March 31, 2021	0	$	0	10,418	$	104	$	562,008	$	8,786	$	(145,625)	$	425,273	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.

Balances, December 31, 2021																Balances, December 31, 2021	—	$	—	10,712	$	107	$	579,354	$	5,037	$	(148,644)	$	435,854
Net loss attributable to Heska Corporation																Net loss attributable to Heska Corporation	—	—		—	—		—		—		(9,986)		(9,986)
Issuance of common stock, net of forfeitures and shares withheld for employee taxes																Issuance of common stock, net of forfeitures and shares withheld for employee taxes	—	—		74	1		(3,201)		—		—		(3,200)
Stock-based compensation																Stock-based compensation	—	—		—	—		5,110		—		—		5,110
Equity contingent consideration																Equity contingent consideration	—	—		—	—		3,860		—		—		3,860
Other comprehensive loss																Other comprehensive loss	—	—		—	—		—		(3,043)		—		(3,043)
Balances, March 31, 2022																Balances, March 31, 2022	—	$	—	10,786	$	108	$	585,123	$	1,994	$	(158,630)	$	428,595

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,
2021 2020
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 amortization 3,571 1,374
Non-cash impact of operating leases 526 408
Deferred income tax benefit (2,206) (1,533)
Stock-based compensation 3,837 353
Equity in losses of unconsolidated affiliates 186 130
Accretion of discounts and issuance costs 22 1,524
Other losses 207 42
Changes in operating assets and liabilities (net of the effect of acquisitions):
Accounts receivable 858 (1,092)
Inventories (1,818) (3,081)
Other assets (893) (429)
Accounts payable 153 837
Other liabilities (4,977) 2,145
Net cash provided by (used in) operating activities 1,337 (4,761)
Cash flows from investing activities:
Acquisition of CVM 0 (14,420)
Acquisition of Lacuna, net of cash acquired (3,882) 0
Promissory note receivable issuance (9,000) 0
Purchases of property and equipment (262) (210)
Proceeds from disposition of property and equipment 13 0
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 0 122,000
Proceeds from issuance of common stock 165,357 336
Repurchase of common stock (679) (538)
Repayments of other debt (106) (10)
Net cash provided by financing activities 164,355 121,630
Foreign exchange effect on cash and cash equivalents (440) (24)
Net increase (decrease) in cash and cash equivalents 152,121 102,215
Cash and cash equivalents, beginning of period 86,334 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 $ 0
Indemnity holdback for acquisition $ 370 $ 0


	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities:
Net (loss) income attributable to Heska Corporation	$	(9,986)	$	1,871
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:
Depreciation and amortization	3,300		3,571
Non-cash impact of operating leases	673		526
Deferred tax benefit	(2,366)		(2,206)
Stock-based compensation	5,110		3,837
Change in fair value of contingent consideration	(236)		—

Equity in losses of unconsolidated affiliates	381		186
Accretion of discounts and issuance costs	11		22
Other (gains) losses	(473)		207
Changes in operating assets and liabilities (net of the effect of acquisitions):
Accounts receivable	2,060		858
Inventories	(6,528)		(1,818)
Lease receivables	(2,248)		49
Other assets	(288)		(942)
Accounts payable	(3,069)		153
Other liabilities	(4,006)		(4,977)
Net cash (used in) provided by operating activities	(17,665)		1,337
Cash flows from investing activities:
Acquisition of Lacuna, net of cash acquired	—		(3,882)
Acquisition of VetZ, net of cash acquired	(29,509)		—

Promissory note receivable issuance	—		(9,000)
Capital expenditures	(334)		(262)
Proceeds from disposition of property and equipment	—		13
Net cash used in investing activities	(29,843)		(13,131)
Cash flows from financing activities:
Payment of stock issuance costs	—		(217)

Proceeds from issuance of common stock	1,761		165,357
Payments for taxes related to shares withheld for employee taxes	(4,961)		(679)
Repayments of other debt	(62)		(106)

Net cash (used in) provided by financing activities	(3,262)		164,355
Foreign exchange effect on cash and cash equivalents	(60)		(440)
Net (decrease) increase in cash and cash equivalents	(50,830)		152,121
Cash and cash equivalents, beginning of period	223,574		86,334
Cash and cash equivalents, end of period	$	172,744	$	238,455

Supplemental disclosure of cash flow information:
Non-cash transfers of equipment between inventory and property and equipment, net	$	749	$	1,549

Contingent consideration for acquisitions	$	3,860	$	1,700


Indemnity holdback and net working capital adjustment for acquisitions	$	1,608	$	370
Accrued preferred issuance costs	$	—	$	97

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 advanced veterinary ~~and animal health~~ diagnostic and specialty products. Our offerings include Point of Care ~~diagnostic~~("POC") laboratory instruments and ~~supplies;~~consumables, single-use offerings such as in-clinic diagnostics tests; Point of Care digital imaging diagnostic ~~products,~~instruments and veterinary practice information management software ~~and services;~~solutions (“PIMS”); 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,~~2022, and the results of our operations and statements of stockholders' equity for the three months ended March 31, 2022 and 2021, and cash flows for the three months ended March 31, ~~2021~~2022 and ~~2020.~~2021.

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~~2022 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~~2021 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~~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~~In some part, and of different degrees depending on the ~~fourth quarter~~geography, due to the introduction and acceptance of ~~2020~~COVID-19 vaccines, restrictions have eased in many of the countries in which we operate. Global diagnostic animal health demand continued throughout 2021 and into the first quarter of ~~2021, increased restrictions, mainly~~2022. While this trend is encouraging, with the rise in COVID-19 variants, 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 pandemic on our customers, suppliers and vendors, as well as the

-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, primarily under long-term contracts, 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~~Fair Value of Financial Instruments

In accordance with ASC 820, Fair Value Measurements (“ASC 820”), the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Quoted prices in active markets for similar assets and liabilities, quoted prices for identically similar assets or liabilities in markets that are not active and models for which all significant inputs are observable either directly or indirectly.

Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs for inactive markets.

The Company's financial instruments consist of cash and cash equivalents, short-term trade receivables and payables, long-term note receivables with embedded derivative assets, contingent consideration liabilities, notes payable for acquisitions and its 3.75% Convertible Senior Notes due 2026 (the "Notes"). The carrying values of cash and cash equivalents and short-term trade receivables and payables approximate fair value because of the short-term nature of the instruments.

-7-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

The fair values of our financial instruments at March 31, 2022 and December 31, 2021 were (in thousands):


	Total		Level 1		Level 2		Level 3
2022
Financial Assets
Convertible note receivable embedded derivative	$	888	$	—	$	—	$	888
Promissory note receivable derivative	337		—		—		337
Financial Liabilities
BiEsseA contingent consideration	1,955		—		—		1,955
Notes payable	15,900		—		—		15,900
Balances, March 31, 2022	$	19,080	$	—	$	—	$	19,080

2021	Total		Level 1		Level 2		Level 3

Financial Assets
Convertible note receivable embedded derivative	$	888	$	—	$	—	$	888
Promissory note receivable embedded derivative	337		—		—		337
Financial Liabilities
BiEsseA contingent consideration	2,334		—		—		2,334
Notes payable	15,900		—		—		15,900
Balances, December 31, 2021	$	19,459	$	—	$	—	$	19,459

The Company's financial assets based upon Level 3 inputs include embedded derivatives relating to its note receivables. The Company determined the redemption features of its convertible note receivable represents an embedded derivative. The estimated fair value of the embedded derivative asset is evaluated through Level 3 inputs using a probability-weighted scenario analysis. The Company determined the warrant associated with its promissory note receivable represents a derivative. The estimated fair value of the derivative asset is evaluated through Level 3 inputs, using an enterprise valuation model. For additional information regarding the Company's note receivables and derivatives, refer to Note 17, Notes Receivable.

The estimated fair value of the Company's 3.75% Convertible Senior Notes due in 2026 (the "Notes"), is disclosed at each reporting period and is evaluated through Level 2 inputs with consideration of quoted market prices in less active markets. For additional information regarding the Company's accounting treatment for the issuance of the Notes, refer to Note 16, Convertible Notes.

The Company's financial liabilities based upon Level 3 inputs include contingent consideration arrangements and notes payable relating to its acquisitions of Lacuna Diagnostics, Inc. ("Lacuna"), BiEsse A-Laboratorio die Analisi Veterinarie S.r.l. (“BSA”), and Biotech Laboratories U.S.A. LLC ("Biotech"). The Company is obligated to pay contingent consideration payments of $2.0 million in connection with the Lacuna acquisition 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 Lacuna contingent consideration was $0 as of both December 31, 2021 and March 31, 2022. The Company is obligated to pay contingent consideration payments of $2.9 million in connection with the BSA acquisition based on the achievement of certain revenue metrics within three annual periods after 2021. The Company is obligated to pay contingent notes of up to $17.5 million in connection

-8-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

with the Biotech acquisition based on the achievement of certain product development milestones or at a predetermined date in the future. Refer to Note 3, Acquisitions and Related Party Items for further discussion.

The fair value of our contingent consideration and notes payable arrangements are determined based on a probability-weighted outcome analysis. The fair value of the contingent consideration and notes payable liabilities associated with future payments were based on several factors, the most significant of which are the financial and product development performance of the acquired businesses. For the contingent consideration liabilities, the Company will update its assumptions each reporting period based on new developments and record such amounts at fair value based on the revised assumptions until the agreements expire. Changes in fair value are recorded in the Condensed Consolidated Statements of (Loss) Income within general and administrative expenses. The note payable associated with the Biotech acquisition is not adjusted to fair value each period.

The following table presents the changes of our Level 3 assets and liabilities as of March 31, 2022 (in thousands):


	Derivative Assets				Contingent Consideration Liability		Notes Payable
	Convertible note receivable		Promissory note receivable		BSA		Biotech
Balances, December 31, 2021	$	888	$	337	$	2,334	$	15,900
Acquisition value	—		—		—		—
Cash payments	—		—		—		—
Changes in fair value, including foreign currency adjustments	—		—		(379)		—
Balances, March 31, 2022	$	888	$	337	$	1,955	$	15,900

Significant 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,~~2021, and other than the recently adopted accounting pronouncements and revenue recognition updates described below, have not changed materially since such filing.

Revenue Recognition

With the acquisition of VetZ GmbH (“VetZ”) on January 3, 2022, the Company entered the market for veterinary practice information management software solutions (“PIMS”). Revenue for the sale of software licenses is recognized at a point in time upon delivery of the software. The software has significant stand-alone functionality, and provides the customer with the right to use the intellectual property as it exists at the point in time at which the license is granted. Revenue for support services, cloud-based services, and installation and training is recognized over time as the services are performed. Refer to Note 3 for further details regarding the VetZ acquisition.

-9-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

Adoption of New Accounting Pronouncements

Effective January 1, ~~2021,~~2022, we adopted ASU ~~2019-12,~~2021-05, ~~Income Taxes~~Leases (Topic ~~740): Simplifying~~842), Lessors- Certain Leases with Variable Lease Payments. This guidance amends the ~~Accounting for Income Taxes, which is intended to simplify various aspects related to the~~lease classification accounting for ~~income taxes. ASU 2019-12 removes~~lessors for certain ~~exceptions to~~leases with variable lease payments that do not depend on a reference index or a rate and would have resulted in the ~~general principles in Topic 740, and also clarifies and amends existing~~recognition of a loss at lease commencement if classified as a sale-type or direct financing lease. Under the new guidance, ~~to improve consistent application.~~these leases will be classified as an operating lease. 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,~~2022, we early adopted ASU ~~2020-01,~~ ~~Investments-Equity Securities~~2021-08, Business Combinations (Topic ~~321)~~805), ~~Investments-Equity Method~~Accounting for Contract Assets and ~~Joint Ventures (Topic 323)~~,Contract Liabilities from Contracts with Customers. This guidance requires an acquiring entity to recognize and ~~Derivatives~~measure contract assets and ~~Hedging (Topic 815). The amendments~~contract liabilities acquired in ~~this ASU clarify~~a business combination in accordance with Topic 606. At the ~~interaction between~~acquisition date, the ~~accounting~~acquirer should account for ~~investments~~the related revenue contracts in ~~equity securities, investments in equity method and certain derivatives instruments. The ASU is expected to reduce diversity in practice and increase comparability of~~accordance with Topic 606 as if it had originated the ~~accounting for these interactions.~~contracts. 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~~2 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~~Company's reportable ~~segments which required recast of prior period presentation.~~segments.

The following table summarizes our segment revenue (in thousands):


	Three Months Ended March 31,
	2022		2021
North America Revenue:
POC Lab Instruments & Other	$	4,647	$	2,988
POC Lab Consumables	18,637		16,951
POC Imaging & Informatics	6,051		6,688
PVD	4,576		6,864
OVP	3,463		3,781
Total North America Revenue	$	37,374	$	37,272
International Revenue:
POC Lab Instruments & Other	$	3,733	$	3,014
POC Lab Consumables	11,748		12,225
POC Imaging & Informatics	10,962		6,658
PVD	983		1,334
Total International Revenue	$	27,426	$	23,231
Total Revenue	$	64,800	$	60,503

~~-8-~~-10-

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,
2021 2020
North America Revenue:
POC Lab Instruments & Other $ 1,970 $ 1,372
POC Sales-type leases 1,018 1,244
POC Lab Consumables 16,951 13,686
POC Imaging 6,688 3,496
PVD 6,864 4,504
OVP 3,781 3,348
Total North America Revenue $ 37,272 $ 27,650
International Revenue:
POC Lab Instruments & Other $ 1,766 $ 235
POC Sales-type leases 640 0
POC Operating Leases 608 0
POC Lab Consumables 12,225 560
POC Imaging 6,658 1,358
PVD 1,334 851
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~~noncancellable 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~~obligations 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,~~2022, the aggregate amount of the transaction price allocated to remaining minimum performance obligations was approximately ~~$148.8~~$178.1 million. As of March 31, ~~2021,~~2022, the Company expects to recognize revenue as follows (in thousands):


Year Ending December 31,	Year Ending December 31,	Revenue		Year Ending December 31,	Revenue
2021 (remaining)		$	26,196
2022		32,891
2022 (remaining)				2022 (remaining)	$	32,055
2023	2023	29,476		2023	40,330
2024	2024	24,369		2024	35,663
2025	2025	18,276		2025	29,854
2026				2026	24,315
Thereafter	Thereafter	17,580		Thereafter	15,888
		$	148,788		$	178,105

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~~2022 were ~~$1.2~~$1.5 million and ~~$4.1~~$5.3 million for current and non-current assets, respectively, shown net of related unearned interest. The balances as of December 31, ~~2020~~2021 were ~~$1.2~~$1.5 million and ~~$4.1~~$5.1 million for current and non-current assets, respectively, shown net of related unearned interest.

-11-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

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~~2022 and December 31, ~~2020,~~2021, contract liabilities were ~~$8.4~~$9.1 million and ~~$8.9~~$9.6 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~~2022 is approximately ~~$1.7~~$2.7 million of revenue recognized during the period, offset by approximately ~~$1.2~~$1.5 million of additional deferred sales in ~~2021.~~2022, and the acquisition of VetZ contract liabilities of approximately $0.7 million. Contract liabilities are reported on the accompanying Condensed Consolidated Balance Sheets on a contract-by-contract basis.

3. ACQUISITIONS AND RELATED PARTY ITEMS

VetZ Acquisition

On January 3, 2022, the Company acquired 100% of the equity of VetZ GmbH (“VetZ”), a European leader in veterinary practice information management software solutions (“PIMS”), for an aggregate purchase price of approximately $36.2 million. The purchase price consisted of approximately $32.4 million in cash, including a general indemnity holdback of approximately $1.4 million to be released within 18 months of closing, a net working capital adjustment of $0.2 million, and contingent consideration as described below.

As additional consideration for the acquisition, the Company agreed to a contingent earn-out of $15.5 million in Heska stock, which will be issued in tranches based on future financial and non-financial milestones. The fair value of the contingent consideration as of the acquisition date was approximately $3.9 million, determined using a Monte-Carlo simulation model. The contingent consideration was determined to be classified as equity, and therefore is not subsequently remeasured each reporting period and subsequent settlement of the obligation will be accounted for within equity.

The purchase price exceeded the fair value of the identifiable net assets, resulting in goodwill of $22.6 million, all of which is attributable to our International segment. The goodwill resulting from this acquisition consists of new product offerings from entering the PIMS market. All of the goodwill is tax deductible for purposes of calculating Controlled Foreign Corporation tested income, which may result in a decrease to the Company's future U.S. federal tax liability.

The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of January 3, 2022. The total purchase consideration is subject to customary working capital adjustments.

~~-10-~~

-12-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

The information below represents the preliminary purchase price allocation as of the acquisition date (in thousands):


	January 3, 2022
Purchase price in cash	$	32,368
Fair value of equity contingent consideration	3,860
Total purchase consideration	$	36,228

Cash and cash equivalents	$	1,251
Inventory	359
Accounts receivable	911
Prepaid expenses and other assets	318
Property and equipment, net	602
Operating lease right-of-use assets	2,962
Intangible assets	18,504
Total assets acquired	24,907
Accounts payable	607
Accrued liabilities	1,260
Operating lease liabilities, current	247
Deferred revenue, current	695
Operating lease liabilities, non-current	2,714
Deferred tax liabilities	5,408
Other liabilities	318
Net assets acquired	13,658
Goodwill	22,570
Total fair value of consideration transferred	$	36,228

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. A decrease in the fair value of assets acquired or an increase in the fair value of liabilities assumed in the acquisition from those valuations would result in a corresponding increase in the amount of goodwill from the acquisition.

Intangible assets acquired, amortization method and estimated useful life as of January 3, 2022, were as follows (dollars in thousands):

Weighted- Average Useful Life

Amortization
Method

Fair Value

Customer relationships

12 years

Straight-line

12,941

Trade name

8 years

Straight-line

1,816

Developed technology

4.3 years

Straight-line

3,747

Total intangible assets acquired

18,504

VetZ generated net revenue of $3.3 million and a net loss of $0.3 million for the period from January 3, 2022 to March 31, 2022.

-13-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

~~3. ACQUISITIONS~~The Company incurred acquisition related costs of approximately $0.5 million for the three months ended March 31, 2022, which are included within general and administrative expenses on our Condensed Consolidated Statements of (Loss) Income.

Unaudited Pro Forma Financial Information

The following table presents unaudited supplemental pro forma financial information as if the acquisition had occurred on January 1, 2021 (in thousands):


	Three Months Ended March 31, 2021
Revenue, net	$	63,460
Net income before equity in losses of unconsolidated affiliates	$	2,429
Net income attributable to Heska Corporation	$	2,243

Biotech Acquisition

On September 1, 2021, Heska acquired 65% of the equity of Biotech Laboratories U.S.A. LLC ("Biotech"), a developer of rapid assay diagnostic testing, in exchange for approximately $16.3 million in cash. As part of the purchase, Heska entered into put and call options in order to purchase the remaining 35% ownership in future years. The counterparty, Chinta Lamichhane, DVM, Ph.D, maintains an interest in Biotech and is an employee of the Company, thus commencing a related party relationship. Aside from the acquisition described herein, there were no financial or non-financial transactions between the Company and the counterparty.

In conjunction with the acquisition, the Company entered into various put and call options which are classified on the Condensed Consolidated Balance Sheets as Notes Payable. The written put options can be exercised after June 30, 2024, at a valuation identical to the initial purchase price. The written call options can be exercised at any time prior to June 30, 2026, at an amount equal to two times the initial valuation or after June 30, 2026, at a valuation identical to the initial purchase price. Additionally, if certain product development milestones are met, the shares may be bought in various tranches at two times the initial valuation. The Company evaluated the put and call options embedded in the shares representing the non-controlling interest under the guidance in ASC 480, Distinguishing Liabilities from Equity, and determined the instrument met the criteria to be recorded as a liability because the fixed price of the put and call options are identical starting after June 30, 2026. As a result, the Company recorded the transaction as a financing arrangement of the purchase of the non-controlling interest, and will record 100% of the income and loss of Biotech in our Condensed Consolidated Statements of (Loss) Income. The options were not redeemable as of the acquisition date or as of the period ending March 31, 2022. The estimated fair value of the Notes Payable of $15.9 million is inclusive of the probability weighted outcomes of the options described herein.

The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in goodwill of $25.8 million, all of which is attributable to our North America segment. In connection with the acquisition and pursuant to the elections under Section 754 of the Internal Revenue Code, the Company expects to obtain an increase with respect to the tax basis in the assets of Biotech.

-14-

HESKA CORPORATION AND ~~RELATED PARTY ITEMS~~SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

The information below represents the preliminary purchase price allocation as of the acquisition date (in thousands):


	September 1, 2021
Purchase price	$	16,250
Notes payable	15,900
Total purchase consideration	$	32,150
Accounts receivables	18
Other current assets	1
Inventories	190
Property and equipment, net	148
Operating lease right-of-use assets	1,033
Other intangible assets, net	6,000
Other non-current assets	15
Total assets acquired	7,405
Accounts payable	11
Accrued liabilities	33
Operating lease liabilities, current	188
Operating lease liabilities, non-current	845
Net assets acquired	6,328
Goodwill	25,822
Total fair value of consideration transferred	$	32,150

Intangible assets acquired, amortization method and estimated useful life as of September 1, 2021, were as follows (dollars in thousands):

Useful Life

Amortization
Method

Fair Value

Development technology

6 years

Straight-line

6,000

Total intangible assets acquired

6,000

Pro forma financial information related to the acquisition of Biotech has not been provided as it is not material to our consolidated results of operations.

-15-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

BiEsseA Acquisition

On July 1, 2021, the Company completed the acquisition of BiEsse A-Laboratorio die Analisi Veterinarie S.r.l. (“BSA”). The Company acquired 100% of the issued and outstanding shares of BSA for an aggregate purchase price of $7.2 million. On January 1, 2022, BSA was merged into scil animal care company Srl, a wholly owned subsidiary of scil animal care company GmbH ("scil").

As additional consideration for the shares, the Company agreed to a contingent earn-out of $2.8 million based on the achievement of certain performance metrics within three annual periods after 2021, each of which can pay up to one third of the total earn-out. The fair value of the contingent consideration as of the acquisition date was $2.3 million, and as of March 31, 2022, was $2.0 million.

The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in $4.6 million of goodwill, all of which is attributable to our International segment. All of the goodwill is tax deductible for purposes of calculating Controlled Foreign Corporation tested income, which may result in a decrease to the Company's future U.S. federal income tax liability.

The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of July 1, 2021. The total purchase consideration is subject to customary working capital adjustments, which were finalized as of December 31, 2021.

Per the tax indemnification included in the purchase agreement of BSA, the seller has indemnified the Company for $0.5 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 2025. As of March 31, 2022, approximately $0.5 million of the indemnification agreement remains outstanding.

-16-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

The information below represents the preliminary purchase price allocation as of the acquisition date (in thousands):


	July 1, 2021
Purchase price	$	4,835
Fair value of contingent consideration	2,334
Total purchase consideration	$	7,169

Cash and cash equivalents	322
Accounts receivables	152
Other receivables	497
Prepaid expenses	8
Other current assets	275
Property and equipment, net	89
Operating lease right-of-use assets	44
Other intangible assets, net	3,329

Total assets acquired	4,716
Accounts payable	208
Accrued liabilities	334
Operating lease liabilities, current	37
Deferred revenue, current, and other	85
Operating lease liabilities, non-current	20
Deferred tax liability	925
Other liabilities	500
Net assets acquired	2,607
Goodwill	4,562
Total fair value of consideration transferred	$	7,169

Intangible assets acquired, amortization method and estimated useful life as of July 1, 2021, were as follows (dollars in thousands):

Useful Life

Amortization Method

Fair Value

Customer relationships

14 years

Straight-line

3,329

Total intangible assets acquired

3,329

Pro forma financial information related to the acquisition of BSA has not been provided as it is not material to our consolidated results of operations.

-17-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

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 of March 31, 2022, $0.1 million of the indemnification holdback was released for licensing fees and $0.3 million of the indemnification holdback remains outstanding. 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.~~million, and subsequently decreased to $0 million as of March 31, 2022 and December 31, 2021.

The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in ~~$3.9~~$4.2 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.~~805, Business Combinations. 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 consideration	1,700
Total purchase consideration	$	5,955

Cash and cash equivalents	$	3
Accounts receivable	170
Property and equipment, net	530
Other intangible assets, net	1,185
~~Deferred tax asset~~	~~167~~
Total assets acquired	~~2,055~~1,888
Deferred tax liability	133
Net assets acquired	1,755
Goodwill	~~3,900~~4,200
Total fair value of consideration transferred	$	5,955

~~-11-~~-18-

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~~were as follows (dollars in thousands):

Useful Life

Amortization
Method

Fair Value

Developed technology

3 years

Straight-line

1,000

Customer relationships

6 months

Straight-line

150

Trade name

11 months

Straight-line

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 equivalents~~	~~5,889~~
~~Accounts receivable~~	~~10,707~~
~~Inventories~~	~~11,278~~
~~Net investment in leases, current~~	~~311~~
~~Prepaid expenses~~	~~1,692~~
~~Other current assets~~	~~1,338~~
~~Property and equipment, net~~	~~19,320~~
~~Operating lease right-of-use assets~~	~~877~~
~~Other intangible assets, net~~	~~44,517~~
~~Net investment in leases, non-current~~	~~1,027~~
~~Investments in unconsolidated affiliates~~	55
~~Other non-current assets~~	~~291~~
~~Total assets acquired~~	~~97,302~~
~~Accounts payable~~	~~8,221~~
~~Accrued liabilities~~	~~7,067~~
~~Operating lease liabilities, current~~	~~356~~
~~Deferred revenue, current, and other~~	~~3,220~~
~~Deferred revenue, non-current~~	94
~~Operating lease liabilities, non-current~~	~~529~~
~~Deferred tax liability~~	~~13,249~~
~~Other liabilities~~	~~276~~
~~Net assets acquired~~	~~64,290~~
~~Goodwill~~	~~46,000~~
~~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 Life~~

Amortization
Method

~~Fair Value~~

~~Customer relationships~~

~~10 years~~

~~Straight-line~~

~~36,272~~

~~Internally developed software~~

~~7 years~~

~~Straight-line~~

~~353~~

~~Backlog~~

~~0.2 years~~

~~Straight-line~~

~~210~~

~~Non-compete agreements~~

~~2 years~~

~~Straight-line~~

~~Trade name subject to amortization~~

~~0.8 years~~

~~Straight-line~~

~~Trademarks and trade names not subject to amortization~~

~~n/a~~

~~Indefinite~~

~~7,556~~

~~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~~In connection with the VetZ acquisition, the Company entered into a related party ~~activities~~building lease agreement 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~~the former owners, who are now employees of the Company. The Company recorded operating lease expense of $75 thousand ~~and $0 during~~related to this lease for the three months ended March 31, ~~2021 and 2020, respectively, all of which is related to lease payments.~~2022. The right-of-use asset and lease liability ~~amounts~~ related to the ~~warehouse leases~~building lease were both approximately ~~$0.2~~$2.6 million as of ~~both~~ March 31, ~~2021~~2022.

Prior to the closing of the VetZ acquisition, the former owners who are now employees of the Company purchased vehicles and ~~December 31, 2020.~~bicycles from VetZ. As of January 3, 2022, a receivable of approximately $165 thousand was included in the preliminary purchase price allocation related to these transactions. These receivables were settled in full on January 7, 2022.

~~-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, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Equity method investment	Equity method investment	$	3,500	$	3,686	Equity method investment	$	2,025	$	2,406
Non-marketable equity security investment	Non-marketable equity security investment	3,018		3,018		Non-marketable equity security investment	3,018		3,018
Investment in Unconsolidated Affiliates		$	6,518	$	6,704
Investments in unconsolidated affiliates						Investments in unconsolidated affiliates	$	5,043	$	5,424

Equity Method Investment

On September 24, 2018, ~~the Company~~we invested approximately $5.1 million, including costs, to acquire an equity interest in a business as part of ~~its~~our product development strategy. As of March 31, ~~2021,~~2022, the Company's ownership interest in the business was ~~29.1%~~26.0%. 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 (loss) income before equity in losses of unconsolidated affiliates within the Condensed Consolidated Statements of ~~Income~~ (Loss). Income.

-19-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

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)~~benefit for our (loss) income ~~(loss)~~ before income taxes were as follows (in thousands):


		Three Months Ended March 31,				Three Months Ended March 31,
		2021		2020				2022		2021
Income (loss) before income taxes and equity in losses of unconsolidated affiliates		$	492	$	(6,817)
(Loss) income before income taxes and equity in losses of unconsolidated affiliates							(Loss) income before income taxes and equity in losses of unconsolidated affiliates	$	(11,813)	$	492
Total income tax benefit	Total income tax benefit	$	(1,565)	$	(1,508)		Total income tax benefit	$	(2,208)	$	(1,565)

There were cash payments for income taxes, net of refunds, of ~~$496 thousand~~$0.5 million for the three months ended March 31, ~~2021~~2022 and there were cash payments of ~~$7 thousand~~$0.5 million for income taxes for the three months ended March 31, ~~2020.~~2021. The ~~Company’s~~Company had a tax benefit ~~was~~of $2.2 million for the three months ended March 31, 2022 compared to the tax benefit of $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.~~2021. The increase in tax benefit in the ~~three-month~~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.~~an increased loss for financial reporting. The Company recognized ~~$0.5~~$0.6 million in excess tax benefits related to employee share-based compensation for the three months ended March 31, ~~2021,~~2022, compared to ~~$0.3~~$0.5 million recognized for the three months ended March 31, ~~2020.~~2021.

As of ~~March~~December 31, 2021, the Company had a deferred tax asset of approximately ~~$9.4~~$5.7 million from net operating losses and tax ~~credits~~credits. The Company has a valuation allowance recorded on statutory deferred tax assets in Germany and a ~~net~~ partial valuation allowance ~~of approximately $4.4 million~~ recorded ~~against these deferred tax assets.~~on state net operating losses in the US. In the first quarter, the Company ~~released~~forecasts an increase of approximately ~~$1.1~~$0.5 million of the ~~partial~~ valuation allowance ~~against~~through the annual effective tax ~~credits expiring~~rate used to estimate income tax expense. The increase is due to forecasted future financial losses in ~~years after~~Germany. After the increase, the net valuation allowance is forecasted to be approximately $3.3 million as of December 31, ~~2021. The release was due to future financial income forecasts showing the utilization of these credits.~~2022.

~~-16-~~-20-

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):

Leases Balance Sheet Location March 31, 2021 December 31, 2020
Assets
Operating Operating lease right-of-use assets $ 5,089 $ 5,457
Finance Property and equipment, net 1,745 1,907
Total Leased Assets $ 6,834 $ 7,364
Liabilities
Operating Operating lease liabilities, current $ 2,015 $ 2,087
Operating lease liabilities, non-current 3,571 3,858
Finance Deferred revenue, current, and other 229 295
Other liabilities 224 261
Total Lease Liabilities $ 6,039 $ 6,501


Leases	Balance Sheet Location	March 31, 2022		December 31, 2021
Assets
Operating	Operating lease right-of-use assets	$	8,154	$	5,198
Finance	Property and equipment, net	1,523		1,650
Total Leased Assets		$	9,677	$	6,848

Liabilities
Operating	Operating lease liabilities, current	$	2,504	$	2,227
	Operating lease liabilities, non-current	6,211		3,509
Finance	Deferred revenue, current, and other	168		200
	Other liabilities	297		331
Total Lease Liabilities		$	9,180	$	6,267

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,					Three Months Ended March 31,
		2021		2020			2022		2021
Sales-type lease revenue	Sales-type lease revenue	$	1,658	$	1,244	Sales-type lease revenue	$	4,101	$	1,658
Sales-type lease cost of revenue	Sales-type lease cost of revenue	1,264		869		Sales-type lease cost of revenue	3,473		1,264
Profit recognized at commencement for sales-type leases	Profit recognized at commencement for sales-type leases	$	394	$	375	Profit recognized at commencement for sales-type leases	$	628	$	394

Operating lease income	Operating lease income	$	608	$	0	Operating lease income	$	503	$	608

~~-17-~~-21-

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~~2022 and ~~2020~~2021 (in thousands, except per share data):

Three Months Ended March 31,
2021 2020
Net income (loss) attributable to Heska Corporation $ 1,871 $ (5,288)
Basic weighted-average common shares outstanding 9,478 7,568
Dilutive effect of stock options and restricted stock awards 366 0
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)


	Three Months Ended March 31,
	2022		2021
Net (loss) income attributable to Heska Corporation	$	(9,986)	$	1,871

Basic weighted-average common shares outstanding	10,273		9,478
Dilutive effect of stock options and restricted stock	—		366
Diluted weighted-average common shares outstanding	10,273		9,844

Basic (loss) earnings per share attributable to Heska Corporation	$	(0.97)	$	0.20
Diluted (loss) earnings per share attributable to Heska Corporation	$	(0.97)	$	0.19

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,		Three Months Ended March 31,
		2021	2020			2022	2021
Convertible preferred stock		0	1,509
Convertible Senior Notes	Convertible Senior Notes	996	43		Convertible Senior Notes	996	996
Stock options and restricted stock	Stock options and restricted stock	0	135		Stock options and restricted stock	356	—
		996	1,687			1,352	996

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~~The Company early 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, 2022, and 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.~~

~~-18-~~-22-

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~~2022 (in thousands):


		North America		International		Total			North America		International		Total
Carrying amount, December 31, 2020		$	35,414	$	52,862	$	88,276
Carrying amount, December 31, 2021								Carrying amount, December 31, 2021	$	65,535	$	53,291	$	118,826
Goodwill attributable to acquisitions (subject to change)	Goodwill attributable to acquisitions (subject to change)	3,900		0		3,900		Goodwill attributable to acquisitions (subject to change)	—		22,570		22,570
Measurement period adjustment to prior year acquisition								Measurement period adjustment to prior year acquisition	(17)		—		(17)
Foreign currency adjustments	Foreign currency adjustments	0		(2,208)		(2,208)		Foreign currency adjustments	(150)		(1,239)		(1,389)
Carrying amount, March 31, 2021		$	39,314	$	50,654	$	89,968
Carrying amount, March 31, 2022								Carrying amount, March 31, 2022	$	65,368	$	74,622	$	139,990

Other intangibles consisted of the following (in thousands):


		March 31, 2021						December 31, 2020							March 31, 2022						December 31, 2021
		Gross Carrying Amount		Accum. Amortiz.		Net Carrying Amount		Gross Carrying Amount		Accum. Amortiz.		Net Carrying Amount			Gross Carrying Amount		Accum. Amortiz.		Net Carrying Amount		Gross Carrying Amount		Accum. Amortiz.		Net Carrying Amount
Intangible assets subject to amortization:	Intangible assets subject to amortization:													Intangible assets subject to amortization:
Customer relationships and other	Customer relationships and other	$	45,636	$	(7,551)	$	38,085	$	46,989	$	(6,436)	$	40,553	Customer relationships and other	$	59,674	$	(12,502)	$	47,172	$	47,629	$	(11,145)	$	36,484
Developed technology	Developed technology	9,647		(1,971)		7,676		8,669		(1,696)		6,973		Developed technology	19,341		(4,039)		15,302		15,633		(3,218)		12,415
Trade names	Trade names	227		(118)		109		197		(105)		92		Trade names	2,000		(229)		1,771		223		(166)		57
Intangible assets not subject to amortization:	Intangible assets not subject to amortization:													Intangible assets not subject to amortization:
Trade names	Trade names	8,009		—		8,009		8,374		—		8,374		Trade names	7,594		—		7,594		7,749		—		7,749
Total intangible assets	Total intangible assets	$	63,519	$	(9,640)	$	53,879	$	64,229	$	(8,237)	$	55,992	Total intangible assets	$	88,609	$	(16,770)	$	71,839	$	71,234	$	(14,529)	$	56,705

Amortization expense ~~relating to other intangibles~~ was ~~as follows (in thousands):~~

Three Months Ended March 31,
2021 2020
Amortization expense $ 1,404 $ 428
$2.2 million and $1.4 million for the three months ended March 31, 2022 and 2021, respectively.

~~The~~0The remaining weighted-average amortization period for intangible assets is approximately ~~8.3~~8.2 years.

Estimated amortization expense related to intangibles for each of the five years from ~~2021~~2022 (remaining) through ~~2025~~2026 and thereafter is as follows (in thousands):


Year Ending December 31,	Year Ending December 31,			Year Ending December 31,
2021 (remaining)		$	4,683
2022		6,038
2022 (remaining)				2022 (remaining)	$	7,095
2023	2023	5,677		2023	8,816
2024	2024	5,245		2024	8,112
2025	2025	5,190		2025	8,059
2026				2026	7,677
Thereafter	Thereafter	19,037		Thereafter	24,486
Total amortization related to finite-lived intangible assets	Total amortization related to finite-lived intangible assets	$	45,870	Total amortization related to finite-lived intangible assets	$	64,245
Indefinite-lived intangible assets		8,009
Intangible assets not subject to amortization				Intangible assets not subject to amortization	7,594
Net intangible assets	Net intangible assets	$	53,879	Net intangible assets	$	71,839

~~-19-~~-23-

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, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Land	Land	$	2,493	$	2,590	Land	$	2,251	$	2,959
Building	Building	12,310		12,737		Building	11,792		11,288
Machinery and equipment	Machinery and equipment	41,559		40,411		Machinery and equipment	40,075		39,851
Office furniture and equipment	Office furniture and equipment	2,033		2,047		Office furniture and equipment	2,481		1,732
Computer hardware and software	Computer hardware and software	4,885		4,773		Computer hardware and software	5,393		5,285
Leasehold and building improvements	Leasehold and building improvements	10,728		10,728		Leasehold and building improvements	10,858		10,796
Construction in progress	Construction in progress	49		4		Construction in progress	482		286
Property and equipment, gross	Property and equipment, gross	74,057		73,290		Property and equipment, gross	73,332		72,197
Less accumulated depreciation	Less accumulated depreciation	(39,194)		(37,748)		Less accumulated depreciation	(39,514)		(38,784)
Total property and equipment, net	Total property and equipment, net	$	34,863	$	35,542	Total property and equipment, net	$	33,818	$	33,413

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~~2022 and December 31, ~~2020,~~2021, was ~~$14.4~~$15.6 million and ~~$13.6~~$15.1 million, respectively, before accumulated depreciation of ~~$5.0~~$5.1 million and ~~$4.7~~$5.8 million, respectively.

Depreciation expense was ~~$1.9~~$0.8 million and ~~$0.9~~$1.9 million for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively.

10. INVENTORIES

Inventories consisted of the following (in thousands):


		March 31, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Raw materials	Raw materials	$	13,028	$	14,454	Raw materials	$	19,808	$	16,094
Work in process	Work in process	4,204		4,262		Work in process	4,778		3,656
Finished goods	Finished goods	22,125		21,321		Finished goods	30,636		29,611
Total inventories	Total inventories	$	39,357	$	40,037	Total inventories	$	55,222	$	49,361

Inventories are measured on a first-in, first-out basis and stated at lower of cost or net realizable value.

~~-20-~~-24-

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, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Accrued payroll and employee benefits	Accrued payroll and employee benefits	$	5,961	$	7,949	Accrued payroll and employee benefits	$	8,074	$	9,392
Accrued property taxes	Accrued property taxes	547		659		Accrued property taxes	542		656
Accrued purchase orders	Accrued purchase orders	1,126		1,549		Accrued purchase orders	1,868		552
Inventory in transit						Inventory in transit	3,040		1,605
Accrued taxes	Accrued taxes	3,882		3,731		Accrued taxes	3,520		3,574
Other	Other	3,404		4,167		Other	2,730		3,645
Total accrued liabilities	Total accrued liabilities	$	14,920	$	18,055	Total accrued liabilities	$	19,774	$	19,424

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,~~2022, the Company granted the following restricted stock ~~options~~awards and restricted stock ~~awards:~~units:


		Three Months Ended March 31, 2021				Three Months Ended March 31, 2022
		Options/Awards Granted	Weighted-Average Grant Date Fair Value (per option/award)			Awards/Units Granted	Weighted-Average Grant Date Fair Value (per award/unit)
Stock options		0	$	0

Restricted stock awards	Restricted stock awards	235	$	154.48	Restricted stock awards	51,919	$	127.09
Restricted stock units					Restricted stock units	9,207	$	127.09

~~The~~We valued the restricted stock awards ~~granted during the three months ended March 31, 2021 contain only time-based vesting terms. The~~and restricted stock units related to service and/or Company performance targets based on grant date 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~~expense over the ~~corresponding~~ requisite service ~~period.~~period when achievement of those conditions is deemed probable.

~~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.

~~-21-~~

~~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 0 (2,271) (3,112) (5,383)
Balances at March 31, 2021 $ (386) $ 3,601 $ 5,571 $ 8,786


	Pension Adjustments		Foreign Currency Translation1		Foreign Currency Gain on Intra-Entity Transactions2		Total Accumulated Other Comprehensive Income
Balances at December 31, 2021	$	(279)	$	1,974	$	3,342	$	5,037
Current period other comprehensive loss	—		(1,545)		(1,498)		(3,043)
Balances at March 31, 2022	$	(279)	$	429	$	1,844	$	1,994

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.

-25-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

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~~$0.6 million and ~~and~~ $0.5 million as of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, 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~~defended itself ~~against~~from 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~~claim but ultimately reached a settlement agreement and ~~as such, no accrual has been recorded for this ongoing litigation. Additionally,~~will pay $0.8 million to the defendant. The Company is indemnified by the scil acquisition agreement for this claim.

As of March 31, ~~2021,~~2022, 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.

Global Supply and Licensing Agreement

On March 28, 2022, the Company entered into a global supply and licensing agreement with VolitionRx Limited (“Volition”) to adapt and commercialize the Nu.Q® Vet Cancer Screening Test at the point of care for canines and felines on Heska’s technology. On March 30, 2022, the Company made an upfront milestone payment of $10 million to Volition in exchange for exclusive rights to develop the Nu.Q® Vet Cancer Screening Test for the point of care and non-exclusive rights for central reference lab testing. The full $10 million payment was expensed to Research and development on the Condensed Consolidated Statements of (Loss) Income for the three months ended March 31, 2022. The Company is obligated to pay an additional $13 million on or before December 31, 2024, if certain milestones are met, or to obtain an extended timeline to meet those milestones. If those milestones are not met by the agreed upon extension, the agreement may be terminated. However, if the $13 million milestones are met, the agreement will have a total term of 22 years for exclusivity in point of care testing. If the first milestones are met and the agreement does not terminate, there will be another $5 million payment due upon the achievement of an additional milestone within the remaining term of the agreement. These potential future milestone payments have not yet been accrued, as the Company has not deemed them probable at this time.

Off-Balance Sheet Commitments

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

~~-22-~~-26-

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~~$105.0 million as of March 31, ~~2021.~~2022.

15. INTEREST AND OTHER EXPENSE, ~~(INCOME),~~ NET

Interest and other expense, ~~(income),~~ net, consisted of the following (in thousands):


		Three Months Ended March 31,				Three Months Ended March 31,
		2021		2020				2022		2021
Interest income	Interest income	$	(389)	$	(233)		Interest income	$	(485)	$	(389)
Interest expense	Interest expense	920		2,346			Interest expense	925		920
Other (income) expense, net		(5)		86
Other (income) expense , net							Other (income) expense , net	(81)		(5)
Total interest and other expense, net	Total interest and other expense, net	$	526	$	2,199		Total interest and other expense, net	$	359	$	526

Cash paid for interest for the three months ended March 31, 2022 and 2021 ~~and 2020~~ was ~~$1.6~~$2.2 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~~2021 Form 10-K for further information on the Notes.

No portion of the Notes was converted during the three months ended March 31, ~~2021~~2022 and the liability component was classified as long-term debt on the Company's Condensed Consolidated Balance Sheet as of March 31, ~~2021.~~2022.

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.

~~-23-~~-27-

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, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Principal amount of the Notes	Principal amount of the Notes	$	86,250	$	86,250	Principal amount of the Notes	$	86,250	$	86,250
Unamortized debt discount	Unamortized debt discount	(2,529)		(37,791)		Unamortized debt discount	(2,110)		(2,216)
Net carrying amount	Net carrying amount	$	83,721	$	48,459	Net carrying amount	$	84,140	$	84,034

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,				Three Months Ended March 31,
		2021		2020				2022		2021
Interest expense related to contractual coupon interest	Interest expense related to contractual coupon interest	$	809	$	809		Interest expense related to contractual coupon interest	$	809	$	809
Interest expense related to amortization of the debt discount	Interest expense related to amortization of the debt discount	102		1,524			Interest expense related to amortization of the debt discount	107		102
		$	911	$	2,333			$	916	$	911

As of March 31, ~~2021,~~2022, the remaining period over which the unamortized discount will be amortized is ~~66.0~~54 months.

The estimated fair value of the Notes was ~~$180.4~~$154.4 million and ~~$156.9~~$194.3 million as of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, 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~~$138.28 on March 31, ~~2021,~~2022, the if-converted value exceeded the aggregate principal amount of the Notes by ~~$81.5~~$51.4 million.

~~-24-~~-28-

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”~~“Equity Method 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.~~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 (income) expense, ~~(income),~~ net on the Condensed Consolidated Statements of (Loss) Income.

The carrying value of the note receivable, included in Related party convertible note receivable, net on the Condensed Consolidated Balance Sheets, is as follows (in thousands):

March 31, 2021 December 31, 2020
Principal amount $ 6,650 $ 6,650
Unamortized discount (903) (977)
Net carrying amount $ 5,747 $ 5,673


	March 31, 2022		December 31, 2021
Principal amount	$	6,650	$	6,650
Unamortized discount	(591)		(672)
Net carrying amount	$	6,059	$	5,978

The fair value of the embedded derivative ~~was $1.0~~was $0.9 million as of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, and is included in Related party convertible note receivable, net on the Condensed 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 Interest and other (income) expense, ~~(income)~~net on the Condensed Consolidated Statements of (Loss) Income. In addition, the Company recorded an allowance for expected credit losses on the promissory note of ~~$33~~$67 thousand as of March 31, ~~2021.~~2022.

Promissory Note

On February 1, 2021, one of the Company's equity investees (the "Investee"), which the Company accounts for as a ~~nonmarketable~~non-marketable 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

-29-

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 it is a freestanding instrument that meets the definition of ~~an embedded~~a 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 (income) expense, ~~(income),~~ net on the Condensed Consolidated Statements of (Loss) Income.

The carrying value of the note receivable, included in ~~Other non-current assets~~Promissory note receivable from investee, net, on the Condensed Consolidated Balance Sheets, is as follows (in thousands):

March 31, 2021 December 31, 2020
Principal amount $ 9,000 $ 0
Unamortized discount (298) 0
Net carrying amount $ 8,702 $ 0


	March 31, 2022		December 31, 2021
Principal amount	$	9,000	$	9,000
Unamortized discount	(238)		(254)
Net carrying amount	$	8,762	$	8,746

The fair value of the ~~embedded~~ derivative was $0.3 million ~~at issuance and~~ as of March 31, 2022 and December 31, 2021, and is included in Other non-current assets on our Condensed 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 Interest and other expense, ~~(income)~~net on the Condensed Consolidated Statements of (Loss) 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.~~2022.

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~~2 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~~evaluates segment performance and ~~allocate~~allocates 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~~2022, due to the acquisition of ~~scil.~~VetZ.

-30-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

Summarized financial information concerning the Company's reportable segments is shown in the following tables (in thousands):


Three Months Ended March 31, 2021		North America			International			Total
Three Months Ended March 31, 2022											Three Months Ended March 31, 2022	North America			International			Total
Total revenue	Total revenue	$	37,272		$	23,231		$	60,503		Total revenue	$	37,374		$	27,426		$	64,800
Cost of revenue	Cost of revenue	19,763			15,270			35,033			Cost of revenue	19,466			16,189			35,655
Gross profit	Gross profit	17,509			7,961			25,470			Gross profit	$	17,908		$	11,237		$	29,145
Gross margin	Gross margin	47		%	34		%	42		%	Gross margin	48		%	41		%	45		%
Operating income (loss)		1,033			(15)			1,018
Operating (loss) income											Operating (loss) income	$	(12,311)		$	857		$	(11,454)

Three Months Ended March 31, 2020 North America International Total
Total revenue $ 27,650 $ 3,004 $ 30,654
Cost of revenue 15,146 2,060 17,206
Gross profit 12,504 944 13,448
Gross margin 45 % 31 % 44 %
Operating loss (4,093) (525) (4,618)


Three Months Ended March 31, 2021	North America			International			Total
Total revenue	$	37,272		$	23,231		$	60,503
Cost of revenue	19,763			15,270			35,033
Gross profit	$	17,509		$	7,961		$	25,470
Gross margin	47		%	34		%	42		%
Operating income (loss)	$	1,033		$	(15)		$	1,018

Asset information by reportable segment as of March 31, ~~2021~~2022 is as follows (in thousands):


As of March 31, 2021		North America		International		Total
As of March 31, 2022								As of March 31, 2022	North America		International		Total
Total assets	Total assets	$	413,913	$	155,660	$	569,573	Total assets	$	369,013	$	232,658	$	601,671

Asset information by reportable segment as of December 31, ~~2020~~2021 is as follows (in thousands):


As of December 31, 2020		North America		International		Total
As of December 31, 2021								As of December 31, 2021	North America		International		Total
Total assets	Total assets	$	238,550	$	161,289	$	399,839	Total assets	$	441,234	$	162,838	$	604,072

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.

~~-27-~~-31-

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 for the year ended December 31, 2021 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~~6, 2022 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 ("POC") laboratory instruments and ~~consumables;~~consumables, single-use offerings such as in-clinic diagnostics tests; Point of Care digital imaging diagnostic ~~instruments;~~instruments and veterinary practice information management software solutions (“PIMS”); 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. Point of Care laboratory consumables also include single-use diagnostic tests, such as those used for heartworm testing. 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 & informatics, 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. On January 3, 2022 we acquired VetZ GmbH, a European leader in veterinary practice information management software solutions, which is now included as a component within Point of Care imaging & informatics.

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Pharmaceuticals, Vaccines and Diagnostic ("PVD") revenue primarily includes ~~single use diagnostic and other tests,~~ pharmaceuticals and biologicals as well as research and development, licensing and royalty ~~revenue.~~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%~~80% and ~~30%~~20%, ~~respectively,~~respectively, of revenue for the three months ended March 31, ~~2021~~2022 and ~~67%~~70% and ~~33%~~30%, 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.2021.

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~~In some part, and of different degrees depending on the ~~fourth quarter~~geography, due to the introduction and acceptance of ~~2020~~COVID-19 vaccines, restrictions eased in many of the countries in which we operate. Global diagnostic animal health demand continued throughout 2021 and into the first quarter of ~~2021, increased restrictions, mainly~~2022. While this trend is encouraging, with the rise in COVID-19 variants, 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

~~-29-~~

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.

AsDue to our dependence on global suppliers, manufacturers and shipping routes, we are experiencing increased delays in receiving supply, increased shipping costs and some targeted increase in materials cost. Because our

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long-term subscription programs, the commercial program of our largest revenue category, Point of Care laboratory instruments and consumables, include annual price adjustments at a ~~result~~greater of ~~social distancing measures, on-site installations~~4% or the consumer price index, we are able to mitigate some 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, ourthese costs in this highly inflationary environment.

Our financial position remains ~~strong. On~~strong as we have a cash balance of $172.7 million as of March ~~5, 2021, we completed a public offering of shares of common stock.~~31, 2022. As a result, we have sufficient liquidity to sustain our ~~operations and do not anticipate~~operations. We will continue to actively seek opportunities that are consistent with our strategic direction, which may include a need to ~~access~~raise 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.capital.

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 (Loss) Income ~~(Loss)~~ (in thousands, except per share):

Three Months Ended March 31,
2021 2020
Revenue, net $ 60,503 $ 30,654
Gross profit 25,470 13,448
Operating expenses 24,452 18,066
Operating income (loss) 1,018 (4,618)
Interest and other expense, net 526 2,199
Income (loss) before income taxes and equity in losses of unconsolidated affiliates 492 (6,817)
Income tax benefit (1,565) (1,508)
Net income (loss) before equity in losses of unconsolidated affiliates 2,057 (5,309)
Equity in losses of unconsolidated affiliates (186) (130)
Net income (loss) after equity in losses of unconsolidated affiliates 1,871 (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 %


	Three Months Ended March 31,
	2022			2021
Revenue, net	$	64,800		$	60,503
Gross profit	29,145			25,470
Operating expenses	40,599			24,452
Operating (loss) income	(11,454)			1,018
Interest and other expense, net	359			526
(Loss) income before income taxes and equity in losses of unconsolidated affiliates	(11,813)			492
Income tax benefit	(2,208)			(1,565)
Net (loss) income before equity in losses of unconsolidated affiliates	(9,605)			2,057
Equity in losses of unconsolidated affiliates	(381)			(186)
Net (loss) income attributable to Heska Corporation	$	(9,986)		$	1,871

Diluted (loss) income per share attributable to Heska Corporation	$	(0.97)		$	0.19
Non-GAAP net income per diluted share(1)(2)	$	0.27		$	0.59

Adjusted EBITDA(1)	$	7,688		$	8,400
Net (loss) income margin(1)	(14.8)		%	3.4		%
Adjusted EBITDA margin(1)	11.9		%	13.9		%

1(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)~~loss per share attributable to Heska Corporation, the closest comparable GAAP measures, for each of the periods presented. Net (loss) income ~~(loss)~~ margin and adjusted EBITDA margin are calculated as the ratio of net (loss) income ~~(loss)~~ and adjusted EBITDA, respectively, to revenue.

2(2) Shares used in the diluted per share calculation for non-GAAP net income per diluted share are (in thousands): 10,605 for the three months ended March 31, 2022 compared to 9,844 for the three months ended March 31, ~~2021 compared~~2021.

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Revenue

Total revenue increased 7.1% to ~~7,568 for~~$64.8 million for the three months ended March 31, ~~2020.~~

~~Revenue~~

~~Total revenue increased 97.4%~~2022, compared to $60.5 million for the three months ended March 31, ~~2021, compared to $30.7 million~~2021. The increase in revenue is driven mainly by growth in POC imaging & informatics of 27.5% in the three months ended March 31, 2022, in part as a result of our acquisition of VetZ as well as increased sales in our international segment. We also experienced a 39.6% growth in POC Lab Instruments for the three months ended March 31, ~~2020. The significant increase~~2022 as a result of the introduction of Element AIM as well as increased capital lease placements globally. These were partially offset by declines in ~~revenue is driven mainly by~~PVD of 32.2%, in part as a result of raw material delays in the ~~acquisition~~production of ~~scil, which represented $22.3~~Tri-Heart.

Gross Profit

Gross profit increased 14.4% to $29.1 million inin 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%~~2022, compared to $25.5 million in the three months ended March 31, ~~2021, compared~~2021. Gross margin increased to ~~$13.4 million~~45.0% in the three months ended March 31, ~~2020. Gross margin decreased~~2022, compared to 42.1% in the three months ended March 31, ~~2021, compared to 43.9% in the three months ended March 31, 2020.~~2021. The increase in gross profit was due mainly to ~~the scil acquisition.~~increased revenue. The ~~decrease~~increase in gross margin percentage was due to ~~lower margin in~~favorable product mix, increased pricing, and the ~~scil business.~~acquisition of VetZ.

Operating Expenses

Selling and marketing expenses ~~increased 47.8%~~were $12.0 million in the three months ended March 31, 2022, compared to $10.9 million in the three months ended March 31, 2021, ~~compared to $7.4 million in~~an increase of 10.0%. The increase for the three months ended March 31, ~~2020. The increase~~2022 is ~~a direct result of international expansion related to~~ primarily driven by recent acquisitions, ~~and is~~which are in line with ~~management expectations.~~management's expectations, as well as increased travel and tradeshow activity as a result of relaxed COVID restrictions compared to the prior year. These increases were partially offset by lower stock compensation of $0.5 million due to the roll off of a vested grant.

Research and development ~~expenses decreased 44.3%~~expenses increased to $12.5 million in the three months ended March 31, 2022, compared to $1.2 million in the three months ended March 31, ~~2021,~~2021. The variance is primarily related to a $10 million dollar payment for an exclusive global supply and licensing agreement to adapt and commercialize the Heska Nu.Q® vet cancer screening test. Refer to Note 14, Commitments and Contingencies. In addition to this, we also experienced increased costs associated with recent acquisitions and higher general research costs.

General and administrative expenses increased 30.6% to $16.1 million in the three months ended March 31, 2022, compared to ~~$2.1~~$12.4 million in the three months ended March 31, ~~2020.~~ 2021. The ~~decrease~~increase is driven by increased stock-based compensation expenses of $2.0 million, increased costs related to ~~timing of spending on product development for the urine~~recent acquisitions (including one-time items), and ~~fecal diagnostic analyzer~~increased cash compensation costs.

Interest and ~~enhanced immunodiagnostic offerings in the current year. As we invest in future growth of the Company, management anticipates continued research~~Other (Income) Expense, net

Interest and ~~development costs throughout 2021, which is consistent with strategic initiatives.~~

~~General and administrative expenses increased 44.4%~~other (income) expense, ne to t, was $0.4 million ex~~$12.4 million~~pense in the three months ended March 31, ~~2021,~~2022, roughly flat compared to ~~$8.6~~$0.5 million expense 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~~

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~~Interest and other expense, net, was $0.5~~

Income Tax (Benefit) Expense

For the three months ended March 31, 2022, the Company had a total income tax benefit of $2.2 million, in including $2.4 million of domestic deferred income tax benefit and $0.2 million of current income tax expense. 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~~Company 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~~$0.6 million in excess tax benefits related to employee share-based compensation in the three months ended March 31, ~~2021,~~2022, compared to ~~$0.3~~$0.5 million recognized in the three months ended March 31, ~~2020.~~

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2021.
The tax benefit for the 2022 period versus the 2021 period is due to an increased loss for financial reporting.

Net (Loss) Income ~~(Loss)~~ Attributable to Heska Corporation

Net loss attributable to Heska was $10.0 million in the three months ended March 31, 2022, compared to net income attributable to Heska ~~was~~of $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"~~change 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 the $10 million licensing payment and increased stock & cash compensation costs as well as one-time and recurring costs associated with recent acquisitions, partially offset by increases in revenue and ~~profit, as discussed above, and the change in non-cash interest charges relating to the Notes.~~gross profit.

Adjusted EBITDA

Adjusted EBITDA in the three months ended March 31, ~~2021 was $8.4~~2022 was $7.7 million ~~(13.9%~~(11.9% adjusted EBITDA margin), ~~compared~~compared to ~~$0.9~~$8.4 million ~~(3.0%~~(13.9% adjusted EBITDA margin) in the three months ended March 31, ~~2020.~~2021. The ~~increase~~decrease is driven by increased ~~revenue~~research and ~~gross profit, partially offset by increased operating expenses, as discussed above. Increased stock based compensation~~development expenses and ~~depreciation~~higher incentive compensation, both short and ~~amortization associated with the acquisition of scil are excluded from adjusted EBITDA.~~long-term. See “Non-GAAP Financial Measures” for a reconciliation of adjusted EBITDA to net ~~income,~~loss (income), the closest comparable GAAP measure, for each of the periods presented.

~~Earnings~~(Loss) Income Per Share

~~Earnings~~Loss per share attributable to Heska ~~was~~was $0.97 per diluted share in the three months ended March 31, 2022 compared to income of $0.19 per diluted share in the three months ended March 31, 2021 ~~compared~~. The loss in the current period is largely due to ~~loss~~increased one-time costs, primarily related to the $10 million licensing payment, as well as other increased operating expenses, partially offset by higher revenue and gross profit, as discussed above.

Non-GAAP Earnings Per Share

Non-GAAP EPS was income of ~~$0.70~~ $0.27 per diluted share in the three months ended March 31, ~~2020. The increase is primarily due~~2022 compared 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.~~2021. The ~~increase~~decrease is primarily due to increased ~~revenue and profit,~~operating expenses, partially offset by ~~increased operating expenses.~~higher revenue and profit. See “Non-GAAP Financial Measures" for a reconciliation of non-GAAP EPS to net (loss) 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

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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,						Three Months Ended March 31,
		2021			2020					2022			2021
Net income (loss)1		$	2,057		$	(5,309)
Income tax benefit		(1,565)			(1,508)
Net (loss) income(1)									Net (loss) income(1)	$	(9,605)		$	2,057
Income tax (benefit) expense									Income tax (benefit) expense	(2,208)			(1,565)
Interest expense, net	Interest expense, net	531			2,113				Interest expense, net	440			531
Depreciation and amortization	Depreciation and amortization	3,571			1,374				Depreciation and amortization	3,300			3,571
EBITDA	EBITDA	$	4,594		$	(3,330)			EBITDA	$	(8,073)		$	4,594
Acquisition-related and other one-time costs2		155			3,874
Acquisition-related and other one-time (benefits) costs(2)									Acquisition-related and other one-time (benefits) costs(2)	11,032			155
Stock-based compensation	Stock-based compensation	3,837			353				Stock-based compensation	5,110			3,837
Equity in losses of unconsolidated affiliates	Equity in losses of unconsolidated affiliates	(186)			(130)				Equity in losses of unconsolidated affiliates	(381)			(186)
Net loss attributable to non-controlling interest		—			151
Adjusted EBITDA	Adjusted EBITDA	$	8,400		$	918			Adjusted EBITDA	$	7,688		$	8,400
Net income (loss) margin3		3.4		%	(17.3)		%
Adjusted EBITDA margin3		13.9		%	3.0		%
Net (loss) income margin(3)									Net (loss) income margin(3)	(14.8)		%	3.4		%
Adjusted EBITDA margin(3)									Adjusted EBITDA margin(3)	11.9		%	13.9		%

1(1) Net (loss) income ~~(loss)~~ used for reconciliation represents the "Net (loss) income ~~(loss)~~ before equity in losses of unconsolidated affiliates."

2(2) To exclude the effect of one-time expense and other one-time charges of $11.0 million and $0.2 million for the three months ending March 31, ~~2021,~~2022 and ~~$3.9 million for the three months ending~~ March 31, ~~2020~~2021, respectively. The costs as of March 31, 2022 were incurred primarily as a result of a $10 million licensing payment. The remainder of the costs in both periods were incurred as ~~part~~a result of ~~acquisition and other related costs.~~acquisition-related charges.

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

Three Months Ended
March 31,
2021 2020
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 compensation 0.39 0.05
Loss on equity investee transactions 0.02 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 calculations 9,844 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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	Three Months Ended March 31,
	2021		2020
GAAP (loss) income attributable to Heska per diluted share	$	(0.97)	$	0.19
Acquisition-related and other one-time costs(1)	1.04		0.02
Amortization of acquired intangibles(2)	0.21		0.14
Purchase accounting adjustments related to inventory and fixed asset step-up(3)	0.05		0.02

Stock-based compensation	0.48		0.39
Loss on equity investee transactions	0.04		0.02
Estimated income tax effect of above non-GAAP adjustments(4)	(0.58)		(0.19)
Non-GAAP net income per diluted share	$	0.27	$	0.59

Shares used in non-GAAP diluted per share calculations	10,605		9,844

2(1) To exclude the effect of one-time expense and other one-time charges of $11.0 million $0.2 million for the three months ended March 31, 2022 and March 31, 2021, respectively. These costs were incurred primarily as a result of a $10 million licensing payment in the three months ended March 31, 2022 as well as acquisition-related charges in both periods.

(2)To exclude the effect of amortization of acquired intangibles of $2.2 million and $1.4 million in the three months ended March 31, ~~2021, compared to $0.1 million in the three months ended~~2022 and March 31, ~~2020.~~2021, respectively. These costs were incurred as part of the purchase accounting adjustments for ~~the acquisitions of scil, Optomed and CVM.~~recent acquisitions.

(3) To exclude the effect of purchase accounting adjustments for inventory ~~and fixed asset~~ step up amortization of $0.6 million and $0.2 million for the three months ended March 31, ~~2021, which we did not have in the three months ended~~2022 and March 31 ~~2020.~~2021, respectively.

4(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~~$0.1 million benefit for each of the three months ended March 31, ~~2021)~~2022 and March 31, 2021, respectively), 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 $0.6 million and $0.5 million for the three months ended March 31, 2022 and March 31, 2021, respectively. This also includes the tax benefits related to R&D tax credit of $0.8 million and ~~to $0.3~~$0.0 million for the three months ended March 31, ~~2020.~~2022 and March 31, 2021, respectively. 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.

~~-35-~~-38-

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%~~57.7% of our revenue and the International segment represented approximately 42.3% 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.~~2022.

The following sections and tables set forth, for the periods indicated, certain data derived from our unaudited Condensed Consolidated Statements ~~of Income (Loss)~~Loss (in thousands).

North America Segment


		Three Months Ended March 31,						Change				Three Months Ended March 31,		Change
		2021			2020			Dollar Change		% Change				2022			2021			Dollar Change		% Change
Point of Care laboratory:	Point of Care laboratory:	$	19,939		$	16,302		$	3,637	22.3	%		Point of Care laboratory:	$	23,284		$	19,939		$	3,345	16.8	%
Instruments & Other	Instruments & Other	2,988			2,616			372		14.2	%		Instruments & Other	4,647			2,988			1,659		55.5	%
Consumables	Consumables	16,951			13,686			3,265		23.9	%		Consumables	18,637			16,951			1,686		9.9	%
Point of Care imaging		6,688			3,496			3,192		91.3	%
Point of Care imaging & informatics													Point of Care imaging & informatics	6,051			6,688			(637)		(9.5)	%
PVD	PVD	6,864			4,504			2,360		52.4	%		PVD	4,576			6,864			(2,288)		(33.3)	%
OVP	OVP	3,781			3,348			433		12.9	%		OVP	3,463			3,781			(318)		(8.4)	%
Total North America revenue	Total North America revenue	$	37,272		$	27,650		$	9,622	34.8	%		Total North America revenue	$	37,374		$	37,272		$	102	0.3	%
North America Gross Profit	North America Gross Profit	$	17,509		$	12,504		$	5,005	40.0	%		North America Gross Profit	$	17,908		$	17,509		$	399	2.3	%
North America Gross Margin	North America Gross Margin	47.0		%	45.2		%						North America Gross Margin	47.9		%	47.0		%
North America Operating Income (Loss)	North America Operating Income (Loss)	$	1,033		$	(4,093)		$	5,126	(125.2)	%		North America Operating Income (Loss)	$	(12,311)		$	1,033		$	(13,344)	N/M
North America Operating Margin	North America Operating Margin	2.8		%	(14.8)		%						North America Operating Margin	(32.9)		%	2.8		%

North America segment revenue increased ~~34.8%~~0.3% to $37.4 million for the three months ended March 31, 2022, compared to $37.3 million for the three months ended March 31, ~~2021, compared~~2021. The $0.1 million increase was driven by a 16.8% increase in POC laboratory instruments and consumables, in part driven by introduction of AIM, which was not present in the prior year period, as well as increased capital lease placements and price increases on consumables. This is mostly offset by a decline in PVD, partially as a result of timing of receiving raw materials for the production of Tri-Heart, and lower POC imaging & informatics sales.

Gross profit for the North America segment was $17.9 million compared to ~~$27.7~~$17.5 million for the three months ended March 31, ~~2020.~~ 2022 and 2021, respectively. The ~~$9.6 million~~ increase ~~was~~in gross profit is driven by ~~a 23.9% increase~~increased revenue in ~~POC Lab Consumables~~the current year period as well as favorable product mix driving lower costs. Gross margin was 47.9% for the three months ended March 31, 2022, compared to 47.0% in the three months ended March 31, 2021 which was primarily driven by ~~utliziation and price increases, an increase of $3.2~~favorable product mix.

North America operating loss was $12.3 million in ~~Point of Care Imaging, which benefited from $3.0~~the three months ended March 31, 2022 compared to $1.0 million ~~in sales from Canada not included~~income in the ~~comparative~~three months ended March 31, 2021. The loss in the current year period asis driven by increased operating expenses, primarily due to higher one-time costs including a ~~result of the scil acquisition,~~$10 million licensing payment and ~~a $2.4~~higher stock-based and cash-based compensation expenses, partially offset by higher revenue and margin.

-39-

International Segment


	Three Months Ended March 31,						Change
	2022			2021			Dollar Change		% Change
Point of Care laboratory:	$	15,481		$	15,239		$	242	1.6	%
Instruments & Other	3,733			3,014			719		23.9	%
Consumables	11,748			12,225			(477)		(3.9)	%
Point of Care imaging & informatics	10,962			6,658			4,304		64.6	%
PVD	983			1,334			(351)		(26.3)	%
Total International revenue	$	27,426		$	23,231		$	4,195	18.1	%
International Gross Profit	$	11,237		$	7,961		$	3,276	41.2	%
International Gross Margin	41.0		%	34.3		%
International Operating (Loss) Income	$	857		$	(15)		$	872	N/M
International Operating Margin	3.1		%	(0.1)		%

International segment revenue was $27.4 million ~~increase in PVD related~~compared 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~~$23.2 million for the three months ended March 31, 2022 and 2021, respectively. The increase in the three months ended March 31, 2022 is primarily due to a $4.3 million increase in sales in POC imaging & informatics, which includes the acquisition of VetZ.

Gross profit for the International segment was $11.2 million compared to $8.0 million for the three months ended March 31, 2022 and ~~2020,~~2021, respectively. Gross margin for the International segment was 41.0% for the three months ended March 31, 2022 compared to 34.3% for the three months ended March 31, 2021. 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.~~higher revenue. The increase ~~is due to increased revenue and margins for consumables, which tend to be our highest~~in gross margin ~~products, and OVP, which experienced greater productivity in the period.~~

~~-36-~~

~~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 thefavorable product mix, particularly within POC Lab Consumables. The acquisition of ~~scil in the prior year of $3.8 million.~~VetZ also favorably impacted gross margin.

~~International Segment~~

Three Months Ended March 31, Change
2021 2020 Dollar
Change %
Change
Point of Care laboratory: $ 15,239 $ 795 $ 14,444 1,816.9 %
Instruments & Other 3,014 235 2,779 1,182.6 %
Consumables 12,225 560 11,665 2,083.0 %
Point of Care imaging 6,658 1,358 5,300 390.3 %
PVD 1,334 851 483 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 Margin 34.3 % 31.4 %
International Operating Loss $ (15) $ (525) $ 510 97.1 %
International Operating Margin (0.1) % (17.5) %

International segment ~~revenue~~operating income 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%~~2022 compared to flat for the three months ended March 31, ~~2021 compared to 31.4%~~2021. The operating income for the three months ended March 31, ~~2020. The increase in gross profit and gross margin~~2022 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 Internationalhigher revenue and gross ~~profit from the scil acquisition.~~margin.

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~~available cash of ~~$238.5 million, which includes net proceeds from the issuance of common stock of approximately $165 million on March 5, 2021.~~$172.7 million.

~~-37-~~-40-

A summary of our cash from operating, investing and financing activities is as follows (in thousands):


		Three Months Ended March 31,				Change					Three Months Ended March 31,				Change
		2021		2020		Dollar Change		% Change			2022		2021		Dollar Change		% Change
Net cash provided by (used in) operating activities		$	1,337	$	(4,761)	$	6,098	(128.1)	%
Net cash (used in) provided by operating activities										Net cash (used in) provided by operating activities	$	(17,665)	$	1,337	$	(19,002)	NM
Net cash used in investing activities	Net cash used in investing activities	(13,131)		(14,630)		1,499		(10.2)	%	Net cash used in investing activities	(29,843)		(13,131)		(16,712)		(127.3)	%
Net cash provided by financing activities		164,355		121,630		42,725		35.1	%
Net cash (used in) provided by financing activities										Net cash (used in) provided by financing activities	(3,262)		164,355		(167,617)		NM
Foreign exchange effect on cash and cash equivalents	Foreign exchange effect on cash and cash equivalents	(440)		(24)		(416)		1,733.3	%	Foreign exchange effect on cash and cash equivalents	(60)		(440)		380		86.4	%
Increase (decrease) in cash and cash equivalents		152,121		102,215		49,906		48.8	%
(Decrease) increase in cash and cash equivalents										(Decrease) increase in cash and cash equivalents	(50,830)		152,121		(202,951)		NM
Cash and cash equivalents, beginning of the period	Cash and cash equivalents, beginning of the period	86,334		89,030		(2,696)		(3.0)	%	Cash and cash equivalents, beginning of the period	223,574		86,334		137,240		159.0	%
Cash and cash equivalents, end of the period	Cash and cash equivalents, end of the period	$	238,455	$	191,245	$	47,210	24.7	%	Cash and cash equivalents, end of the period	$	172,744	$	238,455	$	(65,711)	(27.6)	%

For the three months ended March 31, ~~2021~~2022 and March 31, ~~2020,~~2021, cash flow (used in) provided by ~~(used in)~~ operations ~~was $1.3~~was $(17.7) million and ~~$4.8~~$1.3 million, respectively, which was primarily the result of ~~(used for)~~ (in thousands):


		Three Months Ended March 31,				Change					Three Months Ended March 31,				Change
		2021		2020		Dollar Change		% Change			2022		2021		Dollar Change		% Change
Net income (loss)		$	1,871	$	(5,439)	$	7,310	(134.4)	%
Net (loss) income										Net (loss) income	$	(9,986)	$	1,871	$	(11,857)	NM
Non cash expenses and other adjustments	Non cash expenses and other adjustments	6,143		2,298		3,845		167.3	%	Non cash expenses and other adjustments	6,400		6,143		257		4.2	%
Change in accounts receivable	Change in accounts receivable	858		(1,092)		1,950		(178.6)	%	Change in accounts receivable	2,060		858		1,202		140.1	%
Change in inventories, net	Change in inventories, net	(1,818)		(3,081)		1,263		(41.0)	%	Change in inventories, net	(6,528)		(1,818)		(4,710)		(259.1)	%
Change in other assets	Change in other assets	(893)		(429)		(464)		108.2	%	Change in other assets	(288)		(942)		654		69.4	%
Change in lease receivables										Change in lease receivables	(2,248)		49		(2,297)		NM
Change in accounts payable	Change in accounts payable	153		837		(684)		(81.7)	%	Change in accounts payable	(3,069)		153		(3,222)		NM
Change in other liabilities	Change in other liabilities	(4,977)		2,145		(7,122)		(332.0)	%	Change in other liabilities	(4,006)		(4,977)		971		19.5	%
Net cash provided by (used in) operating activities		$	1,337	$	(4,761)	$	6,098	(128.1)	%
Net cash (used in) provided by operating activities										Net cash (used in) provided by operating activities	$	(17,665)	$	1,337	$	(19,002)	NM

For the three months ended March 31, ~~2021~~2022 and March 31, ~~2020,~~2021, cash flow used in investing activities was $29.8 million and $13.1 ~~million and $14.6~~ million, respectively, which was primarily used for (in thousands):

Three Months Ended
March 31, Change
2021 2020 Dollar
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 property 13 — 13 — %
Net cash provided by (used in) investing activities $ (13,131) $ (14,630) $ 1,499 (10.2) %


	Three Months Ended March 31,				Change
	2022		2021		Dollar Change		% Change
Acquisition of VetZ, net of cash acquired	$	(29,509)	$	—	$	(29,509)	NM
Acquisition of Lacuna, net of cash acquired	—		(3,882)		3,882		NM
Promissory note receivable issuance	—		(9,000)		9,000		NM
Capital expenditures	(334)		(262)		(72)		(27.5)	%
Proceeds from disposition of property and equipment	—		13		(13)		NM
Net cash used in investing activities	$	(29,843)	$	(13,131)	$	(16,712)	(127.3)	%

~~-38-~~-41-

For the three months ended March 31, ~~2021~~2022 and March 31, ~~2020,~~2021, cash flow ~~from~~(used in) provided by financing activities was ~~$164.4 million~~$(3.3) million and ~~$121.6~~$164.4 million, respectively, which was the result of (in thousands):


	Three Months Ended March 31,				Change
	2022		2021		Dollar Change		% Change
Payment of preferred stock issuance costs	$	—	$	(217)	$	217	NM
Proceeds from issuance of common stock	1,761		165,357		(163,596)		(98.9)	%
Payments for taxes related to shares withheld for employee taxes	(4,961)		(679)		(4,282)		(630.6)	%
Repayments of other debt	(62)		(106)		44		41.5	%
Net cash (used in) provided by financing activities	$	(3,262)	$	164,355	$	(167,617)	N/M

Three Months Ended
March 31, Change
2021 2020 Dollar
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 stock 165,357 336 165,021 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, investment in key corporate functions, 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.~~2021. 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~~$0.1 million negative impact for the three months ended March 31, 2022 and a $0.4 million 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.~~2021. 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,~~2022, the Company had purchase obligations for inventory of ~~$50.1~~$105.0 million. Refer to Note 6. Leases in our Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q for a summary of lease obligations.

~~-39-~~-42-

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,~~2021, 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,~~2021, 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.~~2021.

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~~From time to time, the Company may be involved in ~~various~~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.

As of March 31, 2022, we were not a party to any legal proceedings that ~~arise from time to time~~are expected, individually or in the ~~ordinary course of our business. We believe that the outcome of any of the proceedings should not~~aggregate, to have a material adverse effect on our business, financial ~~position~~condition or ~~long-term results of operations or cash flows.~~operating results.

-43-

Item 1A.Risk Factors

~~For a discussion of our~~There have been no material changes to the risk factors ~~see~~disclosed in 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").~~

~~-40-~~

2021.

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:~~2022:

Period Total Number of Shares Purchased (1) Average Price Paid per Share (1) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs
January 2021 2,368 $ 158.44 — $ —
February 2021 — $ — — $ —
March 2021 1,313 $ 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.


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs
January 2022	1,281	$	182.49	—	$	—
February 2022	28,171	$	142.00	—	$	—
March 2022	3,504	$	149.06	—	$	—
	32,956	$	144.32	—	$	—

(1) Shares of Public Common Stock we purchased between January 1, 2022 and March 31, 2022 were solely for the cancellation of shares of stock withheld for related tax obligations.

~~-41-~~-44-

Item 6. Exhibits

Exhibit Number
Notes

Description of Document
2.1#++ (1)
Agreement regarding the sale and purchase of the sole share in scil animal care company GmbH among Registrant, Heska GmbH, Covetrus Animal Health Holdings Limited and Covetrus, Inc. dated January 14, 2020.
2.2# (2)
Amendment Agreement dated April 1, 2020 regarding the agreement on the sale and purchase of the sole share in scil animal care company GmbH.
3.1 (3)
Restated Certificate of Incorporation of the Registrant.
3.2 (3)
Certificate of Amendment to Restated Certificate of Incorporation of Registrant.
3.3 (3)
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.4 (4)
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.5 (5)
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.6 (6)
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.7 (7)
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.8 (8)
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.9 (9)
Certificate of Designation of Preferences, Rights and Limitations of Series X Convertible Preferred Stock.
3.10 (7)
Amended and Restated Bylaws of the Registrant, as amended.
10.1#++
Fourth Amendment to Clinical Chemistry Analyzer Agreement between Registrant and FUJIFILM Corporation, effective as of February 18, 2021.
10.2 (10)
Amended and Restated Management Incentive Plan Master Document.
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1 *
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
104.0 Cover Page Interactive Data File (embedded within the Inline XBRL document contained in Exhibit 101)


Exhibit Number	Notes	Description of Document
2.1#++	(1)	Agreement regarding the sale and purchase of the sole share in scil animal care company GmbH among Registrant, Heska GmbH, Covetrus Animal Health Holdings Limited and Covetrus, Inc. dated January 14, 2020.
2.2#	(2)	Amendment Agreement dated April 1, 2020 regarding the agreement on the sale and purchase of the sole share in scil animal care company GmbH.
2.3#++	(11)	Sale and Purchase Agreement dated November 1, 2021 regarding Veterinärmedizinisches Dienstleistungszentrum (VetZ) GmbH Online-Dienstleistungen Für Tierärzte among Registrant, Heska GmbH, F2 Beteiligungs GmbH & Co. KG, F3P GmbH, Mr. Ingo Fraedrich, and Mr. Thomas Fraedrich.
3.1	(3)	Restated Certificate of Incorporation of the Registrant.
3.2	(3)	Certificate of Amendment to Restated Certificate of Incorporation of Registrant.
3.3	(3)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.4	(4)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.5	(5)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.6	(6)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.7	(7)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.8	(8)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.9	(11)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.10	(9)	Certificate of Designation of Preferences, Rights and Limitations of Series X Convertible Preferred Stock.
3.11	(10)	Amended and Restated Bylaws of the Registrant, as amended.
31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	*	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
104.0		Cover 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~~10-Q for the ~~year~~quarter ended ~~December 31, 2020.~~June 30, 2019.
(11)			Filed with the Registrant’s S-3 on February 16, 2022, File Number 333-262795.

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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.~~9, 2022.


			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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	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	0		(2,271)		(3,112)		(5,383)
Balances at March 31, 2021	$	(386)	$	3,601	$	5,571	$	8,786


Three Months Ended March 31, 2020	North America			International			Total
Total revenue	$	27,650		$	3,004		$	30,654
Cost of revenue	15,146			2,060			17,206
Gross profit	12,504			944			13,448
Gross margin	45		%	31		%	44		%
Operating loss	(4,093)			(525)			(4,618)