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

For the quarterly period ended June 30, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________________
Commission file number: 000-22427
HSKA-20210630_G1.JPG
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 ☒
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 ☒
10,645,363 shares of the Registrant's Public Common Stock, $0.01 par value, were outstanding at August 2, 2021.




TABLE OF CONTENTS 
      Page
PART I - FINANCIAL INFORMATION
  Item 1.
1
1
2
3
4
5
6
6
       Note 2, Revenue
8
11
15
       Note 5, Income Taxes
16
       Note 6, Leases
17
18
19
20
       Note 10, Inventories
20
21
       Note 12, Capital Stock
21
22
22
23
23
25
26
29
Item 2.
29
  Item 3.
42
  Item 4.
42
PART II - OTHER INFORMATION
  Item 1.
43
  Item 1A.
43
Item 2.
43
  Item 6.
43
 
46
HESKA, scil, ALLERCEPT, HemaTrue, Solo Step, Element DC, Element HT5, Element POC, Element i, Element i+, Element COAG, Element DC5X and Element RC, Element RCX, Element RCX3 and scil vet, scil academy, scil vIP, scil ABC are registered trademarks of Heska Corporation and/or 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. 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, 2020, as well as in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q and include, among others, risks and uncertainties related to:

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

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

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


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
  June 30, December 31,
  2021 2020
ASSETS
Current assets:    
Cash and cash equivalents $ 245,153  $ 86,334 
Accounts receivable, net of allowance for losses of $798 and $769, respectively 27,887  31,080 
Inventories 41,204  40,037 
Net investment in leases, current, net of allowance for losses of $136 and $192, respectively 5,394  4,794 
Prepaid expenses 5,517  3,875 
Other current assets 5,688  5,155 
Total current assets 330,843  171,275 
Property and equipment, net 34,296  35,542 
Operating lease right-of-use assets 4,944  5,457 
Goodwill 90,771  88,276 
Other intangible assets, net 52,898  55,992 
Deferred tax asset, net 17,845  5,694 
Net investment in leases, non-current 17,384  15,789 
Investments in unconsolidated affiliates 6,175  6,704 
Related party convertible note receivable, net 6,776  6,671 
Promissory note receivable from investee, net 8,846  — 
Other non-current assets 8,588  8,439 
Total assets $ 579,366  $ 399,839 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:    
Accounts payable $ 14,581  $ 15,119 
Accrued liabilities 17,368  18,055 
Operating lease liabilities, current 2,035  2,087 
Deferred revenue, current, and other 7,497  6,854 
Total current liabilities 41,481  42,115 
Convertible note, non-current, net 83,824  48,459 
Deferred revenue, non-current 4,074  4,667 
Other long-term borrowings 119  554 
Operating lease liabilities, non-current 3,404  3,858 
Deferred tax liability 11,583  11,856 
Other liabilities 1,115  1,277 
Total liabilities 145,600  112,786 
Stockholders' equity:    
Preferred stock, $.01 par value, 2,500,000 shares authorized, none issued or outstanding —  — 
Common stock, $.01 par value, 13,250,000 shares authorized, respectively, none issued or outstanding —  — 
Public common stock, $.01 par value, 13,250,000 shares authorized, 10,645,730 and 9,475,845 shares issued and outstanding, respectively 106  95 
Additional paid-in capital 569,214  423,650 
Accumulated other comprehensive income 10,638  14,169 
Accumulated deficit (146,192) (150,861)
Total stockholders' equity 433,766  287,053 
Total liabilities and stockholders' equity $ 579,366  $ 399,839 

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


HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(in thousands, except per share amounts)
(unaudited)
  Three Months Ended June 30, Six Months Ended June 30,
  2021 2020 2021 2020
Revenue, net $ 64,928  $ 45,712  $ 125,431  $ 76,366 
Cost of revenue 37,656  27,847  72,689  45,053 
Gross profit 27,272  17,865  52,742  31,313 
Operating expenses:  
Selling and marketing 12,449  9,583  23,356  16,963 
Research and development 1,948  1,696  3,134  3,824 
General and administrative 13,569  11,040  25,930  19,599 
Total operating expenses 27,966  22,319  52,420  40,386 
Operating (loss) income (694) (4,454) 322  (9,073)
Interest and other expense, net 581  2,145  1,106  4,343 
Loss before income taxes and equity in losses of unconsolidated affiliates (1,275) (6,599) (784) (13,416)
Income tax expense (benefit):  
Current income tax expense 36  31  677  56 
Deferred income tax benefit (1,087) (243) (3,294) (1,776)
Total income tax benefit (1,051) (212) (2,617) (1,720)
Net (loss) income before equity in losses of unconsolidated affiliates (224) (6,387) 1,833  (11,696)
Equity in losses of unconsolidated affiliates (343) (87) (529) (217)
Net (loss) income after equity in losses of unconsolidated affiliates (567) (6,474) 1,304  (11,913)
Net loss attributable to redeemable non-controlling interest —  (117) —  (268)
Net (loss) income attributable to Heska Corporation $ (567) $ (6,357) $ 1,304  $ (11,645)
Basic (loss) earnings per share attributable to Heska Corporation $ (0.06) $ (0.72) $ 0.13  $ (1.43)
Diluted (loss) earnings per share attributable to Heska Corporation $ (0.06) $ (0.72) $ 0.13  $ (1.43)
Weighted average outstanding shares used to compute basic (loss) earnings per share attributable to Heska Corporation 10,167  8,776  9,825  8,165 
Weighted average outstanding shares used to compute diluted (loss) earnings per share attributable to Heska Corporation 10,167  8,776  10,189  8,165 
 
See accompanying notes to condensed consolidated financial statements.
-2-


HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands) 
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
  2021 2020 2021 2020
Net (loss) income after equity in losses of unconsolidated affiliates $ (567) $ (6,474) $ 1,304  $ (11,913)
Other comprehensive income (loss):  
Translation adjustments and gains (losses) from intra-entity transactions 1,852  2,216  (3,531) 1,860 
Comprehensive income (loss) 1,285  (4,258) (2,227) (10,053)
Comprehensive loss attributable to redeemable non-controlling interest —  (117) —  (268)
Comprehensive income (loss) attributable to Heska Corporation $ 1,285  $ (4,141) $ (2,227) $ (9,785)
 
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
Three Months Ended June 30, 2020 and 2021 Shares Amount Shares Amount
Balances, March 31, 2020 122  $ 1  7,843  $ 78  $ 412,152  $ 157  $ (141,750) $ 270,638 
Net loss attributable to Heska Corporation —  —  —  —  —  —  (6,357) (6,357)
Issuance of common stock, net of shares withheld for employee taxes —  —  63  1  1,105  —  —  1,106 
Conversion of preferred stock to common stock (122) (1) 1,509  15  (14) —  —  — 
Stock-based compensation —  —  —  —  2,444  —  —  2,444 
Other comprehensive income —  —  —  —  —  2,216  —  2,216 
Balances, June 30, 2020 —  $ —  9,415  $ 94  $ 415,687  $ 2,373  $ (148,107) $ 270,047 
Balances, March 31, 2021 —  $ —  10,418  $ 104  $ 562,008  $ 8,786  $ (145,625) $ 425,273 
Net loss attributable to Heska Corporation —  —  —  —  —  —  (567) (567)
Issuance of common stock, net of shares withheld for employee taxes —  —  228  2  1,586  —  —  1,588 
Stock-based compensation —  —  —  —  5,620  —  —  5,620 
Other comprehensive income —  —  —  —  —  1,852  —  1,852 
Balances, June 30, 2021 —  $ —  10,646  $ 106  $ 569,214  $ 10,638  $ (146,192) $ 433,766 
Note: The quarter ended June 30, 2020 excludes amounts related to redeemable non-controlling interests recorded in mezzanine equity.
Preferred Stock Common Stock Additional
Paid-in
Capital 		Accumulated
Other
Comprehensive
Income 		Accumulated
Deficit 		Total
Stockholders'
Equity
Six Months Ended June 30, 2020 and 2021 Shares Amount Shares Amount
Balances, December 31, 2019 —  $ —  7,882  $ 79  $ 290,216  $ 513  $ (136,444) $ 154,364 
Adoption of accounting standards —  —  —  —  —  —  (18) (18)
Balances, January 1, 2020 —  —  7,882  79  290,216  513  (136,462) 154,346 
Net loss attributable to Heska Corporation —  —  —  —  —  —  (11,645) (11,645)
Issuance of common stock, net of shares withheld for employee taxes —  —  24  —  904  —  —  904 
Issuance of preferred stock, net of issuance costs 122  1  —  —  121,784  —  —  121,785 
Conversion of preferred stock to common stock (122) (1) 1,509  15  (14) —  —  — 
Stock-based compensation —  —  —  —  2,797  —  —  2,797 
Other comprehensive income —  —  —  —  —  1,860  —  1,860 
Balances, June 30, 2020 —  $ —  9,415  $ 94  $ 415,687  $ 2,373  $ (148,107) $ 270,047 
Balances, December 31, 2020 —  $ —  9,476  $ 95  $ 423,650  $ 14,169  $ (150,861) $ 287,053 
Adoption of accounting standards —  —  —  —  (29,834) —  3,365  (26,469)
Balances, January 1, 2021 —  —  9,476  95  393,816  14,169  (147,496) 260,584 
Net income attributable to Heska Corporation —  —  —  —  —  —  1,304  1,304 
Issuance of common stock, net of forfeitures and shares withheld for employee taxes —  —  229  2  1,764  —  —  1,766 
Equity offering, net of issuance costs —  —  941  9  164,177  —  —  164,186 
Stock-based compensation —  —  —  —  9,457  —  —  9,457 
Other comprehensive loss —  —  —  —  —  (3,531) —  (3,531)
Balances, June 30, 2021 —  $ —  10,646  $ 106  $ 569,214  $ 10,638  $ (146,192) $ 433,766 
Note: The six months ended June 30, 2020 excludes amounts related to redeemable non-controlling interests recorded in mezzanine equity.
See accompanying notes to condensed consolidated financial statements.
-4-


HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
  Six Months Ended
June 30,
  2021 2020
Cash flows from operating activities:    
Net income (loss) after equity in losses from unconsolidated affiliates $ 1,304  $ (11,913)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:    
Depreciation and amortization 6,680  4,704 
Non-cash impact of operating leases 1,050  840 
Deferred income tax benefit (3,294) (1,776)
Stock-based compensation 9,457  2,797 
Equity in losses of unconsolidated affiliates 529  217 
Accretion of discounts and issuance costs 35  3,049 
Other losses 768  65 
Changes in operating assets and liabilities (net of the effect of acquisitions):    
Accounts receivable 3,046  (1,268)
Inventories (4,080) (4,094)
Other assets (4,404) (56)
Accounts payable (334) (2,732)
Other liabilities (3,603) (2,928)
Net cash provided by (used in) operating activities 7,154  (13,095)
Cash flows from investing activities:    
Acquisition of CVM —  (14,420)
Acquisition of Lacuna, net of cash acquired (3,882) — 
Promissory note receivable issuance (9,000) — 
Purchases of property and equipment (546) (316)
Proceeds from disposition of property and equipment 41  — 
Acquisition of scil, net of cash acquired —  (105,190)
Net cash used in investing activities (13,387) (119,926)
Cash flows from financing activities:    
Payment of stock issuance costs (314) (214)
Preferred stock proceeds —  122,000 
Proceeds from issuance of common stock 167,198  1,514 
Repurchase of common stock (932) (610)
Repayments of other debt (653) (109)
Borrowings on other debts —  410 
Net cash provided by financing activities 165,299  122,991 
Foreign exchange effect on cash and cash equivalents (247) 189 
Net increase (decrease) in cash and cash equivalents 158,819  (9,841)
Cash and cash equivalents, beginning of period 86,334  89,030 
Cash and cash equivalents, end of period $ 245,153  $ 79,189 
Supplemental disclosure of cash flow information:
Non-cash transfers of equipment between inventory and property and equipment, net $ 2,562  $ 1,560 
Non-cash conversion of preferred stock to common stock $ —  $ 122,000 
Consideration payable for scil acquisition $ —  $ 537 
Contingent consideration for acquisition $ 1,700  $ — 
Indemnity holdback for acquisition $ 370  $ — 

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

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Heska Corporation and its wholly-owned subsidiaries ("Heska", the "Company", "we" or "our") sell veterinary and animal health diagnostic and specialty products. Our offerings include Point of Care diagnostic laboratory instruments and supplies; digital imaging diagnostic products, software and services; digital cytology services; vaccines; local and cloud-based data services; allergy testing and immunotherapy; and single-use offerings such as in-clinic diagnostic tests and heartworm preventive products. Our core focus is on supporting veterinarians in the canine and feline healthcare space.
Basis of Presentation and Consolidation
The accompanying interim Condensed Consolidated Financial Statements are unaudited. The interim unaudited Condensed Consolidated Financial Statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include normal, recurring adjustments, necessary to present fairly the financial position of the Company as of June 30, 2021, and the results of our operations and statements of stockholders' equity for the three and six months ended June 30, 2021 and 2020, and cash flows for the six months ended June 30, 2021 and 2020.
The unaudited Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. Our unaudited Condensed Consolidated Financial Statements include our accounts and the accounts of our wholly-owned subsidiaries since their respective dates of acquisitions. All intercompany accounts and transactions have been eliminated in consolidation. Where our ownership of a subsidiary is less than 100%, the non-controlling interest is reported on our Condensed Consolidated Balance Sheets. The non-controlling interest in our consolidated net income is reported as "Net loss attributable to redeemable non-controlling interest" on our Condensed Consolidated Statements of (Loss) Income. The results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full year or any future period, particularly in light of the COVID-19 pandemic and its effects on the domestic and global economies as described below. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2020 and other financial information filed with the SEC.
Beginning in the first quarter of 2020, to limit the spread of COVID-19, governments took various actions including the issuance of stay-at-home policies and social distancing procedures and guidelines, causing some businesses to adjust, reduce or suspend business and operating activities. Veterinary care is widely recognized as an "essential" service for pet owners, and veterinarians continued to deliver essential medical care for sick and injured pets. The stay-at-home policies deployed early in 2020 to combat the spread of COVID-19 resulted in a decrease in companion animal clinical visits, including delay of elective procedures and wellness visits and as a result lowers demand for diagnostic testing services. Beginning in the second quarter of 2020, certain local, state and federal governments began to ease the stay-at-home policies and allowed more businesses and facilities to re-open, leading to a recovery in companion animal clinical visits and associated demand for our diagnostic products. During the fourth quarter of 2020 and into the first quarter of 2021, increased restrictions in countries in which we operate, mainly in the European Union, and certain parts of Canada and Australia, re-emerged. These restrictions lessened during the second quarter of 2021, however, with the rise in variants, 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
-6-

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


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

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

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

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


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

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

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

2.     REVENUE

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

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

Refer to Note 18 for further detail regarding the Company's reportable segments.












-8-

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


The following table summarizes our segment revenue (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
North America Revenue:
POC Lab Instruments & Other $ 3,482  $ 2,962  $ 6,470  $ 5,578 
POC Lab Consumables 19,296  13,537  36,248  27,223 
POC Imaging 7,101  4,148  13,789  7,644 
PVD 6,210  4,880  13,074  9,384 
OVP 4,444  3,455  8,225  6,802 
Total North America Revenue $ 40,533  $ 28,982  $ 77,806  $ 56,631 
International Revenue:
POC Lab Instruments & Other $ 3,987  $ 2,206  $ 7,001  $ 2,440 
POC Lab Consumables 11,935  9,470  24,159  10,032 
POC Imaging 7,277  4,404  13,935  5,762 
PVD 1,196  650  2,530  1,501 
OVP —  —  —  — 
Total International Revenue $ 24,395  $ 16,730  $ 47,625  $ 19,735 
Total Revenue $ 64,928  $ 45,712  $ 125,431  $ 76,366 


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 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 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 June 30, 2021, the aggregate amount of the transaction price allocated to remaining minimum performance obligations was approximately $156.5 million. As of June 30, 2021, the Company expects to recognize revenue as follows (in thousands):
Year Ending December 31, Revenue
2021 (remaining) $ 18,313 
2022 35,463 
2023 31,859 
2024 27,220 
2025 21,672 
Thereafter 22,013 
$ 156,540 

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 June 30, 2021 were $1.4 million and $4.3 million for current and non-current assets, respectively, shown net of related unearned interest. The balances as of December 31, 2020 were $1.2 million and $4.1 million for current and non-current assets, respectively, shown net of related unearned interest.

Contract Liabilities

The Company receives cash payments from customers for licensing fees or other arrangements that extend for a specified term. These contract liabilities are classified as either current or long-term in the Condensed Consolidated Balance Sheets based on the timing of when the Company expects to recognize revenue. As of June 30, 2021 and December 31, 2020, contract liabilities were $8.3 million and $8.9 million, respectively, and are included within "Deferred revenue, current, and other" and "Deferred revenue, non-current" in the accompanying Condensed Consolidated Balance Sheets. The decrease in the contract liability balance during the six-month period ended June 30, 2021 is approximately $3.1 million of revenue recognized during the period, offset by approximately $2.5 million of additional deferred sales in 2021. Contract liabilities are reported on the accompanying Condensed Consolidated Balance Sheets on a contract-by-contract basis.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



3.    ACQUISITIONS AND RELATED PARTY ITEMS
Lacuna Acquisition
On February 1, 2021, the Company completed the acquisition of Lacuna Diagnostics, Inc. ("Lacuna"), a veterinary digital cytology company, to broaden the Company's point of care diagnostic offerings. The Company acquired 100% of the issued and outstanding shares of Lacuna for a purchase price of $4.3 million. The Company then dissolved Lacuna on February 1, 2021. In accordance with the purchase agreement, the Company is required to hold a $0.4 million general indemnity holdback that is intended to provide a non-exclusive source of funds for the payment of any losses identified and shall be released within 18 months of closing. As of June 30, 2021, $0.4 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.
The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in $3.9 million of goodwill, primarily related to expanded opportunities with our offerings. All of the goodwill is allocated to the North America segment and is not tax deductible for income tax purposes.
The acquisition was accounted for as a business combination in accordance with ASC 805. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of February 1, 2021.
The information below represents the preliminary purchase price allocation as of the acquisition date (in thousands):
February 1, 2021
Purchase price $ 4,255 
Fair value of contingent 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 
Goodwill 3,900 
Total fair value of consideration transferred $ 5,955 

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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Intangible assets acquired, amortization method and estimated useful life as of February 1, 2021, was as follows (dollars in thousands):
Useful 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 35 
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 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. The Company finalized the accounting for the acquisition as of March 31, 2021.


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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 lease, 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 June 30, 2021, approximately $0.4 million of the indemnification agreement remains outstanding.

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


Intangible assets acquired, amortization method and estimated useful life as of April 1, 2020, was as follows (dollars in thousands):
Useful 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 60 
Trade name subject to amortization 0.8 years Straight-line 66 
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):
Six Months Ended June 30, 2020
Revenue, net $ 94,917 
Net (loss) income before equity in losses of unconsolidated affiliates $ (12,512)
Net (loss) income attributable to Heska Corporation $ (12,461)
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) conducted related party activities with Practice Clinicas Veterinarias Moviles, S.L. ("CVM Practice"), the owner of which was part of CVM management through June 1, 2021. CVM leases two warehouses from CVM Practice. CVM Practice charged CVM $16 thousand and $15 thousand during the six months ended June 30, 2021 and 2020, respectively, all of which is related to lease payments. The right-of-use asset and lease liability amounts related to the warehouse leases were approximately $0.2 million as of both June 30, 2021 and December 31, 2020. CVM continues to lease the warehouses from CVM Practice, however the related party relationship was terminated as of June 1, 2021.

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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):
June 30, 2021 December 31, 2020
Equity method investment $ 3,157  $ 3,686 
Non-marketable equity security investment 3,018  3,018 
Investments in unconsolidated affiliates $ 6,175  $ 6,704 
Equity Method Investment
On September 24, 2018, the Company invested approximately $5.1 million, including costs, to acquire an equity interest in a business as part of its product development strategy. As of June 30, 2021, the Company's ownership interest in the business was 29.1%. In connection with the investment, the Company entered into a Manufacturing Supply Agreement that grants the Company global exclusivity to specified products to be delivered under the agreement for a 15-year period that begins upon the Company's receipt and acceptance of an initial order under the agreement. The Company accounts for this investment using the equity method of accounting. Under the equity method, the carrying value of the investment is adjusted for the Company's proportionate share of the investee's reported earnings or losses with the corresponding share of earnings or losses reported as Equity in losses of unconsolidated affiliates, listed below Net income before equity in losses of unconsolidated affiliates within the Condensed Consolidated Statements of (Loss) Income.
Non-Marketable Equity Security Investment

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

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

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


5.    INCOME TAXES

The Company's total income tax benefit for our loss before income taxes were as follows (in thousands):
  Three Months Ended June 30, Six Months Ended June 30,
  2021 2020 2021 2020
Loss before income taxes and equity in losses of unconsolidated affiliates $ (1,275) $ (6,599) $ (784) $ (13,416)
Total income tax benefit $ (1,051) $ (212) $ (2,617) $ (1,720)
        
There were cash payments for income taxes of $0.7 million and $1.2 million for the three and six months ended June 30, 2021, respectively, and there were cash payments of $340 thousand and $347 thousand, respectively, for income taxes for the three and six months ended June 30, 2020. The Company’s tax benefit was $1.1 million and $2.6 million for the three and six months ended June 30, 2021, respectively, compared to the tax benefit of $0.2 million and $1.7 million for the three and six months ended June 30, 2020, respectively. The increase in tax benefit in the six month period is due to excess tax benefits recognized from employee stock compensation and a release in the partial valuation allowance further discussed below. The Company recognized $0.6 million in excess tax benefits related to employee share-based compensation for the three months ended June 30, 2021, compared to $0.2 million recognized for the three months ended June 30, 2020. The Company recognized $1.0 million in excess tax benefits related to employee share-based compensation for the six months ended June 30, 2021, compared to $0.5 million recognized for the six months ended June 30, 2020.

As of June 30, 2021, the Company had a deferred tax asset of approximately $9.4 million from net operating losses and tax credits and a net partial valuation allowance recorded against these deferred tax assets. During the current year, the Company forecasts the release of approximately $1.2 million of the partial valuation allowance through the annual effective tax rate used to estimate tax expense. The release is due to an increase in non-deductible executive compensation and capitalization of research and development expenses that results in the projected utilization of net operating losses in the current year. After the release, the net partial valuation allowance is forecasted to be approximately $3.2 million as of December 31, 2021.
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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 June 30, 2021 December 31, 2020
Assets
Operating Operating lease right-of-use assets $ 4,944  $ 5,457 
Finance Property and equipment, net 1,814  1,907 
Total Leased Assets $ 6,758  $ 7,364 
Liabilities
Operating Operating lease liabilities, current $ 2,035  $ 2,087 
Operating lease liabilities, non-current 3,404  3,858 
Finance Deferred revenue, current, and other 235  295 
Other liabilities 278  261 
Total Lease Liabilities $ 5,952  $ 6,501 

Lessor Accounting

The following table summarizes the profit recognized on the commencement date for sales-type leases and lease income for equipment-only operating leases (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Sales-type lease revenue $ 3,414  $ 1,298  $ 5,157  $ 2,587 
Sales-type lease cost of revenue 2,717  908  3,977  1,776 
Profit recognized at commencement for sales-type leases $ 697  $ 390  $ 1,180  $ 811 
Operating lease income $ 543  $ 430  $ 1,150  $ 430 
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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 and six months ended June 30, 2021 and 2020 (in thousands, except per share data):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Net (loss) income attributable to Heska Corporation $ (567) $ (6,357) $ 1,304  $ (11,645)
Basic weighted-average common shares outstanding 10,167  8,776  9,825  8,165 
    Dilutive effect of stock options and restricted stock awards —  —  364  — 
Diluted weighted-average common shares outstanding 10,167  8,776  10,189  8,165 
Basic (loss) earnings per share attributable to Heska Corporation $ (0.06) $ (0.72) $ 0.13  $ (1.43)
Diluted (loss) earnings per share attributable to Heska Corporation $ (0.06) $ (0.72) $ 0.13  $ (1.43)

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 June 30, Six Months Ended June 30,
2021 2020 2021 2020
Convertible preferred stock —  332  —  920 
Convertible Senior Notes 996  —  996  21 
Stock options and restricted stock 374  355  6  299 
1,370  687  1,002  1,240 

As more fully described in Note 16, the Notes are convertible under certain circumstances, as defined in the indenture, into a combination of cash and shares of the Company's common stock. As discussed in Note 1, the Company 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 and six months ended June 30, 2021, all of the potentially issuable shares with respect to the Notes were excluded from the calculation of diluted net earnings per share because the effect was anti-dilutive. The Company has elected to apply the modified retrospective method of adoption and will not restate EPS for the prior period.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


8.    GOODWILL AND OTHER INTANGIBLES

The following summarizes the change in goodwill during the six months ended June 30, 2021 (in thousands):
North America International Total
Carrying amount, December 31, 2020 $ 35,414  $ 52,862  $ 88,276 
Goodwill attributable to acquisitions (subject to change) 3,900  —  3,900 
Foreign currency adjustments —  (1,405) (1,405)
Carrying amount, June 30, 2021 $ 39,314  $ 51,457  $ 90,771 

Other intangibles consisted of the following (in thousands):
June 30, 2021 December 31, 2020
Gross Carrying Amount Accum. Amortiz. Net Carrying Amount Gross Carrying Amount Accum. Amortiz. Net Carrying Amount
Intangible assets subject to amortization:
Customer relationships and other $ 46,196  $ (8,878) $ 37,318  $ 46,989  $ (6,436) $ 40,553 
Developed technology 9,654  (2,278) 7,376  8,669  (1,696) 6,973 
Trade names 230  (137) 93  197  (105) 92 
Intangible assets not subject to amortization:
Trade names 8,111  —  8,111  8,374  —  8,374 
Total intangible assets $ 64,191  $ (11,293) $ 52,898  $ 64,229  $ (8,237) $ 55,992 

Amortization expense relating to other intangibles was as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Amortization expense $ 1,652  $ 1,624  $ 3,056  $ 2,053 

The remaining weighted-average amortization period for intangible assets is approximately 8.1 years.

Estimated amortization expense related to intangibles for each of the five years from 2021 (remaining) through 2025 and thereafter is as follows (in thousands):
Year Ending December 31,
2021 (remaining) $ 3,116 
2022 6,111 
2023 5,749 
2024 5,306 
2025 5,248 
Thereafter 19,257 
Total amortization related to finite-lived intangible assets $ 44,787 
Indefinite-lived intangible assets 8,111 
Net intangible assets $ 52,898 
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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

9.    PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following (in thousands):
  June 30, 2021 December 31, 2020
Land $ 2,520  $ 2,590 
Building 12,439  12,737 
Machinery and equipment 41,407  40,411 
Office furniture and equipment 2,120  2,047 
Computer hardware and software 5,102  4,773 
Leasehold and building improvements 10,729  10,728 
Construction in progress 61  4 
Property and equipment, gross 74,378  73,290 
Less accumulated depreciation (40,082) (37,748)
Total property and equipment, net $ 34,296  $ 35,542 
The Company has subscription agreements whereby its instruments in inventory may be placed at a customer's location on a rental basis. For instruments classified as operating leases, the cost of these instruments is transferred to machinery and equipment and depreciated, typically over a 5 to 7 year period depending on the circumstance under which the instrument is placed with the customer. Our cost of instruments under operating leases as of June 30, 2021 and December 31, 2020, was $14.9 million and $13.6 million, respectively, before accumulated depreciation of $5.1 million and $4.7 million, respectively.
Depreciation expense was $1.6 million and $1.7 million for the three months ended June 30, 2021 and 2020, respectively, and $3.5 million and $2.7 million for the six months ended June 30, 2021 and 2020, respectively.
10.    INVENTORIES

Inventories consisted of the following (in thousands):
June 30, 2021 December 31, 2020
Raw materials $ 12,798  $ 14,454 
Work in process 4,850  4,262 
Finished goods 23,556  21,321 
Total inventories $ 41,204  $ 40,037 

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


11.    ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
June 30, 2021 December 31, 2020
Accrued payroll and employee benefits $ 6,458  $ 7,949 
Accrued property taxes 403  659 
Accrued purchase orders 2,298  1,549 
Accrued taxes 3,839  3,731 
Other 4,370  4,167 
Total accrued liabilities $ 17,368  $ 18,055 
Other accrued liabilities consist of items that are individually less than 5% of total current liabilities.
12.    CAPITAL STOCK
During the six months ended June 30, 2021, the Company granted the following stock options, restricted stock awards, and restricted stock units:
  Six Months Ended June 30, 2021
  Options/Awards/Units
Granted 		Weighted-Average Grant Date Fair Value
(per option/award)
Stock options 54,300  $ 78.19 
Restricted stock awards 203,369  $ 196.48 
Restricted stock units 6,000  $ 172.11 
The Company used the Black-Scholes option pricing model to determine the grant date fair value of stock options with service and/or company performance conditions. For stock options with market conditions, we utilized a Monte Carlo simulation model to estimate grant date fair value. Compensation cost is recognized ratably over the vesting periods of the options.
We valued the restricted stock awards and restricted stock units related to service and/or company performance targets based on grant date fair value and will expense over the requisite service period when achievement of those conditions is deemed probable. For restricted stock awards and restricted stock units related to market conditions, we utilized a Monte Carlo simulation model to estimate grant date fair value and expense over the requisite period.
2021 Equity Offering

On March 5, 2021, the Company completed a public offering of 940,860 shares of common stock, $0.01 par value per share, at a public offering price of $186.00 per share. The Company received net proceeds of approximately $164.2 million after deducting underwriting discounts and commissions and issuance costs. The Company granted the underwriters an option to purchase up to an additional 141,129 shares of common stock from the Company at the offering price of $186.00 per share (less the underwriting discounts and commissions), within 30 days of the Prospectus Supplement dated March 2, 2021. The Company evaluated the accounting treatment of the option under ASC 815-40, Derivatives and Hedging - Contracts on an Entity's
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Own Equity, and determined that it met 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.
13.    ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income 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 —  (1,206) (2,325) (3,531)
Balances at June 30, 2021 $ (386) $ 4,666  $ 6,358  $ 10,638 
1 Foreign currency gains and losses related to translation of foreign subsidiary financial statements.
2 The Company has intercompany loans of a long-term investment nature that are denominated in a foreign currency. These transactions are considered to be of a long-term nature if settlement is not planned or anticipated in the foreseeable future.
14.    COMMITMENTS AND CONTINGENCIES
Warranties

The Company's current terms and conditions of sale include a limited warranty that its products and services will conform to published specifications at the time of shipment and a more extensive warranty related to certain products. The Company also sells a renewal warranty for certain of its products. The typical remedy for breach of warranty is to repair or replace any defective product, and if not possible or practical, the Company will accept the return of the defective product and refund the amount paid. Historically, the Company has incurred minimal warranty costs. The Company's warranty reserve was $0.5 million and $0.5 million as of June 30, 2021 and December 31, 2020, respectively.

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

On February 18, 2020, a former managing director of scil filed a claim disputing the effective date of the termination of his management service agreement and the validity of the Company´s waiver of his two-year post-contractual non-compete obligation. The Company intends to defend itself against the claim. Whether or not this will be successful depends on complex facts and circumstances. The Company is, based on the advice of its legal counsel, confident that it will be successful in evidencing the effective date of the termination of the management service agreement. Additionally, the Company is indemnified by the scil acquisition agreement for this claim.

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


As of June 30, 2021, the Company was not a party to any other legal proceedings that were expected, individually or in the aggregate, to have a material adverse effect on its business, financial condition, or operating results.

Off-Balance Sheet Commitments

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

Purchase Obligations

The Company has contractual obligations with suppliers for unconditional annual minimum inventory purchases in the amounts of $48.1 million as of June 30, 2021.
15.    INTEREST AND OTHER EXPENSE, NET
Interest and other expense, net, consisted of the following (in thousands):
  Three Months Ended June 30, Six Months Ended June 30,
  2021 2020 2021 2020
Interest income $ (467) $ (120) $ (856) $ (353)
Interest expense 922  2,333  1,842  4,679 
Other expense (income), net 126  (68) 120  17 
Total interest and other expense, net $ 581  $ 2,145  $ 1,106  $ 4,343 
Cash paid for interest for the three months ended June 30, 2021 and 2020 was $5 thousand and $4 thousand, respectively. Cash paid for interest for the six months ended June 30, 2021and 2020 was $1.6 million and $1.6 million, respectively.
16.    CONVERTIBLE NOTES

Convertible Notes

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

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

No portion of the Notes was converted during the six months ended June 30, 2021 and the liability component was classified as long-term debt on the Company's Condensed Consolidated Balance Sheet as of June 30, 2021.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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.

The following table summarizes the net carrying amount of the Notes (in thousands):
June 30, 2021 December 31, 2020
Principal amount of the Notes $ 86,250  $ 86,250 
Unamortized debt discount (2,426) (37,791)
Net carrying amount $ 83,824  $ 48,459 
Interest expense related to the Notes is comprised of the amortization of debt discount and debt issuance costs and the contractual coupon interest as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Interest expense related to contractual coupon interest $ 809  $ 809  $ 1,617  $ 1,617 
Interest expense related to amortization of the debt discount 103  1,524  205  3,049 
$ 912  $ 2,333  $ 1,822  $ 4,666 

As of June 30, 2021, the remaining period over which the unamortized discount will be amortized is 63.0 months.

The estimated fair value of the Notes was $235.4 million and $156.9 million as of June 30, 2021 and December 31, 2020, respectively, determined through consideration of quoted market prices in less active markets. The fair value measurement is classified as Level 2 in the fair value hierarchy, which is defined in ASC 820 as inputs other than quoted prices in active markets that are either directly or indirectly observable. Based on our closing stock price of $229.73 on June 30, 2021, the if-converted value exceeded the aggregate principal amount of the Notes by $142.5 million.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


17.    NOTE RECEIVABLES
Convertible Promissory Note
On December 9, 2020, the Company's equity method investee (the “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. The Company accounted for the transaction as a note receivable, included in Related party convertible note receivable, net on the Consolidated Balance Sheets. The note receivable will be measured at amortized cost and evaluated for credit losses each reporting period. The Company determined that the redemption features described above met the definition of an embedded derivative that requires bifurcation from the note receivable host. The Company measured the redemption features at fair value, with the residual proceeds paid allocated to the note receivable host, creating a discount to the note receivable. The discount will be amortized over the contractual term of the Convertible Promissory Note using the effective interest method. The effective interest rate of the Convertible Promissory Note is 8.69%, and the amortization of the discount will be included as interest income within Interest and other expense, net on the Consolidated Statements of (Loss) Income.
The carrying value of the note receivable, included in Related party convertible note receivable, net on the Consolidated Balance Sheets, is as follows (in thousands):
June 30, 2021 December 31, 2020
Principal amount $ 6,650  $ 6,650 
Unamortized discount (828) (977)
Net carrying amount $ 5,822  $ 5,673 

The fair value of the embedded derivative was $1.0 million as of June 30, 2021 and December 31, 2020, respectively, and is included in Related party convertible note receivable, net on the Consolidated Balance Sheets. The fair value of the derivative will be remeasured each reporting period, with the mark-to-market adjustment to be included in Interest and other expense, net on the Consolidated Statements of (Loss) Income. In addition, the Company recorded an allowance for expected credit losses on the promissory note of $33 thousand as of June 30, 2021.

Promissory Note

On February 1, 2021, one of the Company's equity investees (the "Investee"), which the Company accounts for as a 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
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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

The Company evaluated the accounting treatment of the warrant to acquire securities and determined is a freestanding instrument that meets the definition of an embedded derivative under ASC 815 and requires bifurcation from the note receivable host. The Company measured the warrant at fair value, with the residual proceeds paid allocated to the note receivable host, creating a discount to the note receivable. The discount will be amortized over the contractual term of the Promissory Note using the effective interest method. The effective interest rate of the Promissory Note is 10.99%, and the amortization of the discount will be included as interest income within Interest and other expense, net on the Consolidated Statements of (Loss) Income.
The carrying value of the note receivable, included in Promissory note receivable from investee, net, on the Consolidated Balance Sheets, is as follows (in thousands):
June 30, 2021 December 31, 2020
Principal amount $ 9,000  $ — 
Unamortized discount (283) — 
Net carrying amount $ 8,717  $ — 

The fair value of the embedded derivative was $0.3 million at issuance and $0.4 million as of June 30, 2021, and is included in Other non-current assets on our Consolidated Balance Sheets. The fair value of the derivative will be remeasured each reporting period, with the mark-to-market adjustment to be included in other Interest and other expense, net on the 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 June 30, 2021.
18.    SEGMENT REPORTING
On April 1, 2020, Heska completed the acquisition of scil. Following this acquisition, the Company restructured its operating segments based on how the Chief Operating Decision Maker (“CODM”) manages the business, allocates resources, makes operating decisions and evaluates operating performance. The CODM changed how he assesses performance and allocates resources based on geographic regions in order to better align with the global operations of the Company. Based on this change, the Company determined it has two reportable segments and revised prior comparative periods to conform to the current period segment presentation. The Company’s two segments are North America and International.
The North America segment is comprised of the Company's operations in the United States, Canada and Mexico and the International segment is comprised of geographies outside of North America, which are the Company's operations primarily in Australia, France, Germany, Italy, Malaysia, Spain and Switzerland. Certain expenses incurred at the Company’s headquarters located in the North America segment are allocated to each segment in a manner consistent with where the benefits from the expenses are derived. However, there are certain corporate expenses included in the North America segment that the Company does not allocate. Such expenses include research and development, certain selling, marketing, general, and administrative costs that support the global organization. Sales and transfers between operating segments are accounted for at market-based transaction prices and are eliminated in consolidation. The Company's sales are determined by the country of origin where the sale occurred. For a description of Heska's previous operating segments, refer to Note 17 to the consolidated financial statements included in Part II. Item 8 of Heska's Annual Report on Form 10-K for the year ended December 31, 2019.
Our CODM continues to evaluate segment performance and allocate resources based on Revenue, Cost of Revenue, Gross Profit, Gross Margin and Operating Income. The CODM does not evaluate operating
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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 June 30, 2021 due to the acquisition of scil.
Summarized financial information concerning the Company's reportable segments is shown in the following tables (in thousands):
Three Months Ended June 30, 2021 North America International Total
Total revenue $ 40,533  $ 24,395  $ 64,928 
Cost of revenue 21,111  16,545  37,656 
Gross profit $ 19,422  $ 7,850  $ 27,272 
Gross margin 48  % 32  % 42  %
Operating income (loss) $ 130  $ (824) $ (694)
Three Months Ended June 30, 2020 North America International Total
Total revenue $ 28,982  $ 16,730  $ 45,712 
Cost of revenue 16,222  11,625  27,847 
Gross profit $ 12,760  $ 5,105  $ 17,865 
Gross margin 44  % 31  % 39  %
Operating loss $ (3,067) $ (1,387) $ (4,454)

Six Months Ended June 30, 2021 North America International Total
Total revenue $ 77,806  $ 47,625  $ 125,431 
Cost of revenue 40,875  31,814  72,689 
Gross profit $ 36,931  $ 15,811  $ 52,742 
Gross margin 47  % 33  % 42  %
Operating income (loss) $ 1,160  $ (838) $ 322 


Six Months Ended June 30, 2020 North America International Total
Total revenue $ 56,631  $ 19,735  $ 76,366 
Cost of revenue 31,368  13,685  45,053 
Gross profit $ 25,263  $ 6,050  $ 31,313 
Gross margin 45  % 31  % 41  %
Operating loss $ (7,161) $ (1,912) $ (9,073)


Asset information by reportable segment as of June 30, 2021 is as follows (in thousands):
As of June 30, 2021 North America International Total
Total assets $ 418,842  $ 160,524  $ 579,366 

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


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

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


     19.    SUBSEQUENT EVENTS

On July 1, 2021, the Company completed the acquisition of BiEsseA s.r.l., a veterinary reference lab based in Milan, Italy ("BiEsseA"). In exchange for all of the shares of BiEsseA, the Company paid total consideration of $4.7 million upon closing. The Company expects to account for this transaction as a business combination however, the Company does not have the accounting complete as of the date of this filing due to the limited time that has passed since the date of acquisition. As additional consideration for the shares of BiEsseA, the Company agreed to make a contingent earn-out payment of up to an additional $3.0 million based on the achievement of certain performance metrics during the next three years.

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.
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, 2020 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 August 3, 2021 and we undertake no duty and do not intend to update this information, except as required by applicable laws. If we updated one or more forward looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. See “Statement Regarding Forward Looking Statements.”
Overview
We sell advanced veterinary diagnostic and specialty products. Our offerings include Point of Care ("POC") laboratory instruments and consumables; Point of Care digital imaging diagnostic instruments; digital cytology services; vaccines; local and cloud-based data services; allergy testing and immunotherapy; and single-use offerings such as in-clinic diagnostic tests and heartworm preventive products. Our core focus is on supporting veterinarians in the canine and feline healthcare space.
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Point of Care laboratory instruments and other sales include outright instrument sales, revenue recognized from sales-type lease treatment, and other revenue sources, such as charges for repairs. Revenue from Point of Care laboratory consumables primarily involves placing an instrument under contract in the field and generating future revenue from testing consumables, such as cartridges and reagents, as that instrument is used. Instruments placed under subscription agreements are considered operating or sales-type leases, depending on the duration and other factors of the underlying agreement. A loss of, or disruption in, the supply of consumables we are selling to an installed base of instruments could substantially harm our business. All of our Point of Care laboratory and other non-imaging instruments and consumables are supplied by third parties, who typically own the product rights and supply the product to us under marketing and/or distribution agreements. In many cases, we have collaborated with a third party to adapt a human instrument for veterinary use. Major products in this area include our instruments for chemistry, hematology, blood gas and immunodiagnostic testing and their affiliated operating consumable.
Radiography is the largest product offering in Point of Care imaging, which includes digital and computed radiography and ultrasound instruments. Radiography solutions typically consist of a combination of hardware and software placed with a customer, often combined with an ongoing service and support contract. Our experience has been that most of the revenue is generated at the time of sale in this area, in contrast to the Point of Care diagnostic laboratory placements discussed above where ongoing consumable revenue is often a larger component of economic value as a given instrument is used.
Pharmaceuticals, Vaccines and Diagnostic ("PVD") revenue, includes single use diagnostic and other tests, pharmaceuticals and biologicals as well as research and development, licensing and royalty revenue. Since items in this area are often single use by their nature, our typical aim is to build customer satisfaction and loyalty for each product, generate repeat annual sales from existing customers and expand our customer base in the future. Products in this area are both supplied by third parties and provided by us. Major products and services in this area include heartworm diagnostic tests and preventives, and allergy test kits, allergy immunotherapy and testing.
Other Vaccines and Pharmaceuticals ("OVP") revenue is generated in our USDA, FDA and DEA licensed production facility in Des Moines, Iowa. We view this facility as an asset which could allow us to control our cost of goods on any pharmaceuticals and vaccines that we may commercialize in the future. We have increased integration of this facility with our operations elsewhere. For example, virtually all of our U.S. inventory, excluding our imaging products, is stored at this facility and related fulfillment logistics are managed there. Our OVP revenue includes vaccines and pharmaceuticals produced for third parties. OVP is attributable only to the North America segment.
All of our products are ultimately sold primarily to or through veterinarians. In many cases, veterinarians will mark up their costs to their customers. The acceptance of our products by veterinarians is critical to our success. These products are sold directly to end users by us as well as through distribution relationships, such as the sale of kits to conduct blood testing to third-party veterinary diagnostic laboratories and sales to independent third-party distributors. Revenue from direct sales and distribution relationships represented 72% and 28%, respectively, of revenue for the three months ended June 30, 2021 and 71% and 29%, respectively, for the six months ended June 30, 2021. Revenue from direct sales and distribution relationships represented 68% and 32%, respectively, of revenue for the three months ended June 30, 2020 and 68% and 32%, respectively, for the six months ended June 30, 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
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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 Annual Report on Form 10-K for the year ended December 31, 2020 for further information.
Impact of COVID-19 Pandemic and Current Economic Environment

Beginning in the first quarter of 2020, to limit the spread of COVID-19, governments took various actions including the issuance of stay-at-home policies and social distancing procedures and guidelines, causing some businesses to adjust, reduce or suspend business and operating activities. Veterinary care is widely recognized as an "essential" service for pet owners, and veterinarians continued to deliver essential medical care for sick and injured pets. The stay-at-home policies deployed early in 2020 to combat the spread of COVID-19 resulted in a decrease in companion animal clinical visits, including delay of elective procedures and wellness visits and as a result lower demand for diagnostic testing services. Beginning in the second quarter of 2020, certain local, state and federal governments began to ease the stay-at-home policies and allowed more businesses and facilities to re-open, leading to a recovery in companion animal clinical visits and associated demand for our diagnostic products. During the fourth quarter of 2020 and into the first quarter of 2021, increased restrictions in countries in which we operate, mainly in the European Union and certain parts of Canada and Australia, re-emerged. These restrictions lessened during the second quarter of 2021 however, with the rise in variants, 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 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 may occur in the future.

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

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
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because: (1) our customers and products are essential, (2) our main Point of Care laboratory business continues to show healthy consumables use and margin, (3) our subscriptions model metrics continue to show solid performance, (4) our vaccines and pharmaceuticals business continues to perform with minimal disruption, (5) our balance sheet is strong, and (6) our employees, logistics, supply chain, and operations continue to operate well in the current environment and they are fully prepared for both a phased return and an instant return to full capacity.
Results of Operations
Our analysis presented below is organized to provide the information we believe will facilitate an understanding of our historical performance and relevant trends going forward.
The following table sets forth, for the periods indicated, certain data derived from our unaudited Condensed Consolidated Statements of (Loss) Income (in thousands, except per share):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Revenue, net $ 64,928  $ 45,712  $ 125,431  $ 76,366 
Gross profit 27,272  17,865  52,742  31,313 
Operating expenses 27,966  22,319  52,420  40,386 
Operating (loss) income (694) (4,454) 322  (9,073)
Interest and other expense, net 581  2,145  1,106  4,343 
Loss before income taxes and equity in losses of unconsolidated affiliates (1,275) (6,599) (784) (13,416)
Income tax benefit (1,051) (212) (2,617) (1,720)
Net (loss) income before equity in losses of unconsolidated affiliates (224) (6,387) 1,833  (11,696)
Equity in losses of unconsolidated affiliates (343) (87) (529) (217)
Net (loss) income after equity in losses of unconsolidated affiliates (567) (6,474) 1,304  (11,913)
Net loss attributable to redeemable non-controlling interest —  (117) —  (268)
Net (loss) income attributable to Heska Corporation $ (567) $ (6,357) $ 1,304  $ (11,645)
Diluted (loss) earnings per share attributable to Heska Corporation $ (0.06) $ (0.72) $ 0.13  $ (1.43)
Non-GAAP net income per diluted share(1)(2)
$ 0.50  $ —  $ 1.08  $ 0.03 
Adjusted EBITDA(1)
$ 8,429  $ 4,146  $ 16,827  $ 5,065 
Net (loss) income margin(1)
(0.3) % (14.0) % 1.5  % (15.3) %
Adjusted EBITDA margin(1)
13.0  % 9.1  % 13.4  % 6.6  %
(1) See “Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA to net income and Non-GAAP net income per diluted share to diluted earnings (loss) per share attributable to Heska Corporation, the closest comparable GAAP measures, for each of the periods presented. Net (loss) income margin and adjusted EBITDA margin are calculated as the ratio of net income (loss) and adjusted EBITDA, respectively, to revenue.
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(2) Shares used in the diluted per share calculation for non-GAAP net income per diluted share are (in thousands): 10,530 for the three months ended June 30, 2021 compared to 9,269 for the three months ended June 30, 2020 and 10,189 for the six months ended June 30, 2021 compared to 8,165 for the six months ended June 30, 2020.
Revenue
Total revenue increased 42.0% to $64.9 million for the three months ended June 30, 2021, compared to $45.7 million for the three months ended June 30, 2020. Total revenue increased 64.2% to $125.4 million in the six months ended June 30, 2021, compared to $76.4 million in the six months ended June 30, 2020. The significant increases in revenue are driven mainly by significant growth in POC Lab Consumables of 35.7% and 62.2% in the three and six months ended June 30, 2021. We also experienced recovery from COVID impacts in the prior year related to capital placements in POC Lab instruments and POC Imaging products, and increased sales of Allergy and Tri Heart. The six months ending June 30, 2021 are also favorably impacted by the acquisition of scil, which was acquired on April 1, 2020.
Gross Profit
Gross profit increased 52.7% to $27.3 million in the three months ended June 30, 2021, compared to $17.9 million in the three months ended June 30, 2020. Gross margin increased to 42.0% in the three months ended June 30, 2021, compared to 39.1% in the three months ended June 30, 2020. Gross profit increased 68.4% to $52.7 million in the six months ended June 30, 2021, compared to $31.3 million in the six months ended June 30, 2020. Gross margin increased to 42.0% in six months ended June 30, 2021, compared to 41.0% in the six months ended June 30, 2020. The increase in gross profit for both periods was due mainly to increased revenue. The increase in gross margin percentage for both periods was due to favorable product mix.
Operating Expenses
Selling and marketing expenses increased 29.9% to $12.4 million in the three months ended June 30, 2021, compared to $9.6 million in the three months ended June 30, 2020. Selling and marketing expenses increased 37.7% to $23.4 million in the six months ended June 30, 2021, compared to $17.0 million in the six months ended June 30, 2020. The increase in both periods is driven by increased stock-based compensation expenses of $0.8 million and $1.8 million for the three and six months ended June 30, 2021, respectively, as well as the impact of international expansion related to recent acquisitions, which are in line with management expectations.
Research and development expenses increased 14.9% to $1.9 million in the three months ended June 30, 2021, compared to $1.7 million in the three months ended June 30, 2020. Research and development expenses decreased 18.0% to $3.1 million in six months ended June 30, 2021, compared to $3.8 million in the six months ended June 30, 2020. The variance is related to lower spending on product development for urine and fecal diagnostic analyzer and enhanced immunodiagnostic offerings in the current year.
General and administrative expenses increased 22.9% to $13.6 million in the three months ended June 30, 2021, compared to $11.0 million in the three months ended June 30, 2020. General and administrative expenses increased 32.3% to $25.9 million in the six months ended June 30, 2021, compared to $19.6 million in the six months ended June 30, 2020. The increase in both periods is driven by increased stock-based compensation expenses of $1.9 million and $3.6 million for the three and six months ended June 30, 2021, respectively, and other general and administrative costs related to the impact of international acquisitions. These increases are partially offset by lower one-time costs of $1.9 million and $5.6 million incurred in the three and six months ended June 30, 2020, respectively, related to the acquisition of scil that did not repeat in the three and six months ended June 30, 2021, respectively.
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Interest and Other Expense, net
Interest and other expense (income), net, was $0.6 million in the three months ended June 30, 2021, compared to $2.1 million in the three months ended June 30, 2020. Interest and other expense (income), net, was $1.1 million in the six months ended June 30, 2021, compared to $4.3 million in the six months ended June 30, 2020. The decrease in interest and other expense in both periods was primarily driven by a change in accounting treatment related to non-cash interest expense as a result of the Notes.
Income Tax (Benefit) Expense
For the three months ended June 30, 2021, the Company had a total income tax benefit of $1.1 million, including $1.1 million of domestic deferred income tax expense and $36 thousand of current income tax expense. In the three months ended June 30, 2020, the Company had a total income tax benefit of $0.2 million, including $0.2 million of domestic deferred income tax benefit and $31 thousand of current income tax expense. The Company recognized $0.6 million in excess tax benefits related to employee share-based compensation in the three months ended June 30, 2021, compared to $0.2 million recognized in the three months ended June 30, 2020. For the six months ended June 30, 2021 the Company had a total income tax benefit of $2.6 million, including $3.3 million of domestic deferred income tax expense and $0.7 million of current income tax expense. In the six months ended June 30, 2020, the Company had a total income tax benefit of $1.7 million, including $1.8 million of domestic deferred income tax benefit and $56 thousand of current income tax expense. The Company recognized $1.0 million in excess tax benefits related to employee share-based compensation in the six months ended June 30, 2021, compared to $0.5 million recognized in the six months ended June 30, 2020. The increase in tax benefit for the 2021 periods is due to the excess tax benefits from employee stock compensation, and the release of the valuation allowance for tax credits and the current year expiring net operating loss.
Net (Loss) Income Attributable to Heska Corporation
Net loss attributable to Heska was $0.6 million in the three months ended June 30, 2021, compared to net loss attributable to Heska of $6.4 million in the three months ended June 30, 2020. Net income attributable to Heska was $1.3 million in the six months ended June 30, 2021, compared to net loss attributable to Heska of $11.6 million in the six months ended June 30, 2020. The difference between this line item and "Net (loss) income after equity in losses of unconsolidated affiliates" is the net income or loss attributable to our minority interest in our French subsidiary, which we purchased in February 2019. In October 2020, the Company acquired the remaining 30% minority interest in Optomed. Net income is higher in both comparative periods due to increases in revenue and gross profit; partially offset by increased operating expenses as discussed above, lower interest relating to the Notes, and increased tax benefit.
Adjusted EBITDA
Adjusted EBITDA in the three months ended June 30, 2021 was $8.4 million (13.0% adjusted EBITDA margin), compared to $4.1 million (9.1% adjusted EBITDA margin) in the three months ended June 30, 2020. Adjusted EBITDA was $16.8 million (13.4% adjusted EBITDA margin) in the six months ended June 30, 2021, compared to $5.1 million (6.6% adjusted EBITDA margin) in the six months ended June 30, 2020. The increase is driven by increased revenue and gross profit as discussed above. The majority of the increases in operating expenses are excluded from adjusted EBITDA due to their nature. See “Non-GAAP Financial Measures” for a reconciliation of adjusted EBITDA to net (loss) income, the closest comparable GAAP measure, for each of the periods presented.
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Earnings Per Share
Loss per share attributable to Heska was $0.06 per diluted share in the three months ended June 30, 2021 compared to loss of $0.72 per diluted share in the three months ended June 30, 2020. In the six months ended June 30, 2021 we had income of $0.13 per diluted share compared to a loss of $1.43 per diluted share in the six months ended June 30, 2020. The increases in both periods is primarily due to increases in revenue and profit; partially offset by operating expenses as discussed above, lower interest and amortization charges relating to the Notes, and increased tax benefit.
Non-GAAP Earnings Per Share
Non-GAAP EPS was income of $0.50 per diluted share in the three months ended June 30, 2021 compared to income of $0.00 per diluted share in the three months ended June 30, 2020. In the six months ended June 30, 2021 non-GAAP EPS was income of $1.08 per diluted share compared to income of $0.03 per diluted share in the six months ended June 30, 2020. The increase in both periods is primarily due to increases in revenue and profit, partially offset by operating expenses. See “Non-GAAP Financial Measures" for a reconciliation of non-GAAP EPS to net (loss) income attributable to Heska per diluted share, the closest comparable U.S. GAAP measure, in each of the periods presented.
Non-GAAP Financial Measures

In addition to financial measures presented on the basis of accounting principles generally accepted in the U.S. (“U.S. GAAP”), we also present EBITDA, adjusted EBITDA, adjusted EBITDA margin, and non-GAAP net income (loss) per diluted share, which are non-GAAP measures.
These measures should be viewed as a supplement to, not substitute for, our results of operations presented under U.S. GAAP. The non-GAAP financial measures presented may not be comparable to similarly titled measures of other companies because they may not calculate their measures in the same manner. Management uses EBITDA, adjusted EBITDA, adjusted EBITDA margin and non-GAAP net income (loss) per diluted share as key profitability measures, which are included in monthly or quarterly analyses of our operating results to our senior management team, our annual budget and related goal setting and other performance measurements. We believe these non-GAAP measures enhance our investors' understanding of our business performance and that not adjusting for the items included in the reconciliations below would hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses.
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The following tables reconcile our most directly comparable as-reported financial measures calculated in accordance with GAAP to our non-GAAP financial measures (in thousands, except percentages and per share amounts):
  Three Months Ended
June 30, 		Six Months Ended
June 30,
  2021 2020 2021 2020
Net (loss) income(1)
$ (224) $ (6,387) $ 1,833  $ (11,696)
    Income tax benefit (1,051) (212) (2,617) (1,720)
    Interest expense, net 455  2,213  986  4,326 
    Depreciation and amortization 3,109  3,330  6,680  4,704 
EBITDA $ 2,289  $ (1,056) $ 6,882  $ (4,386)
    Acquisition-related and other one-time costs(2)
862  2,728  1,017  6,603 
    Stock-based compensation 5,621  2,444  9,457  2,797 
    Equity in losses of unconsolidated affiliates (343) (87) (529) (217)
    Net loss attributable to non-controlling interest —  117  —  268 
Adjusted EBITDA $ 8,429  $ 4,146  $ 16,827  $ 5,065 
Net (loss) income margin(3)
(0.3) % (14.0) % 1.5  % (15.3) %
Adjusted EBITDA margin(3)
13.0  % 9.1  % 13.4  % 6.6  %
(1) Net (loss) income used for reconciliation represents the "Net income (loss) before equity in losses of unconsolidated affiliates."

(2) To exclude the effect of one-time charges of $0.9 million and $1.0 million for the three and six months ending June 30, 2021, and $2.7 million and $6.6 million for the three and six months ending June 30, 2020. These costs were incurred primarily as a result of acquisition-related charges.

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


  Three Months Ended
June 30, 		Six Months Ended
June 30,
  2021 2020 2021 2020
GAAP net (loss) income attributable to Heska per diluted share $ (0.06) $ (0.72) $ 0.13  $ (1.43)
    Acquisition-related and other one-time costs(1)
0.08  0.29  0.10  0.81 
    Amortization of acquired intangibles(2)
0.16  0.18  0.30  0.25 
    Purchase accounting adjustments related to inventory and fixed asset step-up(3)
0.01  0.04  0.02  0.05 
    Amortization of debt discount and issuance costs —  0.16  —  0.37 
    Stock-based compensation 0.53  0.26  0.93  0.34 
    Loss on equity investee transactions 0.03  0.01  0.05  0.03 
    Estimated income tax effect of above non-GAAP adjustments(4)
(0.25) (0.22) (0.45) (0.39)
Non-GAAP net income per diluted share $ 0.50  $ —  $ 1.08  $ 0.03 
Shares used in diluted per share calculations 10,530  9,269  10,189  8,165 
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(1) To exclude the effect of one-time charges of $0.9 million and $1.0 million for the three and six months ending June 30, 2021, and $2.7 million and $6.6 million for the three and six months ending June 30, 2020. These costs were incurred primarily as a result of acquisition related charges.

(2) To exclude the effect of amortization of acquired intangibles of $1.7 million and $3.1 million in the three and six months ended June 30, 2021, compared to $1.6 million and $2.1 million in the three and six months ended June 30, 2020. These costs were incurred as part of the purchase accounting adjustments for the acquisitions of scil, Optomed and CVM.

(3) To exclude the effect of purchase accounting adjustments for inventory step up amortization of $0.1 million and $0.2 million for the three and six months ended June 30, 2021, compared to $0.4 million and $0.4 million in the three and six months ended June 30, 2020.

(4) Represents income tax expense utilizing an estimated effective tax rate that adjusts for non-GAAP measures including: acquisition-related and other one-time costs (excluding items which are not deductible for tax of $40 thousand and $0.1 million for the three and six months ended June 30, 2021, respectively, compared to $1.3 million and $4.0 million for the three and six months ended June 30, 2020, 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 $1.0 million for the three and six months ended June 30, 2021, respectively, compared to $0.2 million and $0.5 million for the three and six months ended June 30, 2020, respectively. Adjusted effective tax rates are approximately 25% for all periods presented.
Impact of Inflation
In recent years, inflation has not had a significant impact on our operations.
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 62.4% and 62.0% of our revenue for the three and six months ended June 30, 2021, respectively, and the International segment represented approximately 37.6% and 38.0% of our revenue for the three and six months ended June 30, 2021, respectively.
The following sections and tables set forth, for the periods indicated, certain data derived from our unaudited Condensed Consolidated Statements of Income (Loss) (in thousands).












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North America Segment
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 Dollar Change % Change 2021 2020 Dollar Change % Change
Point of Care laboratory: $ 22,778  $ 16,499  $ 6,279  38.1  % $ 42,718  $ 32,801  $ 9,917  30.2  %
Instruments & Other 3,482  2,962  520  17.6  % 6,470  5,578  892  16.0  %
Consumables 19,296  13,537  5,759  42.5  % 36,248  27,223  9,025  33.2  %
Point of Care imaging 7,101  4,148  2,953  71.2  % 13,789  7,644  6,145  80.4  %
PVD 6,210  4,880  1,330  27.3  % 13,074  9,384  3,690  39.3  %
OVP 4,444  3,455  989  28.6  % 8,225  6,802  1,423  20.9  %
Total North America revenue $ 40,533  $ 28,982  $ 11,551  39.9  % $ 77,806  $ 56,631  $ 21,175  37.4  %
North America Gross Profit $ 19,422  $ 12,760  $ 6,662  52.2  % $ 36,931  $ 25,263  $ 11,668  46.2  %
North America Gross Margin 47.9  % 44.0  % 47.5  % 44.6  %
North America Operating Income (Loss) $ 130  $ (3,067) $ 3,197  104.2  % $ 1,160  $ (7,161) $ 8,321  116.2  %
North America Operating Margin 0.3  % (10.6) % 1.5  % (12.6) %
North America segment revenue increased 39.9% to $40.5 million for the three months ended June 30, 2021, compared to $29.0 million for the three months ended June 30, 2020. The $11.6 million increase was driven by a 42.5% increase in revenue in POC Lab Consumables, which had increased utilization and price in the current period, increased POC Imaging sales of $3.0 million driven by increased sales in Canada, and higher PVD sales of $1.3 million, primarily for allergy and Tri-heart. North America segment revenue increased 37.4% to $77.8 million for the six months ended June 30, 2021, compared to $56.6 million for the six months ended June 30, 2020. The $21.2 million increase was driven by a 33.2% increase in revenue in POC Lab Consumables, which had increased utilization and price in the current period, increased POC imaging sales of $6.1 million driven by increased sales in Canada, and higher PVD sales of $3.7 million, primarily for allergy and Tri-heart.

Gross profit for the North America segment was $19.4 million compared to $12.8 million for the three months ended June 30, 2021 and 2020, respectively. Gross profit was $36.9 million compared to $25.3 million for the six months ended June 30, 2021 and 2020, respectively. The increase in gross profit for both periods is primarily driven by increased revenue in the current year periods. Gross margin was 47.9% for the three months ended June 30, 2021, compared to 44.0% in the three months ended June 30, 2020. Gross margin was 47.5% for the six months ended June 30, 2021, compared to 44.6% in the six months ended June 30, 2020. The increase is due to favorable product mix, primarily due to increased sales of higher margin POC Lab Consumables, and increased margin from OVP.
North America operating income increased $3.2 million and $8.3 million for the three and six months ended June 30, 2021 compared to the prior year periods. The increase is driven by increased revenue and margin; partially offset by higher operating expenses, primarily due to higher stock-based compensation expenses.
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International Segment
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 Dollar
 Change 		%
 Change 		2021 2020 Dollar
 Change 		%
 Change
Point of Care laboratory: $ 15,922  $ 11,676  $ 4,246  36.4  % $ 31,160  $ 12,472  $ 18,688  149.8  %
Instruments & Other 3,987  2,206  1,781  80.7  % 7,001  2,440  4,561  186.9  %
Consumables 11,935  9,470  2,465  26.0  % 24,159  10,032  14,127  140.8  %
Point of Care imaging 7,277  4,404  2,873  65.2  % 13,935  5,762  8,173  141.8  %
PVD 1,196  650  546  84.0  % 2,530  1,501  1,029  68.6  %
Total International revenue $ 24,395  $ 16,730  $ 7,665  45.8  % $ 47,625  $ 19,735  $ 27,890  141.3  %
International Gross Profit $ 7,850  $ 5,105  $ 2,745  53.8  % $ 15,811  $ 6,050  $ 9,761  161.3  %
International Gross Margin 32.2  % 30.5  % 33.2  % 30.7  %
International Operating Loss $ (824) $ (1,387) $ 563  40.6  % $ (838) $ (1,912) $ 1,074  56.2  %
International Operating Margin (3.4) % (8.3) % (1.8) % (9.7) %

International segment revenue was $24.4 million compared to $16.7 million for the three months ended June 30, 2021 and 2020, respectively. International segment revenue was $47.6 million compared to $19.7 million for the six months ended June 30, 2021 and 2020, respectively. The increase in the three months ended June 30, 2021 is due to a 26.0% increase in revenue in POC Lab Consumables. For the three months ended June 30, 2021, we also saw an increase in revenue of $2.9 million in POC Imaging and $1.8 million in POC Lab Instruments, as a result of fewer COVID-19 impacts in the current year. The increase in the six months ended June 30, 2021 is due to increased POC Lab Consumables revenue, fewer COVID-19 impacts for POC Imaging and POC Lab Instruments and the acquisition of scil, which occurred on April 1, 2020.
Gross profit for the International segment was $7.9 million compared to $5.1 million for the three months ended June 30, 2021 and 2020, respectively. Gross profit was $15.8 million compared to $6.1 million for the six months ended June 30, 2021 and 2020, respectively. Gross margin for the International segment was 32.2% and 33.2% for the three and six months ended June 30, 2021, respectively, compared to 30.5% and 30.7% for the three and six months ended June 30, 2020, respectively. The increase in gross profit for both periods is primarily driven by increased revenue. The increase in gross margin is driven by favorable mix related to increased POC Lab Consumable sales and POC Imaging products.
International segment operating loss decreased $0.6 million and $1.1 million for the three and six months ended June 30, 2021, respectively, compared to the prior year periods. The decrease in operating loss for the three months ended June 30, 2021 is driven by increased International segment revenue and gross profit, as discussed above. The decrease in operating loss for the six months ended June 30, 2020 is driven by increased International segment revenue and gross profit as a result of the scil acquisition, as discussed above.
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Liquidity, Capital Resources and Financial Condition
We believe that adequate liquidity and cash generation is important to the execution of our strategic initiatives. Our ability to fund our operations, acquisitions, capital expenditures, and product development efforts may depend on our ability to access other forms of capital as well as our ability to generate cash from operating activities, which is subject to future operating performance, as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control, including but not limited to effects of the COVID-19 pandemic. Our primary source of liquidity is our available cash of $245.2 million, which includes net proceeds from the issuance of common stock of approximately $165 million on March 5, 2021.
A summary of our cash from operating, investing and financing activities is as follows (in thousands):
Six Months Ended
June 30,
Change
2021 2020 Dollar
Change 		%
Change
Net cash provided by (used in) operating activities $ 7,154  $ (13,095) $ 20,249  154.6  %
Net cash used in investing activities (13,387) (119,926) 106,539  88.8  %
Net cash provided by financing activities 165,299  122,991  42,308  34.4  %
Foreign exchange effect on cash and cash equivalents (247) 189  (436) (230.7) %
Increase (decrease) in cash and cash equivalents 158,819  (9,841) 168,660  1,713.9  %
Cash and cash equivalents, beginning of the period 86,334  89,030  (2,696) (3.0) %
Cash and cash equivalents, end of the period $ 245,153  $ 79,189  $ 165,964  209.6  %
For the six months ended June 30, 2021 and June 30, 2020, cash flow provided by (used in) operations was $7.2 million and $(13.1) million, respectively, which was primarily the result of (in thousands):
Six Months Ended
June 30,
Change
2021 2020 Dollar
Change 		%
Change
Net income (loss) $ 1,304  $ (11,913) $ 13,217  (110.9) %
Non cash expenses and other adjustments 15,225  9,896  5,329  53.9  %
Change in accounts receivable 3,046  (1,268) 4,314  (340.2) %
Change in inventories, net (4,080) (4,094) 14  (0.3) %
Change in other assets (4,404) (56) (4,348) 7,764.3  %
Change in accounts payable (334) (2,732) 2,398  (87.8) %
Change in other liabilities (3,603) (2,928) (675) 23.1  %
Net cash provided by (used in) operating activities $ 7,154  $ (13,095) $ 20,249  (154.6) %
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For the six months ended June 30, 2021 and June 30, 2020, cash flow used in investing activities was $13.4 million and $119.9 million, respectively, which was primarily used for (in thousands):
Six Months Ended
June 30,
Change
2021 2020 Dollar
Change 		%
Change
Acquisition of CVM $ —  $ (14,420) $ 14,420  NM
Acquisition of Lacuna, net of cash acquired (3,882) —  (3,882) NM
Promissory note receivable issuance (9,000) —  (9,000) NM
Purchases of property and equipment (546) (316) (230) NM
Proceeds from disposition of property and equipment 41  —  41  NM
Acquisition of scil, net of cash acquired —  (105,190) 105,190  NM
Net cash (used in) provided by investing activities $ (13,387) $ (119,926) $ 106,539  (88.8) %
For the six months ended June 30, 2021 and June 30, 2020, cash flow from financing activities was $165.3 million and $123.0 million, respectively, which was the result of (in thousands):
Six Months Ended
June 30,
Change
2021 2020 Dollar
Change 		%
Change
Payment of preferred stock issuance costs $ (314) $ (214) $ (100) 46.7  %
Preferred stock proceeds —  122,000  (122,000) NM
Proceeds from issuance of common stock 167,198  1,514  165,684  10,943.5  %
Repurchases of common stock (stock received for options in lieu of cash) (932) (610) (322) 52.8  %
Repayments of other debt (653) (109) (544) 499.1  %
Borrowings on other debts —  410  (410) NM
Net cash provided by (used in) financing activities $ 165,299  $ 122,991  $ 42,308  34.4  %
We believe that our cash, cash equivalents and marketable securities balances, as well as the cash flows generated by our operations, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures, including selling and marketing team expansion and product development initiatives, for at least the next 12 months. Our belief may prove to be incorrect, however, and we could utilize our available financial resources sooner than we currently expect. For example, we actively seek opportunities that are consistent with our strategic direction, which may require additional capital. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020. We may be required to seek additional equity or debt financing in order to meet these future capital requirements, even in the absence of any acquisitions. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.
-41-


Effect of currency translation on cash
Net effect of foreign currency translations on cash was a $0.2 million negative impact for the six months ended June 30, 2021 and a $0.2 million positive impact for the six months ended June 30, 2020, which represents a decrease of $0.4 million. 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 June 30, 2021, the Company had purchase obligations for inventory of $48.1 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.
Critical Accounting Policies and Estimates
Our accounting policies are described in our audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2020, other than the recently adopted accounting pronouncements described in Note 1. Operations and Summary of Significant Accounting Policies in our Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q, have not changed significantly since such filing.

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about other market risk affecting us, see the section under the heading “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2020, which is incorporated by reference herein. As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the market risks described in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 4.     Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined by Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
-42-


Changes in Internal Control over Financial Reporting
On April 1, 2020, we acquired scil animal care company GmbH, as more fully described in Note 3. Acquisitions and Related Party Items in our Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q. During the initial transition period following the acquisition, we enhanced our internal control process to ensure that all financial information related to this acquisition was properly reflected in our consolidated financial statements. As of June 30, 2021, the integration of the internal controls relating to the acquired business has been substantially completed and the acquired business will be included in our evaluation of the effectiveness of our internal control over financial reporting for fiscal year 2021. There have been no other changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures.


PART II. OTHER INFORMATION
Item 1.    Legal Proceedings

We are involved in various legal proceedings that arise from time to time in the ordinary course of our business. We believe that the outcome of any of the proceedings should not have a material adverse effect on our financial position or long-term results of operations or cash flows.
Item 1A.Risk Factors
For a discussion of our risk factors, see Item 1A. Risk Factors in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020.
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 June 30, 2021:
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
April 2021 —  $ —  —  $ — 
May 2021 —  $ —  —  $ — 
June 2021 263  $ 196.29  —  $ — 
263  $ 196.29  —  $ — 
 (1) Shares of Public Common Stock we purchased between April 1, 2021 and June 30, 2021 were solely for the cancellation of shares of stock withheld for related tax obligations.

-43-


Item 6.    Exhibits
Exhibit Number  
Notes
 
Description of Document
2.1#++ (1)
2.2# (2)
3.1 (3)
3.2 (3)
3.3 (3)
3.4 (4)
3.5 (5)
3.6 (6)
3.7 (7)
3.8 (8)
3.9 (9)
3.10 (10)
10.1** (11)
10.2**
31.1  
31.2  
32.1 *
101.INS   XBRL Instance Document.
101.SCH   XBRL Taxonomy Extension Schema Document.
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
104.0 Cover Page Interactive Data File (embedded within the Inline XBRL document contained in Exhibit 101)
-44-


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.
**
Indicates management contract or compensatory plan or arrangement.
(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-Q for the quarter ended June 30, 2019.
(11) Filed with the Registrant’s Form 8-K on June 10, 2021.
-45-


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 August 4, 2021.

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

 

-46-

Exhibit 10.2
HESKA CORPORATION
EQUITY INCENTIVE PLAN
Effective May 5, 2021

ARTICLE 1.
INTRODUCTION
The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Employees, Outside Directors and Consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Restricted Stock Units, Options (which may constitute ISOs or NQOs), Stock Appreciation Rights, Performance-Based Awards, Other Cash-Based Awards, or Other Stock-Based Awards.
The Plan shall be governed by, and construed in accordance with, the laws of the State of Colorado (except its choice-of-law provisions).
ARTICLE 2.
ADMINISTRATION.
2.1    COMMITTEE COMPOSITION. The Plan shall be administered by the Committee. The Committee shall consist exclusively of two or more independent directors of the Company, who shall be appointed by the Board. The initial Committee shall be the Compensation Committee of the Board. In addition, the composition of the Committee shall satisfy such requirements as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 under the Exchange Act. The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need not satisfy the foregoing requirements, who may administer the Plan with respect to Employees and Consultants who are not considered officers or directors of the Company under Section 16 of the Exchange Act, may grant Awards under the Plan to such Employees and Consultants and may determine all terms of such Awards. In addition, to the fullest extent permitted by applicable law and subject to any limitations that may be established by the Board or the Committee, the Board or the Committee may delegate to one or more officers of the Company the authority to designate the individuals (other than such officer(s) or any individual considered an officer or director of the Company under Section 16 of the Exchange Act) among those eligible to receive Awards pursuant to the terms of the Plan, who will receive Awards under the Plan and the size of each such grant.

2.2    COMMITTEE RESPONSIBILITIES. The Committee shall (a) select the Employees, Outside Directors and Consultants who are to receive Awards under the Plan, (b) determine the type, number, vesting requirements and other features and conditions of such Awards, (c) interpret the Plan and (d) make all other decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee may amend or modify any outstanding Awards in any manner to the extent the Committee would have had the authority under the Plan initially to make such Awards as so amended or modified. The Committee’s determinations under the Plan shall be final and binding on all persons.

2.3    INDEMNIFICATION. No member of the Board or the Committee, or any officer or employee of the Company or any Subsidiary or Affiliate thereof acting on behalf of the Board or the Committee, shall be personally liable for any action, omission, determination or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company and of any Subsidiary or Affiliate thereof acting on their behalf shall, to the maximum extent permitted by applicable law and the Company’s by-laws and governing documents, be fully indemnified and protected by the Company in respect of any such action, omission, determination or interpretation.
2.4    BENEFICIARY DESIGNATIONS. If permitted by the Committee, a Participant under the Plan may name a beneficiary or beneficiaries to whom any vested but unpaid Award shall be paid in the event of the Participant’s
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death. Each such designation shall revoke all prior designations by the Participant and shall be effective only if given in a form and manner acceptable to the Committee. In the absence of any such designation, any vested benefits remaining unpaid at the Participant’s death shall be paid to the Participant’s surviving spouse, or if none, to the Participant’s estate.


ARTICLE 3.
SHARES AVAILABLE FOR GRANTS.
3.1    BASIC LIMITATION. Common Shares issued pursuant to the Plan may be authorized but unissued Common Shares or treasury shares, or Common Shares reacquired by the Company in any manner. Subject to adjustment in accordance with Article 12, the number of Common Shares which may be issued pursuant to Awards granted under the Plan is 250,000 Common Shares plus the number of Common Shares that remain available for grant under the Prior Plans as of May 5, 2021. The aggregate number of Common Shares that may be issued pursuant to the exercise of ISOs granted under the Plan is 250,000, subject to adjustment in accordance with Article 12 to the extent such adjustment will not affect the status of any Option intended to qualify as an ISO.
3.2    ADDITIONAL SHARES.
(a)    Any Common Shares subject to an Award that is canceled, forfeited, settled in cash or expires prior to exercise or realization, either in full or in part, shall again become available for issuance under the Plan as Awards. Notwithstanding anything to the contrary contained herein, Common Shares subject to an Award under the Plan shall not again be made available for issuance or delivery under the Plan if such Common Shares are (i) tendered in payment of an Option, (ii) delivered or withheld by the Company to satisfy any tax withholding obligation, (iii) repurchased by the Company using the proceeds from an Option exercise, or (iv) subject to a Stock Appreciation Right that are not issued in connection with its stock settlement on exercise thereof.
(b)    Any Common Shares subject to an award granted under a Prior Plan that is canceled, forfeited, settled in cash or expires prior to exercise or realization, either in full or in part, shall become available for issuance under the Plan as Awards. Notwithstanding anything to the contrary contained herein, Common Shares subject to an award granted under a Prior Plan shall not be made available for issuance or delivery under the Plan if such Common Shares are (i) tendered in payment of an option granted under a Prior Plan, (ii) delivered or withheld by the Company to satisfy any tax withholding obligation with respect to any award granted under a Prior Plan, (iii) repurchased by the Company using the proceeds from an option exercise; or (iv) subject to a stock appreciation right granted under a Prior Plan that are not issued in connection with its stock settlement on exercise thereof.

3.3    MINIMUM VESTING REQUIREMENTS. Except as otherwise provided in this Section 3.3, Awards granted under the Plan shall be subject to a minimum vesting period of one (1) year. Notwithstanding the foregoing, (a) such minimum vesting provision shall not apply to the accelerated vesting of an Award in the event of a Participant’s death or Disability or the occurrence of a Change in Control, and (b) the Committee may grant Awards covering five percent (5%) or fewer of the total number of Common Shares authorized under the Plan as set forth in Section 3.1 without regard to the above-described minimum vesting requirements. In addition, with respect to Awards made to Outside Directors, the vesting of such Awards will be deemed to satisfy the one (1)-year minimum vesting requirement to the extent that the Awards vest on the earlier of the one (1)-year anniversary of the date of grant and the next regular annual meeting of the Company’s stockholders that is at least fifty (50) weeks after the immediately preceding year’s annual meeting.
3.4    LIMITATION ON OUTSIDE DIRECTOR COMPENSATION. Notwithstanding anything herein to the contrary, compensation paid to an Outside Director in respect of his or her service as an Outside Director, including cash fees and Awards under the Plan (based on the grant date Fair Market Value of such Awards for financial reporting purposes), shall not exceed $300,000 per fiscal year. For the avoidance of doubt, compensation shall be counted toward this limit for the Board compensation year in which it is earned (and not when it is paid or settled in the event that it is deferred).

3.5    ASSUMPTION UNDER THE PLAN OF AWARDS; SUBSTITUTE AWARDS. Notwithstanding any other provision of the Plan, the Board or the Committee, in its discretion, may authorize the assumption and continuation
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under the Plan of outstanding and unexercised stock options or other types of stock-based awards that were granted under an equity plan or agreement that is or was maintained by a corporation or other entity that was merged into, consolidated with, or whose stock or assets were acquired by, the Company as the surviving corporation. Any such action will be upon such terms and conditions as the Board or the Committee, in its discretion, may deem appropriate, including provisions to preserve the holder’s rights under the previously granted and unexercised award. The exercise price and number of shares for any such stock options shall be determined in accordance with the principles of Sections 409A and 424(a) of the Code. Any such assumption and continuation of any such previously granted and unexercised award will be treated as an outstanding Award under the Plan, but will not count against the number of Shares reserved for issuance pursuant to Section 3.1. In addition, any Shares issued by the Company through the assumption or substitution of outstanding grants from an acquired company will not reduce the Shares available for grants as provided in Section 3.1.



ARTICLE 4.
ELIGIBILITY.

4.1    AWARDS OTHER THAN ISOS. Employees, Outside Directors and Consultants shall be eligible for the grant of Awards other than ISOs.
4.2    INCENTIVE STOCK OPTIONS. Only Employees of the Company, a Parent or a Subsidiary shall be eligible for the grant of ISOs.

ARTICLE 5.
OPTIONS.
5.1    STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall be evidenced by an Award Agreement between the Participant and the Company. Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The Award Agreement shall specify whether the Option is an ISO or an NQO. The provisions of the various Award Agreements entered into under the Plan need not be identical.
5.2    NUMBER OF SHARES. Each Award Agreement shall specify the number of Common Shares subject to the Option and such number shall be subject to adjustment in accordance with Article 12 hereof.
5.3    EXERCISE PRICE. Each Award Agreement shall specify the Exercise Price; provided that the Exercise Price under an Option shall in no event be less than one-hundred percent (100%) of the Fair Market Value of a Common Share on the date of grant.
5.4    INCENTIVE STOCK OPTIOINS. The grant of ISOs shall be subject to all of the requirements of Code Section 422, including the following limitations:
(a)    The Exercise Price of an ISO shall not be less than one-hundred percent (100%) of the Fair Market Value of a Common Share on the date of grant; provided, however, if on the date of grant, the Employee (together with persons whose stock ownership is attributed to the Employee pursuant to Code Section 424(d)) owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries (a “10% Stockholder”), the Exercise Price shall not be less than one-hundred and ten percent (110%) of the Fair Market Value of a Common Share on the date of grant.

(b)    To the extent that the aggregate Fair Market Value of the Common Shares with respect to which ISOs are exercisable for the first time by any individual during any calendar year (under all plans of the Company) exceeds $100,000, such Options will be treated as NQOs to the extent required by Code Section 422. For purposes of this Section 5.4(b), ISOs shall be taken into account in the order in which they were granted. The Fair Market Value of the Common Shares shall be determined as of the time the Option with respect to such Common Shares is granted.
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(c)    In the event of a Participant’s change of status from Employee to Consultant or Outside Director, an ISO held by the Participant shall cease to be treated as an ISO and shall be treated for tax purposes as an NQO three (3) months and one (1) day following such change of status.
5.5    EXERCISABILITY. Each Award Agreement shall specify the date when all or any installment of the Option is to become exercisable. Each Award Agreement may also provide for accelerated exercisability of the Option in the event of the Participant’s death, Disability or Retirement or other events and may provide for expiration prior to the end of the Option’s term in the event of the termination of the Participant’s service. NQOs may also be awarded in combination with Restricted Shares, and such an Award may provide that the NQOs will not be exercisable unless the related Restricted Shares are forfeited.
5.6    OPTION TERM. Unless otherwise specified in an Award Agreement, but in any event, no later than ten (10) years from the date of grant thereof, each Option shall terminate no later than the first to occur of the following events:
(a)    Date in Award Agreement. The date for termination of the Option set forth in the Award Agreement;
(b)    Termination of Service. The ninetieth (90th) day following the date on which the Participant’s service terminates (other than for a reason described in Section 5.6(c) or (d) below);
(c)    Disability. In the event that a Participant’s service terminates due to the Participant’s Disability, the Participant may exercise his or her Option at any time within twelve (12) months following the date of such termination, but only to the extent that the Participant was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of the Option as set forth in the applicable Award Agreement). If, at the date of termination, the Participant is not entitled to exercise his or her entire Option, the Common Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Participant does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Common Shares covered by such Option shall revert to the Plan;
(d)    Death. In the event of the death of a Participant, the Participant’s Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration of the term of such Option as set forth in the applicable Award Agreement), by the Participant’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Participant was entitled to exercise the Option at the date of death. If, at the time of death, the Participant was not entitled to exercise his or her entire Option, the Common Shares covered by the unexercisable portion of the Option shall immediately revert to the Plan. If, after death, the Participant’s estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Common Shares covered by such Option shall revert to the Plan; or
(e)    Ten Years from Grant. An Option shall expire no more than ten (10) years after the date of grant; provided, however, that if an ISO is granted to a 10% Stockholder, such ISO may not be exercised after the expiration of five (5) years from the date of grant.
5.7    EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become exercisable as to all or part of the Common Shares subject to such Option in the event that a Change in Control occurs with respect to the Company.
5.8    PROHIBITION ON REPRICINGS. Notwithstanding anything to the contrary contained herein and except as may be permitted under Section 3.5 hereof, the Board and the Committee may not, without stockholder approval, directly or indirectly reduce the exercise price of an outstanding Option or Stock Appreciation Right, including (i) changing the terms of an Option or Stock Appreciation Right to reduce the exercise price of such Option or Stock Appreciation Right; (ii) cancelling an Option or Stock Appreciation Right in exchange for a new Option or Stock Appreciation Right with a lower exercise price, (iii) cancelling an Option or Stock Appreciation Right in exchange for a different type of Award under the Plan that has a value that is greater than the excess of the Fair Market Value of the applicable shares on the date of such payment over the exercise price, (iv) authorizing, in lieu of the exercise or in exchange for the cancellation of an Option or Stock Appreciation Right, the payment of cash in an amount that is greater than the excess of the Fair Market Value of the Common Shares on the date of such payment over the
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exercise price, or (v) taking any other action that is treated as a “repricing” under generally accepted accounting principles, unless the cancellation and exchange occurs in connection with an adjustment permitted under Article 12.
5.9    PAYMENT FOR OPTION SHARES
.
(a)    General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash or cash equivalents at the time when such Common Shares are purchased, except as follows:
(1)    In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Award Agreement. The Award Agreement may specify that payment may be made in any form(s) described in this Section 5.9.
(2)    In the case of an NQO, the Committee may at any time accept payment in any form(s) described in this Section 5.9.
(b)    Surrender of Stock. To the extent that this Section 5.9(b) is applicable, all or any part of the Exercise Price may be paid by surrendering Common Shares that are already owned by the Participant. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. The Participant shall not surrender Common Shares in payment of the Exercise Price if such action could cause the Company to recognize additional compensation expense with respect to the Option for financial reporting purposes under GAAP accounting at the time of such proposed surrender.
(c)    Exercise/Sale. To the extent that this Section 5.9(c) is applicable, all or any part of the Exercise Price may be paid by delivering (on a form prescribed by the Company) an irrevocable direction to a securities broker approved by the Company to sell all or part of the Common Shares being purchased under the Plan and to deliver all or part of the sales proceeds to the Company.
(d)    Other Forms of Payment. To the extent that this Section 5.9(d) is applicable, all or any part of the Exercise Price may be paid in any other form that is consistent with applicable laws, regulations and rules, including, without limitation, pursuant to a net exercise.
ARTICLE 6.
RESTRICTED SHARES.
6.1    TIME, AMOUNT AND FORM OF AWARDS. Awards under the Plan may be granted in the form of Restricted Shares. Restricted Shares may also be awarded in combination with NQOs, and such an Award may provide that the Restricted Shares will be forfeited in the event that the related NQOs are exercised. The Committee shall determine the eligible individuals to whom, and the time or times at which, grants of Restricted Shares shall be made; the number of Restricted Shares to be awarded; the period of restrictions, if any, applicable to Restricted Shares; the performance goals (if any) applicable to Restricted Shares; and all other conditions of the Restricted Shares. If the restrictions, performance goals and/or conditions established by the Committee are not attained, a Participant shall forfeit his or her Restricted Shares in accordance with the terms of the grant. The provisions of Restricted Shares need not be the same with respect to each Participant.
6.2    PAYMENT FOR AWARDS. To the extent that an Award is granted in the form of newly issued Restricted Shares, the Award recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash, cash equivalents or any other form of legal consideration acceptable to the Company, including but not limited to future services, an amount equal to the par value of such Restricted Shares. To the extent that an Award is granted in the form of Restricted Shares from the Company’s treasury, no cash consideration shall be required of the Award recipients.
6.3    VESTING CONDITIONS. Each Award of Restricted Shares shall be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Award Agreement. An Award Agreement may provide for accelerated vesting in the event of the Participant’s death, Disability or Retirement or other events. Notwithstanding any other provision of the Plan to the contrary, the Committee may determine, at the time of
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granting Restricted Shares or thereafter, that all or part of such Restricted Shares shall become vested in the event that a Change in Control occurs with respect to the Company.
6.4    VOTING AND DIVIDEND RIGHTS. Unless otherwise provided in the Award Agreement, the holder of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company’s other stockholders; provided, that to the extent that a Restricted Share carries with it a right to receive dividends, any dividends declared shall be accumulated and paid at the time (and to the extent) that the Restricted Shares vest, but in no event later than two-and-a-half (2.5) months following the end of the calendar year in which the vesting occurs. Without limitation, an Award Agreement may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares (in which case such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid).
ARTICLE 7.
RESTRICTED STOCK UNITS.
7.1    TIME, AMOUNT AND FORM OF AWARDS. Awards under the Plan may be granted in the form of Restricted Stock Units. Restricted Stock Units may be issued either alone or in addition to other Awards granted under the Plan. The Committee shall determine the eligible individuals to whom, and the time or times at which, grants of Restricted Stock Units shall be made; the number of Restricted Stock Units to be awarded; the period of restrictions, if any, applicable to Restricted Stock Units; the performance goals (if any) applicable to Restricted Stock Units; and all other conditions of the Restricted Stock Units. If the restrictions, performance goals and/or conditions established by the Committee are not attained, a Participant shall forfeit his or her Restricted Stock Units in accordance with the terms of the grant. The provisions of Restricted Stock Units need not be the same with respect to each Participant.
7.2    RESTRICTIONS AND CONDITIONS. Each Award of Restricted Stock Units shall be subject to the following restrictions and conditions and any additional restrictions or conditions as determined by the Committee at the time of grant or, subject to Code Section 409A, thereafter:
(a)    Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Award Agreement.
(b)    An Award Agreement may provide for accelerated vesting in the event of the Participant’s death, Disability or Retirement or other events. Notwithstanding any other provision of the Plan to the contrary, the Committee may determine, at the time of granting Restricted Stock Units or thereafter, that all or part of such Restricted Stock Units shall become vested in the event that a Change in Control occurs with respect to the Company.
(c)    Participants holding Restricted Stock Units shall have no voting rights. A Restricted Stock Unit may, at the Committee’s discretion, carry with it a right to dividend equivalents. Such right would entitle the holder to be credited with an amount equal to all cash dividends paid on one Common Share while the Restricted Stock Unit is outstanding. The Committee, in its discretion, may grant dividend equivalents from the date of grant or only after a Restricted Stock Unit is vested. Notwithstanding anything herein to the contrary, to the extent that a Restricted Stock Unit carries with it rights to dividend equivalents, any dividend equivalents with respect to dividends declared shall be accumulated and paid at the time (and to the extent) that the Restricted Stock Units vest, but in no event later than two-and-a-half (2.5) months following the end of the calendar year in which the vesting occurs.
(d)    The rights of Participants granted Restricted Stock Units upon termination of employment or service as an Outside Director or Consultant of the Company or an Affiliate thereof terminates for any reason while the Restricted Stock Units remain outstanding shall be set forth in the Award Agreement.
7.3    RIGHTS AS A STOCKHOLDER. Except as may otherwise be provided in an Award Agreement with respect to dividend equivalents (in accordance with Section 7.2(c)), a Participant shall have no rights to dividends or any other rights of a stockholder with respect to the Common Shares subject to Restricted Stock Units until the Participant has satisfied all conditions of the Award Agreement and the requirements of Section 15.1, and the Common Shares have been issued to the Participant.
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7.4    SETTLEMENT OF RESTRICTED STOCK UNITS. Settlement of vested Restricted Stock Units shall be made to Participants in the form of Common Shares, unless the Committee, in its sole discretion, provides for the payment of the Restricted Stock Units in cash (or partly in cash and partly in Common Shares) equal to the Fair Market Value of the Common Shares that would otherwise be distributed to the Participant.
ARTICLE 8.
STOCK APPRECIATION RIGHTS.
8.1    IN GENERAL. Stock Appreciation Rights may be granted either alone (“Free Standing Rights”) or in conjunction with all or part of any Option granted under the Plan (“Related Rights”). Related Rights may be granted either at or after the time of the grant of such Option. The Committee shall determine the eligible individuals to whom, and the time or times at which, grants of Stock Appreciation Rights shall be made, the number of Common Shares to be awarded, the price per Common Share, and all other conditions of Stock Appreciation Rights. Notwithstanding the foregoing, no Related Right may be granted for more Common Shares than are subject to the Option to which it relates and any Stock Appreciation Right must be granted with an Exercise Price not less than the Fair Market Value of a Common Share on the date of grant. The provisions of Stock Appreciation Rights need not be the same with respect to each Participant. Stock Appreciation Rights granted under the Plan shall be subject to the following terms and conditions set forth in this Section 8.1 and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable, as set forth in the applicable Award Agreement.
8.2    RIGHTS AS STOCKHOLDER. A Participant shall have no rights to dividends or any other rights of a stockholder with respect to the Common Shares subject to a Stock Appreciation Right until the Participant has given written notice of the exercise thereof, has satisfied the requirements of Section 15.1 and the Common Shares have been issued to the Participant.
8.3    EXERCISABILITY.
(a)    Stock Appreciation Rights that are Free Standing Rights shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee in the applicable Award Agreement.
(b)    Stock Appreciation Rights that are Related Rights shall be exercisable only at such time or times and to the extent that the Options to which they relate shall be exercisable in accordance with the provisions of Article 5 and this Article 8.
(c)    An Award Agreement may provide for accelerated vesting in the event of the Participant’s death, Disability or Retirement or other events. Notwithstanding any other provision of the Plan to the contrary, the Committee may determine, at the time of granting Stock Appreciation Rights or thereafter, that all or part of such Stock Appreciation Rights shall become vested in the event that a Change in Control occurs with respect to the Company.
8.4    PAYMENT UPON EXERCISE.
(a)    Upon the exercise of a Free Standing Right, the Participant shall be entitled to receive up to, but not more than, that number of Common Shares, determined using the Fair Market Value, equal in value to the excess of the Fair Market Value as of the date of exercise over the price per Common Share specified in the Free Standing Right multiplied by the number of Common Shares in respect of which the Free Standing Right is being exercised.
(b)    A Related Right may be exercised by a Participant by surrendering the applicable portion of the related Option. Upon such exercise and surrender, the Participant shall be entitled to receive up to, but not more than, that number of Common Shares, determined using the Fair Market Value, equal in value to the excess of the Fair Market Value as of the date of exercise over the Exercise Price specified in the related Option multiplied by the number of Common Shares in respect of which the Related Right is being exercised. Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the Related Rights have been so exercised.
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(c)    Notwithstanding the foregoing, the Committee may determine to settle the exercise of a Stock Appreciation Right in cash (or in any combination of Common Shares and cash).
8.5    TERMINATION OF EMPLOYMENT OR SERVICE.
(a)    In the event of the termination of employment or service with the Company and all Affiliates thereof of a Participant who has been granted one or more Free Standing Rights, such rights shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee in the applicable Award Agreement.
(b)    In the event of the termination of employment or service with the Company and all Affiliates thereof of a Participant who has been granted one or more Related Rights, such rights shall be exercisable at such time or times and subject to such terms and conditions as set forth in the related Options.
8.6    TERM.
(a)    The term of each Free Standing Right shall be fixed by the Committee, but no Free Standing Right shall be exercisable more than ten (10) years after the date such right is granted.
(b)    The term of each Related Right shall be the term of the Option to which it relates, but no Related Right shall be exercisable more than ten (10) years after the date such right is granted.
ARTICLE 9.
OTHER STOCK-BASED OR CASH-BASED AWARDS.
9.1    IN GENERAL. The Committee is authorized to grant Awards to Participants in the form of Other Stock‑Based Awards or Other Cash-Based Awards, as deemed by the Committee to be consistent with the purposes of the Plan and as evidenced by an Award Agreement. The Committee shall determine the terms and conditions of such Awards, consistent with the terms of the Plan, at the date of grant or thereafter, including any performance goals and performance periods. Common Shares or other securities or property delivered pursuant to an Award in the nature of a purchase right granted under this Section 9.1 shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, Common Shares, other Awards, notes or other property, as the Committee shall determine, subject to any required corporate action.
9.2    VESTING. An Award Agreement with respect to an Other Stock-Based Award or Other Cash-Based Award may provide for accelerated vesting in the event of the Participant’s death, Disability or Retirement or other events. Notwithstanding any other provision of the Plan to the contrary, the Committee may determine, at the time of granting an Other Stock-Based Award or Other Cash-Based Award or thereafter, that all or part of such Awards shall become vested in the event that a Change in Control occurs with respect to the Company.
ARTICLE 10.
PERFORMANCE-BASED AWARDS.
The Committee, in its discretion, may make Awards subject to vesting based on the achievement of performance goals (such awards, “Performance-Based Awards”), in which case the Committee will specify in writing, by resolution or otherwise, the Participants eligible to receive a Performance-Based Award (which may be expressed in terms of a class of individuals) and the performance goals applicable to Performance-Based Awards. The Committee may make Awards subject to the achievement of such performance goals as it determines in its sole discretion. The Committee also has the authority to provide in an Award for accelerated vesting of an Award based on the achievement of performance goals. In determining the actual amount of a Participant’s Performance-Based Award for a Performance Period, the Committee may reduce or eliminate the amount of the Performance-Based Award otherwise earned if, in its sole judgment, such reduction or elimination is appropriate.
ARTICLE 11
CLAWBACK
Notwithstanding any other provisions in this Plan to the contrary, any Award received by a Subject Participant, and/or any Common Share issued upon exercise of any Award received by a Subject Participant hereunder, and/or any
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amount received with respect to any sale of any such Award or Common Share, will be subject to potential cancellation, recoupment, rescission, payback or other action to the extent required pursuant to applicable law, government regulation or national securities exchange listing requirement (or any clawback policy adopted by the Company from time to time pursuant to any such law, government regulation or national securities exchange listing requirement or to comport with good corporate governance practices). Each Subject Participant agrees and consents to the Company’s application, implementation and enforcement of any clawback policy established by the Company that may apply to the Subject Participant and any provision of applicable law, government regulation or national securities exchange listing requirement relating to cancellation, rescission, payback or recoupment of compensation, and expressly agrees that the Company may take such actions as are necessary to effectuate any such policy (as applicable to the Subject Participant) or applicable law, government regulation or national securities exchange listing requirement without further consent or action being required by the Subject Participant.
ARTICLE 12
PROTECTION AGAINST DILUTION.
12.1    ADJUSTMENTS. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of (a) the number of Common Shares available for issuance pursuant to future Awards under Article 3, (b) the number of Common Shares covered by each outstanding Award or (c) the Exercise Price under each outstanding Option and Stock Appreciation Right. Except as provided in this Article 12, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class.
12.2    DISSOLUTION OR LIQUIDATION. To the extent not previously exercised, Options shall terminate immediately prior to the dissolution or liquidation of the Company.
12.3    REORGANIZATIONS. In the event that the Company is a party to a merger or other reorganization, outstanding Awards shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for the continuation of outstanding Awards by the Company (if the Company is a surviving corporation), for their assumption by the surviving corporation or its parent or subsidiary, for the substitution by the surviving corporation or its parent or subsidiary of its own awards for such Awards, for accelerated vesting and accelerated expiration, or for settlement in cash or cash equivalents.
ARTICLE 13.
AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such awards may be settled in the form of Common Shares issued under this Plan. Such Common Shares shall be treated for all purposes under the Plan like Restricted Shares and shall, when issued, reduce the number of Common Shares available under Article 3.
ARTICLE 14.
LIMITATION ON RIGHTS.
14.1    RETENTION RIGHTS; NATURE OF PAYMENTS. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an Employee, Outside Director or Consultant. The Company and its Parents, Subsidiaries and Affiliates reserve the right to terminate the service of any Employee, Outside Director or Consultant at any time, with or without cause, subject to applicable laws, the Company’s certificate of incorporation and bylaws and a written employment agreement (if any). Any and all grants of Awards and issuances of Common Shares under the Plan shall be in consideration of services performed for the Company by the Participant. All such grants and issuances shall constitute a special incentive payment to the Participant and shall not be taken into account in computing the amount of salary or compensation of the Participant for the purpose of determining any benefits under any pension, retirement, profit-sharing, bonus, life insurance or other benefit plan of
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the Company or any Affiliate or under any agreement between the Company or any Affiliate and the Participant, unless such plan or agreement specifically otherwise provides.
14.2    STOCKHOLDERS' RIGHTS. Subject to the other terms and conditions of the Plan, a Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the time when a stock certificate for such Common Shares is issued. No adjustment shall be made for cash dividends or other rights for which the record date is prior to such time, except as expressly provided in the Plan.
14.3    REGULATORY REQUIREMENTS. Any other provision of the Plan notwithstanding, the obligation of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing.
ARTICLE 15.
WITHHOLDING TAXES; PARACHUTE PAYMENTS.
15.1    GENERAL. To the extent provided by the terms of an Award Agreement and subject to the discretion of the Committee, the Participant may satisfy any federal, state, foreign or local tax withholding obligation relating to the exercise or acquisition of Common Shares under an Award by any of the following means (in addition to the Company’s right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (a) tendering a cash payment; (b) authorizing the Company to withhold Common Shares from the Common Shares otherwise issuable to the Participant as a result of the exercise or acquisition of Common Shares under the Award, provided, however, that no Common Shares are withheld with a value exceeding the amount of tax required to be withheld by law (or, to the extent permitted by the Committee, such other greater amount up to the maximum statutory rate under applicable law, as applicable to such Participant, if such other greater amount would not result in adverse financial accounting treatment, as determined by the Committee (including in connection with the effectiveness of FASB Accounting Standards Update 2016-09)); or (c) delivering to the Company previously owned and unencumbered Common Shares. The Company shall not be required to issue any Common Shares or make any cash payment under the Plan until such obligations are satisfied.
15.2    SECTION 280G.
(a)    To the extent that any of the payments and benefits provided for under the Plan or any other agreement or arrangement between the Company or its Affiliates and a Participant (collectively, the “Payments”) (i) constitute a “parachute payment” within the meaning of Code Section 280G and (ii) but for this paragraph would be subject to the excise tax imposed by Code Section 4999, then the Payments shall be payable either (i) in full or (ii) as to such lesser amount which would result in no portion of such Payments being subject to excise tax under Code Section 4999 (determined in accordance with the reduction of payments and benefits paragraph set forth below); whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Code Section 4999, results in the Participant’s receipt on an after-tax basis, of the greatest amount of benefits under this Plan, notwithstanding that all or some portion of such benefits may be taxable under Code Section 4999. Any determination required under this provision will be made by accountants chosen by the Company, whose determination shall be conclusive and binding upon the Participant and the Company for all purposes.
(b)    Except to the extent, if any, otherwise agreed in writing between a Participant and the Company, reduction of payments and benefits hereunder, if applicable, will be made by reducing, first, payments or benefits to be paid in cash in the order in which such payment or benefit would be paid or provided (beginning with such payment or benefit that would be made last in time and continuing, to the extent necessary, through to such payment or benefit that would be made first in time) and, then, reducing any benefit to be provided in-kind hereunder in a similar order; provided, however, that any reduction or elimination of accelerated vesting of any equity award will first be accomplished by reducing or eliminating the vesting of such awards that are valued in full for purposes of Code Section 280G, then the reduction or elimination of vesting of other equity awards.
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ARTICLE 16.
AMENDMENT; TERM OF THE PLAN.
The Plan shall become effective on May 5, 2021. The Board may, at any time and for any reason, amend, suspend or terminate the Plan (subject to the approval of the Company’s stockholders only to the extent required by applicable law, regulations or the requirements of the securities exchange on which the Common Shares are listed). The Committee may issue ISOs under the Plan until February 18, 2031. The Committee may issue any Award other than ISOs at any time prior to the date, if any, that the Board suspends or terminates the Plan. No Award may be granted pursuant to the Plan after such date, but Awards granted before such date may extend beyond that date.
ARTICLE 17.
CODE SECTION 409A; UNFUNDED PLAN
17.1    CODE SECTION 409A. The intent of the parties is that payments and benefits under the Plan comply with Code Section 409A to the extent subject thereto, and, accordingly, to the maximum extent permitted, the Plan shall be interpreted and be administered to be in compliance therewith. Any payments described in the Plan that are due within the “short-term deferral period” as defined in Code Section 409A shall not be treated as deferred compensation unless applicable law requires otherwise. Notwithstanding anything to the contrary in the Plan, to the extent required in order to avoid accelerated taxation and/or tax penalties under Code Section 409A, amounts that would otherwise be payable and benefits that would otherwise be provided upon a “separation from service” to a Participant who is a “specified employee” shall be paid on the first business day after the date that is six (6) months following the Participant’s separation from service (or upon the Participant’s death, if earlier). In addition, for purposes of the Plan, each amount to be paid or benefit to be provided to the Participant pursuant to the Plan, which constitute deferred compensation subject to Code Section 409A, shall be construed as a separate identified payment for purposes of Code Section 409A. Nothing contained in the Plan or an Award Agreement shall be construed as a guarantee of any particular tax effect with respect to an Award. The Company does not guarantee that any Awards provided under the Plan will satisfy the provisions of Code Section 409A, and in no event will the Company be liable for any or all portion of any taxes, penalties, interest or other expenses that may be incurred by a Participant on account of any non-compliance with Code Section 409A.
17.2    UNFUNDED STATUS. The Plan is intended to constitute an “unfunded” plan for incentive and deferred compensation. Although bookkeeping accounts may be established with respect to Participants who are entitled to cash, Common Shares or rights thereto under the Plan, any such accounts shall be used merely as a bookkeeping convenience. The Company shall not be required to segregate any assets that may at any time be represented by cash, Common Shares or rights thereto, nor shall the Plan be construed as providing for such segregation, nor shall the Company, the Board or the Committee be deemed to be a trustee of any cash, Common Shares or rights thereto to be granted under the Plan. Any liability or obligation of the Company to any Participant with respect to an Award of cash, Shares or rights thereto under the Plan shall be based solely upon any contractual obligations that may be created by the Plan and any Award Agreement, and no such liability or obligation of the Company shall be deemed to be secured by any pledge or other encumbrance on any property of the Company. None of the Company, the Board or the Committee shall be required to give any security or bond for the performance of any obligation that may be created by the Plan. With respect to the Plan and any Awards granted hereunder, Participants are general and unsecured creditors of the Company and have no rights or claims except as otherwise provided in the Plan or any applicable Award Agreement.
ARTICLE 18.
AWARDS TO FOREIGN NATIONALS AND PARTICIPANTS OUTSIDE THE UNITED STATES
Notwithstanding any provision of the Plan to the contrary, in order to comply, or facilitate compliance, with the applicable law or customs in other countries in which the Company or any of its affiliates operates or has employees or to qualify for preferred tax treatment of such jurisdictions, the Committee, in its discretion, will have the power and authority to (a) determine which Affiliates will be covered by the Plan; (b) determine which persons employed outside the United States are eligible to participate in the Plan; (c) amend or vary the terms and provisions of the Plan and the terms and conditions of any Award granted to persons who reside outside the United States; (d) establish subplans and modify exercise procedures and terms and procedures to the extent such actions are deemed to be necessary or advisable; and (e) take any action, before or after an Award is made, that it deems advisable to obtain or comply with any applicable law or regulatory exemptions or approvals.
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ARTICLE 19.
GOVERNING LAW
This Plan, the Award Agreements and any other agreements or other documents hereunder shall be interpreted and construed in accordance with the laws of the State of Delaware and applicable federal law. Any reference in this Plan or in any Award Agreement or other agreement or document hereunder to a provision of law or to a rule or regulation shall be deemed to include any successor law, rule or regulation of similar effect or applicability.
ARTICLE 20.
DEFINITIONS.
20.1    Affiliate means any entity other than a Subsidiary, if the Company and/or one or more Subsidiaries own, directly or indirectly, not less than fifty percent (50%) of such entity.
20.2    Award means any award of an Option, Restricted Share, Restricted Stock Unit, Stock Appreciation Right, Other Stock-Based Award or Other Cash-Based Award under the Plan.
20.3    Award Agreement means any agreement, contract or other instrument or document evidencing an Award. Evidence of an Award may be in written or electronic form, may be limited to notation on the books and records of the Company and, with the approval of the Committee, need not be signed by a representative of the Company or a Participant. Any Common Shares that become deliverable to a Participant pursuant to the Plan may be issued in certificate form in the name of the Participant or in book-entry form in the name of the Participant.
20.4    Board means the Company’s Board of Directors, as constituted from time to time.
20.5    Cause shall have the meaning assigned to such term in a Participant’s written employment, severance, or similar agreement or Award Agreement with the Company, or, if no such agreement exists or the agreement does not define “Cause,” Cause means a Participant’s termination of service by the Company due to the Participant’s (a) failure to perform his or her assigned duties or responsibilities as an Employee, Consultant or Outside Director of the Company or an Affiliate thereof (other than a failure resulting from the Participant’s Disability) after notice thereof from the Company describing his or her failure to perform such duties or responsibilities; (b) breach of any confidentiality agreement, invention assignment agreement or written restrictive covenant agreement between the Participant and the Company or an Affiliate thereof; (c) engagement in any act of dishonesty, fraud, misrepresentation, moral turpitude or misappropriation of material property that was or is materially injurious to the Company or its Affiliates; (d) violation of any written Company policy, including, without limitation, any policy with respect to sexual harassment in the workplace; (e) violation of any federal or state law or regulation applicable to the Company’s business; or (f) conviction of, or entrance of a plea of nolo contendere to, any crime. In addition, a Participant’s service shall be deemed to have terminated for “Cause” if, on the date the Participant’s service terminates, facts and circumstances exist that would have justified a termination for Cause, even if such facts and circumstances are discovered after such termination.
20.6    Change in Control shall mean:
(a)    The consummation of a merger or consolidation of the Company with or into another entity of any other corporate reorganization, if more than fifty percent (50%) of the combined voting power of the continuing or surviving entity’s securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not stockholders of the Company immediately prior to such merger, consolidation, or other reorganization;
(b)    The consummation of a sale, transfer or other disposition of all or substantially all of the Company’s assets;
(c)    A majority of the members of the Board are replaced during any eighteen (18) month period by directors whose appointment or election is not endorsed by a majority of the Board before the date of appointment or election; or
(d)    Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than (i) the Company, (ii) a subsidiary thereof, (iii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary thereof, or (iv) any company owned, directly or indirectly,
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by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power represented by the Company’s then outstanding voting securities.
20.7    Code means the Internal Revenue Code of 1986, as amended.
20.8    Committee means a committee of the Board, as described in Article 2.
20.9    Common Share means one share of common stock, par value $0.01 per share, of the Company.
20.10    Company means Heska Corporation, a Delaware corporation.
20.11    Consultant means a consultant or adviser who provides bona fide services to the Company, a Parent, a Subsidiary or an Affiliate as an independent contractor. Service as a Consultant shall be considered employment for all purposes of the Plan, except as provided in Section 4.2.
20.12    Disability shall have the meaning assigned to such term in a Participant’s written employment, severance, or similar agreement or Award Agreement with the Company, or, if no such agreement exists or the agreement does not define “Disability,” Disability means a Participant’s inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted, or can be expected to last, for a continuous period of not less than one year.
20.13    Employee means a common-law employee of the Company, a Parent, a Subsidiary or an Affiliate.
20.14    Exchange Act means the Securities Exchange Act of 1934, as amended.
20.15    Exercise Price means, with respect to any Award under which the holder may purchase Common Shares, the price per Common Share at which a holder of such Award granted hereunder may purchase Common Shares issuable upon exercise of such Award, as specified in the applicable Award Agreement.
20.16    Fair Market Value means, for so long as the Common Shares are listed on any established stock exchange or a national market system, the value of a Common Share as determined by reference to the most recent reported sale price of a Common Share (or if no sales were reported, the most recent closing price) as quoted on such exchange or system at the time of determination. In the absence of an established market for the Common Shares, the Fair Market Value shall be determined in good faith by the Committee and such determination shall be conclusive and binding on all persons.
20.17    ISO means an incentive stock option described in Code Section 422(b).
20.18    NQO means a stock option not described in Code Sections 422 or 423.
20.19    Option means an ISO or NQO granted under the Plan and entitling the holder to purchase Common Shares.
20.20    Other Cash-Based Award means a cash Award granted to a Participant under Article 9, including cash awarded as a bonus or upon the attainment of performance goals or otherwise as permitted under the Plan.
20.21    Other Stock-Based Award means a right or other interest granted to a Participant under Article 9 that may be denominated or payable and valued in whole or in part by reference to, or otherwise based on or related to, Common Shares, including, but not limited to, unrestricted Common Shares or dividend equivalents, each of which may be subject to the attainment of performance goals or a period of continued employment or other terms or conditions as permitted under the Plan.
20.22    Outside Director shall mean a member of the Board who is not an Employee.
20.23    Parent means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation
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that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date.
20.24    Participant means an individual or estate who holds an Award.
20.25    Plan means this Heska Corporation Equity Incentive Plan, as amended from time to time.
20.26    Prior Plans means the Heska Corporation Stock Incentive Plan and the Heska Corporation 2003 Equity Incentive Plan.
20.27    Restricted Share means a Common Share awarded under the Plan. An Award of Restricted Shares constitutes a transfer of ownership of Common Shares to a Participant from the Company subject to restrictions against transferability, assignment and hypothecation. Under the terms of the Award, the restrictions against transferability are removed when the Participant has met the specified vesting requirement.
20.28    Restricted Stock Unit means a notional account established pursuant to an Award granted to a Participant, as described in Article 7, that is (i) valued solely by reference to Common Shares, (ii) subject to restrictions specified in the Award Agreement, and (iii) payable in cash or in Common Shares (as specified in the Award Agreement). The Restricted Stock Units awarded to the Participant will vest according to the time-based criteria or performance goal criteria specified in the Award Agreement.
20.29    Retirement shall mean a Participant’s termination of service with the Company (for any reason other than for Cause) on or after the attainment of age fifty-five (55) with at least ten (10) years of service with the Company and its Affiliates (including service with another company prior to it becoming an Affiliate).
20.30    Stock Appreciation Right means the right pursuant to an Award granted under Article 8 to receive an amount equal to the excess, if any, of (i) the aggregate Fair Market Value, as of the date such Award or portion thereof is surrendered, of the Common Shares covered by such Award or such portion thereof, over (ii) the aggregate Exercise Price of such Award or such portion thereof.
20.31    Subsidiary means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.
20.32    Subject Participant means a Participant who is designated by the Board as an “executive officer” under the Exchange Act.


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Exhibit 31.1
 
 
CERTIFICATION
 
I, Kevin S. Wilson, certify that:
 
1.I have reviewed this quarterly report on Form 10-Q of Heska Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
Dated: August 4, 2021 /s/ Kevin S. Wilson
  KEVIN S. WILSON
  Chief Executive Officer and President
  (Principal Executive Officer)


Exhibit 31.2
 
CERTIFICATION
 
I, Catherine Grassman, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Heska Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
 
Dated: August 4, 2021 /s/ Catherine Grassman
  CATHERINE GRASSMAN
  Executive Vice President, Chief Financial Officer
  (Principal Financial Officer)




Exhibit 32.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Kevin S. Wilson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Heska Corporation on Form 10-Q for the quarter ended June 30, 2021 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Heska Corporation, to the best of my knowledge.

 
Dated: August 4, 2021 By: /s/ Kevin S. Wilson
  Name: KEVIN S. WILSON
  Title: Chief Executive Officer and President
 
 
I, Catherine Grassman, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Heska Corporation on Form 10-Q for the quarter ended June 30, 2021 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Heska Corporation, to the best of my knowledge.

 
Dated: August 4, 2021 By: /s/ Catherine Grassman
  Name: CATHERINE GRASSMAN
  Title: Executive Vice President, Chief Financial Officer
 
A signed original of this written statement required by Section 906 has been provided to Heska Corporation and will be retained by Heska Corporation and furnished to the Securities and Exchange Commission or its staff upon request.