Document

LOVELAND, CO, November 8, 2022 -- Heska Corporation (NASDAQ: HSKA; “Heska” or the “Company”), a leading global provider of advanced veterinary diagnostic and specialty solutions, reported financial results in two segments (North America and International) for its third quarter ended September 30, 2022. In this release, Point of Care is “POC”, Pharmaceuticals, Vaccines and Diagnostics is “PVD”, Other Vaccines and Pharmaceuticals is “OVP”, and basis points is “bps”.


	Q3 2022 ($)	Q3 2021 ($)	Q3 (%) YOY
Consolidated Revenue	$61.5	$60.2	2.1%
North America Revenue	$40.3	$37.8	6.7%
International Revenue	$21.2	$22.4	(5.7)%

	Q3 2022 (%)	Q3 2021 (%)	Q3 YOY bps
Consolidated Gross Margin	43.7%	41.9%	180
Net Loss Margin1	(0.1)%	(2.6)%	250
Adjusted EBITDA Margin1,2	10.3%	9.4%	90

	Q3 2022 ($)	Q3 2021 ($)	Q3 (%) YOY
Net loss attributable to Heska	$(0.4)	$(1.9)	77.0%
Net loss3	$(0.1)	$(1.6)	95.1%
Adjusted EBITDA2	$6.3	$5.6	12.3%
EPS, Diluted	$(0.04)	$(0.19)	78.9%
Non-GAAP EPS, Diluted2	$0.41	$0.20	105.0%

•Strategic initiatives advanced, including new product launches toward commercial rollout and the execution of a definitive agreement to acquire LightDeck Diagnostics (“LightDeck”) to strengthen manufacturing at scale capabilities, to accelerate menu development, and to acquire valuable intellectual property and rights to globally scale the Company's key Element i+® growth platform.

Kevin Wilson, Heska’s Chief Executive Officer and President, commented, “In the third quarter, Heska exceeded nearly all profitability targets despite some softness in reported revenue. The profitability performance is clear throughout the release, as we execute on our European products and subscriptions conversion strategy and North America continues to do well. Turning to sales, underlying patient visits trends in North America are showing an upswing, while International reported top-line remains challenged by seasonal, energy inflation, and economy related lower patient visits and budgets, and significant foreign exchange currency impacts that, when combined with our ongoing, purposeful conversion of legacy customers into higher margin, lower unit price subscriptions, drove a 2.7% reduction in constant currency International POC Lab Consumables. Meanwhile, North America POC Lab Consumables sales grew 11.4%, driven by growing Element AIM®, Element POC®, and Heskaview® Telecytology utilization, and price, highlighting the ongoing contributions from our recent innovations and the resiliency of Heska’s expanding customer base.

“As we work to close this year and begin next, our solutions, selling prices and costs, supply chain, innovations pipeline, and team are broadly stronger and much further along in our strategic plan than last year. Heska remains focused on entering 2023 prepared to Win at Scale and Win at Innovation,” continued Mr. Wilson, “Advancing both goals this quarter, Heska is securing major manufacturing-at-scale and R&D capabilities by acquiring LightDeck, the inventor and producer of Heska’s very important Element i+® platform. In addition to a broad menu of already released and popular immunoassay tests, Element i+® is targeted to launch transformative menu in 2023, including our exclusive point of care Nu.Q® Vet Cancer Screening Test recently announced. Further supporting our 2023 consumables growth, in addition to continued success in Element AIM®, is receipt of our long-awaited USDA clearance on October 20th for our truRapidTM canine heartworm product, in advance of the main 2023 selling season and upcoming new, cloud-based AI-powered Practice Information Management Software (“PIMS”) in the first half of 2023. These and several other exciting product and commercial wins on tap for early 2023, combined with a strong subscriptions base, a solid cash position, a great team, several of the industry's newest and most

Consolidated gross margin expanded approximately 180 bps to 43.7%. International gross margin increased approximately 510 bps to 38.4%, largely driven by the continued execution of ongoing product rationalization efforts to replace lower margin legacy products acquired during the 2020 acquisition of scil Animal Care Company, particularly within POC Lab. The addition of PIMS and other software applications to our product portfolio from our acquisition of VetZ earlier this year favorably impacted gross margin. North America gross margin experienced slight compression of approximately 50 bps to 46.5%, due to product mix and as expected as we continue to install instrument placements of Element AIM®.

Adjusted EBITDA margin, which excludes stock-based compensation and acquisition related costs, non-recurring items and extraordinary charges not indicative of ongoing operations, grew approximately 90 bps (50 bps on a constant currency basis) driven by gross margin gains, partially offset by increased operating costs from investment in growth and new technologies like cloud-based PIMS and new truRapidTM portfolio.

This year's challenges in foreign exchange, inflation, interest rates, labor constraints, supply chain, pandemic-era comparisons, pet patient visit trends, delayed regulatory approvals, and the slower-than-expected launch of truRapidTM single use tests and Element AIM® into Europe and other channels have all combined into headwinds to reaching our 2022 Outlook. We are updating our 2022 Updated Outlook to reflect the accumulation of these factors year to date.

Heska management will host a conference call on November 8, 2022 at 9:00 a.m. MT (11:00 a.m. ET) to discuss the Company’s third quarter 2022 financial results. The call may be accessed by dialing 1-800-239-9838 within the United States and 1-323-794-2551 outside of the United States and referencing conference identification number 7035658. The call will also be webcast online at https://ir.heska.com/events/. A telephonic replay of the conference call will be available through November 22, 2022. The replay may be accessed by dialing 1-844-512-2921 within the United States or 1-412-317-6671 outside of the United States and referencing replay identification number 7035658. The webcast will be archived on the Company’s website for 90 days.

Both segments include Point of Care Lab testing instruments and consumables, single-use offerings such as in-clinic diagnostic tests, digital imaging products, software and services, data services, allergy testing and immunotherapy, and heartworm preventive products. The North America segment also includes private label vaccine and pharmaceutical production under third-party agreements and channels, primarily for herd animal health. For more information, please visit www.heska.com.

This document contains forward-looking information related to the Company. These forward-looking statements generally include statements that are predictive in nature and depend upon or refer to future events or conditions, and include words such as “believes,” “plans,” “anticipates,” “expects,” “intends,” “strategy,” “future,” “opportunity,” “may,” “will,” “should,” “could,” “potential,” or similar expressions. All of the statements in this document, other than historical facts, are forward-looking statements and are based on a number of assumptions that could ultimately prove inaccurate and cause actual results to materially deviate from forward-looking statements. Forward-looking statements in this document include, among other things, statements with respect to Heska's future financial and operating results, future sales, sales split percentages, sales geography percentages, market share, and strategic goals, and the anticipated benefits of the scil, Lacuna, BiEsseA, Biotech, VetZ, and potential LightDeck acquisitions. Such statements are based on current expectations and are subject to a number of risks and uncertainties, including but not limited to, risks and uncertainties related to the ability to achieve the anticipated benefits of recent acquisitions; supplier availability; competing suppliers; any product's ability to performed and be recognized as anticipated, in particular when such product is under development; Heska’s ability to sell and market its products in an economically sustainable fashion, including related to varying customs, cultures, languages and sales cycles and uncertainties with foreign political and economic climates; the impact of foreign exchange rates, inflation, interest rates, and labor constraints; the Company’s ability to integrate the acquired businesses within its existing operations; and new product development and release schedules.

Other factors that could cause actual results to differ materially from those matters expressed in or implied by such forward-looking statements include, among others, risks and uncertainties related to: the impact of the COVID-19 pandemic on our business, results of operations and financial condition; the success of third parties in marketing our products; 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; and our ability to service our convertible notes and comply with their terms. Such factors are set forth under “Risk Factors” in the Company’s most recent annual report on Form 10-K.

income before income taxes, interest, depreciation and amortization), Adjusted EBITDA, Adjusted EBITDA Margin and Non-GAAP earnings per 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. A reconciliation of non-GAAP financial measures and most directly comparable GAAP financial measures is included in this release. Our management has included these measures to assist in comparing performance from period to period on a consistent basis.

Constant currency is a non-GAAP measure utilized by Heska management to measure performance, excluding the impact of translational movements, and is intended to be indicative of results in local currency. As we operate in various foreign countries where the local currency may strengthen or weaken significantly versus the U.S. dollar, we utilize a constant currency measure as an additional metric to evaluate performance without consideration of foreign currency movements. This information is non-GAAP and should be viewed as a supplement to (not a substitute for) our reported results of operations under U.S. GAAP. We calculate the impact of foreign exchange by translating our current period local currency results throughout the year at the average exchange rates during the respective prior year period. The result is the current period results in U.S. dollars, as if foreign exchange rates had not changed from the prior year period.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue, net	$	61,492	$	60,240	$	190,969	$	185,671
Cost of revenue	34,616		34,996		107,621		107,685
Gross profit	26,876		25,244		83,348		77,986

Operating expenses:
Selling and marketing	11,280		10,785		35,042		34,141
Research and development	2,382		1,955		17,164		5,089
General and administrative	13,885		14,937		48,811		40,867
Total operating expenses	27,547		27,677		101,017		80,097
Operating loss	(671)		(2,433)		(17,669)		(2,111)
Interest and other expense (income), net	241		(30)		1,080		1,075
Net loss before taxes and equity in losses of unconsolidated affiliates	(912)		(2,403)		(18,749)		(3,186)
Income tax (benefit) expense:
Current income tax expense (benefit)	235		(63)		450		614
Deferred income tax benefit	(1,069)		(750)		(4,625)		(4,043)
Total income tax benefit	(834)		(813)		(4,175)		(3,429)

Net (loss) income before equity in losses of unconsolidated affiliates	(78)		(1,590)		(14,574)		243
Equity in losses of unconsolidated affiliates	(358)		(308)		(1,094)		(837)


Net loss attributable to Heska Corporation	$	(436)	$	(1,898)	$	(15,668)	$	(594)

Basic loss per share attributable to Heska Corporation	$	(0.04)	$	(0.19)	$	(1.52)	$	(0.06)
Diluted loss per share attributable to Heska Corporation	$	(0.04)	$	(0.19)	$	(1.52)	$	(0.06)

Weighted average outstanding shares used to compute basic (loss) earnings per share attributable to Heska Corporation	10,368		10,195		10,330		9,949
Weighted average outstanding shares used to compute diluted (loss) earnings per share attributable to Heska Corporation	10,368		10,195		10,330		9,949


	September 30,		December 31,
	2022		2021

ASSETS
Current Assets:
Cash and cash equivalents	$	161,074	$	223,574
Accounts receivable, net of allowance for losses of $1,130 and $874, respectively	26,415		27,995
Inventories	57,477		49,361
Net investment in leases, current, net of allowance for losses of $149 and $137, respectively	6,898		6,175
Prepaid expenses	5,269		5,244
Other current assets	5,681		7,206
Total current assets	262,814		319,555

Property and equipment, net	31,059		33,413
Operating lease right-of-use assets	6,810		5,198
Goodwill	129,960		118,826
Other intangible assets, net	60,435		56,705
Deferred tax asset, net	23,763		19,429
Net investment in leases, non-current	23,782		20,128
Investments in unconsolidated affiliates	4,330		5,424
Related party convertible note receivable, net	3,015		6,800
Promissory note receivable from investee, net	13,196		8,448
Other non-current assets	10,903		10,146
Total assets	$	570,067	$	604,072

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable	$	14,749	$	15,374
Accrued liabilities	14,292		19,424
Operating lease liabilities, current	2,681		2,227
Deferred revenue, current, and other	4,869		6,901
Total current liabilities	36,591		43,926

Convertible note, non-current, net	84,357		84,034
Notes payable	13,515		15,900
Deferred revenue, non-current	3,603		3,854

Operating lease liabilities, non-current	4,713		3,509
Deferred tax liability	15,436		12,667
Other liabilities	3,953		4,328
Total liabilities	162,168		168,218

Total stockholders' equity	407,899		435,854
Total liabilities and stockholders' equity	$	570,067	$	604,072


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Net (loss) income(1)	$	(78)		$	(1,590)		$	(14,574)		$	243
Income tax benefit	(834)			(813)			(4,175)			(3,429)
Interest expense, net	315			439			1,111			1,425
Depreciation and amortization	3,501			3,404			10,327			10,084
EBITDA	$	2,904		$	1,440		$	(7,311)		$	8,323
Acquisition related and other non-recurring/extraordinary costs(2)	1,464			(896)			17,092			121
Stock-based compensation	2,321			5,404			12,311			14,861
Equity in losses of unconsolidated affiliates	(358)			(308)			(1,094)			(837)
Adjusted EBITDA	$	6,331		$	5,640		$	20,998		$	22,468
Net (loss) income margin(3)	(0.1)		%	(2.6)		%	(7.6)		%	0.1		%
Adjusted EBITDA margin(3)	10.3		%	9.4		%	11.0		%	12.1		%

(2) To exclude the effect of acquisition related costs, non-recurring items and extraordinary charges not indicative of ongoing operations of $1.5 million charge and $17.1 million charge for the three and nine months ending September 30, 2022, and $0.9 million benefit and $0.1 million charge for the three and nine months ending September 30, 2021. The costs for the three months ended September 30, 2022 are primarily due to acquisition related charges. The costs for the nine months ended September 30, 2022 were incurred primarily as a result of the $3.5 million provision for credit losses for a convertible note receivable, the $0.5 million mark-to-market adjustment of the fair value of the embedded derivative on the convertible note receivable, and a $10.0 million licensing payment. The remainder of the costs in both periods were incurred as a result of acquisition related charges.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
GAAP net (loss) income attributable to Heska per diluted share	$	(0.04)	$	(0.19)	$	(1.52)	$	(0.06)
Acquisition related and other non-recurring/extraordinary costs(1)	0.14		(0.08)		1.62		0.01
Amortization of acquired intangibles(2)	0.14		0.15		0.51		0.45
Purchase accounting adjustments related to inventory and fixed asset step-up(3)	0.05		0.01		0.16		0.03
Stock-based compensation	0.22		0.51		1.17		1.44
Loss on equity investee transactions	0.03		0.03		0.10		0.08
Estimated income tax effect of above non-GAAP adjustments(4)	(0.13)		(0.23)		(1.02)		(0.68)
Non-GAAP net income per diluted share	$	0.41	$	0.20	$	1.02	$	1.27

Shares used in non-GAAP diluted per share calculations	10,508		10,580		10,549		10,321

(1) To exclude the effect of acquisition related costs, non-recurring items and extraordinary charges not indicative of ongoing operations of $1.5 million charge and $17.1 million charge for the three and nine months ending September 30, 2022, and $0.9 million benefit and $0.1 million charge for the three and nine months ending September 30, 2021. The costs for the three months ended September 30, 2022 are primarily due to acquisition related charges. The costs for the nine months ended September 30, 2022 were incurred primarily as a result of the $3.5 million provision for credit losses for a convertible note receivable, the $0.5 million mark-to-market adjustment of the fair value of the embedded derivative on the convertible note receivable, and a $10.0 million licensing payment. The remainder of the costs in both periods were incurred as a result of acquisition related charges.

(4) Represents income tax expense utilizing an estimated effective tax rate that adjusts for non-GAAP measures including: acquisition related, non-recurring and extraordinary costs (excluding items which are not deductible for tax of $0 and $0.1 million expense for the three and nine months ending September 30, 2022, respectively, compared to $0.7 million benefit and $0.6 million benefit for the three and nine months ending September 30, 2021, respectively), amortization of acquired intangibles, purchase accounting adjustments, amortization of debt discount and issuance costs, and stock-based compensation. This incorporates the discrete tax expense related to stock-based compensation of $0.2 million and benefit of $0.3 million for the three and nine months ending September 30, 2022, respectively, compared to benefits of $0.7 million and $1.7 million for the three and nine months ending September 30, 2021, respectively. This also includes the tax benefits related to R&D tax credit of $0.1 million and $1.1 million for the three and nine months ending September 30, 2022, respectively, compared to $0 for each of the three and nine months ending September 30, 2021 respectively. Adjusted effective tax rates are approximately 25% for both periods presented.


Heska Corporation
Jon Aagaard
Investor Relations
970.619.3033
investorrelations@heska.com


	Q3 2022 ($)	Q3 (%) YOY
North America Revenue	$40.3	6.7%
POC Lab Instruments & Other	$3.6	2.3%
POC Lab Consumables	$19.7	11.4%
POC Imaging & Informatics	$7.7	3.4%
PVD1	$5.3	24.3%
OVP2	$4.0	(18.2)%


	Q3 2022 ($)	Q3 (%) YOY	Q3 (%) YOY
		Reported	Constant Currency
International Revenue	$21.2	(5.7)%	7.3%
POC Lab Instruments & Other	$3.7	(2.7)%	13.1%
POC Lab Consumables	$9.4	(16.4)%	(2.7)%
POC Imaging & Informatics	$7.2	23.8%	36.3%
PVD1	$0.8	(46.1)%	(43.2)%