PR Newswire | Nov 4, 2021 08:02AM EDT

11/04 07:00 CDT

Heska Corporation Reports Third Quarter 2021 ResultsNorth America Lab Consumables Sales Up 10.1%Key Strategic Initiatives Advanced, Key Markets Addressed, Key Subscriptions Metrics Achieved LOVELAND, Colo., Nov. 4, 2021

LOVELAND, Colo., Nov. 4, 2021 /PRNewswire/ -- Heska Corporation (NASDAQ: HSKA; "Heska" or "Company"), a leading provider of advanced veterinary diagnostic and specialty products, reported financial results in two segments (North America and International) for its third quarter ended September 30, 2021. In this release, Point of Care is "POC", Pharmaceuticals, Vaccines and Diagnostics is "PVD", Other Vaccines and Pharmaceuticals is "OVP", contract subscription value is "CSV", practice information management software is "PIMS", Biotech Laboratories U.S.A. LLC is "Biotech", BiEsseA Laboratorio Veterinario Srl is "BiEsseA", Lacuna Diagnostics, Inc. is "Lacuna", and scil animal care company GmbH is "scil".

Third Quarter 2021 and Year Over Year ("YOY") Metrics

$ in millions except Earnings Per Share ("EPS")

Q3 ($) Q3 (%) YOY

Consolidated Revenue $60.2 6.4%

North America Revenue $37.8 9.8%

International Revenue $22.4 1.1%

Q3 (%) Q3 YOY bps^(1)

Consolidated Gross Margin 41.9% 60

Net loss margin (2.6)% 660

Adjusted EBITDA Margin^(2) 9.4% (590)

Q3 ($) Q3 (%) YOY

Net loss attributable to Heska $(1.9) 63.6%

Net loss $(1.6) 69.5%

Adjusted EBITDA^(2) $5.6 (34.8)%

EPS, Diluted $(0.19) 66.7%

Non-GAAP EPS, Diluted^(2) $0.20 150.0%

^(1) "bps" is basis points. ^(2) See "Use of Non-GAAP Financial Measures" andrelated reconciliations provided below.

Third Quarter 2021 Highlights

* Quarterly revenue of $60.2 million led by North America POC Lab Consumables growth of 10.1%, attributable to strong utilization, price, growth in key accounts, and expanding menu, and North America POC Imaging growth of 41.1%. * Consolidated gross margin rose approximately 60 bps compared to prior year, to 41.9%. International gross margin rose approximately 280 bps year over year to 33.3%; up sequentially from 32.2%. * Key full-year-ending 2021 CSV Subscriptions Outlook metrics achieved in third quarter. * Heska enters the full line point of care rapids diagnostics market, estimated to be in excess of $500 million annually, with the acquisition of Biotech on September 1, 2021.

Recent Update Highlights

* Element AIM(tm) manufacturing at scale and full commercial launch commenced in October. * Heska enters PIMS solutions market with agreement to acquire VetZ GmbH ("VetZ"), a leading European provider with growing international presence, announced November 2, 2021.

"Heska teams executed incredibly well in the third quarter of 2021 to continue fantastic year-to-date performance," commented Kevin Wilson, Heska's CEO and President. "Highlighting the period, North America POC Lab Consumables sales grew 10.1% in line with our full year guidance, off a very strong prior year comparison, while North America POC Imaging grew 41.1% as we begin to launch our new line of HD digital radiography products to kick off a new refresh cycle we see continuing well in 2022 in North America, Europe, and Australia. Offsetting these results, supply chain shortages in raw materials impacted timing and production in contract manufacturing within OVP and PVD, and equipment delays impacted the launch timing of digital radiography into our International segment in the third quarter; we have worked through these delays - roughly $4.5 million in headwinds - in the third quarter and are well prepared for the final quarter of the year and for next year. Despite these impacts, POC Imaging still did quite well, especially in North America, and consolidated gross margin expanded, led by increases in sales, price and margins in POC Lab Consumables products, and favorable product mix throughout the business."

"Heska advanced several important strategic initiatives in the period as well, with our acquisition of BiEsseA in July and Biotech in September," continued Mr. Wilson. "And this week, we announced our definitive agreement to acquire leading European PIMS provider VetZ. With this announcement, Heska enters the PIMS market as a European leader, with the intent to accelerate VetZ's vision and adoption of its world-class solutions across Heska's base of over 7,000 customers to create a global leader with the most compelling all-in-one subscription platform in veterinary medicine. In just one short year, Heska has assembled what I and thousands of others believe is the best combined offering for subscribers, now housed directly within the Heska family, by adding key components to our fully refreshed POC blood and imaging diagnostics, including: point of care urine and fecal diagnostics with the launch of Element AIM(tm), digital cytology telemedicine with the acquisition of Lacuna, single-use rapids diagnostics with the acquisition of Biotech, PIMS and PACS with the acquisition of VetZ, and entry into European central reference laboratory services with the acquisition of BiEsseA. This is a remarkable leap forward that in my experience is unmatched by anyone in our industry. Now, we will bring to bear our full attention and skills to welcome, integrate, expand, and scale our full capabilities in subscriptions to help veterinarians across all our expanded geographies to capture value and improve pet healthcare access, outcomes and satisfaction for pet families."

"With the supply chain issues largely resolved, we are on track to finish the year strongly as we look toward a wonderful 2022 powered by our new capabilities," concluded Mr. Wilson. "Element AIM(tm) components have been secured and Heska teams are currently installing instruments in-line with our new commercial rollout run rate. Early feedback is overwhelmingly positive and our early pre-sold order book points to a strong 2022 Element AIM(tm) contribution. Our International business is advancing nicely as well, ahead of schedule in many ways - especially in margin capture - as we continue to optimize operations and unify around commercial strategy. Also key to our successes, Heska teams met several full year 2021 Subscriptions Outlook metrics earlier this year and we have continued to run up the score. Finally, as a result of these accomplishments and more, we are on track to achieve our previously raised 2021 Outlook targets for POC Lab Consumables growth rate, gross margin and revenue, the last of which, given supply chain impacts in the third quarter, foreign exchange headwind trends, the current 'lumpy' state of the world, and the short calendar ahead, we believe can be prudently expected to be towards the lower end of the range or approximately 27% growth above 2020. While not at the top end of our range, I am pleased. We are on pace to finish 2021 one full year ahead of our multi-year outlook for the revenue and gross margin targets shared at Investor Day November 2020 which is really a remarkable feat. On top of this accomplishment, and perhaps more importantly, we have assembled the assets and the geographies to win in the much larger competition and to get a much bigger piece of the rewards; now we have footholds or leadership positions in all key legs of the stool: POC blood-plasma diagnostics, POC urine-fecal diagnostics, POC rapids diagnostics, imaging diagnostics, telemedicine specialty services, central reference laboratory, and PIMS, all tied together by a unified, multi-year subscriptions model. We are advancing in the businesses we want to be in and are moving quickly to offer the full suite in more geographies, in subscription, at scale, while adding to menu and utilization. I'm incredibly proud of our team's effort in the first three quarters of 2021, and as we have begun the fourth quarter, I look forward to continued good work in the final two months of this year. This is, by far, the most exciting time in Heska's history."

Revenue

North America Segment Revenue

Q3 ($) Q3 (%) YOY

North America Revenue $ 37.8 9.8%

POC Lab Instruments & Other 3.5 (5.9)%

POC Lab Consumables 17.7 10.1%

POC Imaging 7.4 41.1%

PVD^(1) 4.3 (21.0)%

OVP^(2) 4.8 23.9%

^(1) "PVD" is Pharmaceuticals, Vaccines and Diagnostic, and includes Tri-Heart(r) heartworm and Allercept(r) allergy testing and therapeutics.

^(2) "OVP" is former Other Vaccines and Pharmaceuticals segment contractmanufacturing products.

Note: Numbers may not foot due to rounding.

International Segment Revenue

Q3 ($) Q3 (%) YOY

International Revenue $22.4 1.1%

POC Lab Instruments & Other $3.8 30.1%

POC Lab Consumables $11.2 (1.4)%

POC Imaging $5.8 (16.8)%

PVD^(1) $1.6 83.4%

^(1) "PVD" is Pharmaceuticals, Vaccines and Diagnostic, and includes allergytesting and therapeutics.

ProfitabilityConsolidated gross margin improved approximately 60 bps to 41.9%. International gross margin improved approximately 280 bps to 33.3%, largely due to increased use of higher margin consumables under new subscriptions. North America gross margin declined approximately 130 bps compared to prior year, to 47.0% in the third quarter, in part due to idle plant and unfavorable product mix. We continue to see substantial opportunity to move International gross margin toward the North America level.

Operating margin declined 440 bps to (4.0%) because of increased operating expenses of $4.5 million. Higher cash compensation, including short-term incentives, as well as stock-based incentive costs as the Company continues to achieve its strategic objectives were the primary drivers. Overall, general and administrative costs were higher due to increased consulting and other professional services and one-time acquisition and other related costs due to business development. Adjusted EBITDA margin declined 590 bps for the same reasons as mentioned above excluding one-times and stock-based compensation.

LiquidityWe continue to demonstrate a strong liquidity position with cash of $222.9 million.

Earnings Conference CallHeska management will host a conference call on November 4, 2021 at 9:00 a.m. MT (11:00 a.m. ET) to discuss the Company's third quarter 2021 financial results. The call may be accessed by dialing 1-888-394-8218 within the United States and 1-323-701-0225 outside of the United States and by referencing conference identification number 2365183. The call will also be accessible online at https://ir.heska.com/events/. A telephonic replay of the conference call will be available through November 18, 2021. 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 by referencing replay identification number 2365183. The webcast will be archived on the Company's website for 90 days.

About HeskaHeska Corporation (NASDAQ: HSKA) manufactures, develops and sells advanced veterinary diagnostic and specialty healthcare products through its two business segments: North America and International. Both segments include Point of Care Lab testing instruments and consumables, digital imaging products, software and services, data services, allergy testing and immunotherapy, and single-use offerings such as in-clinic diagnostic tests 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.

Forward-Looking StatementsThis 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; the anticipated benefits of the scil, Lacuna, BiEsseA, Biotech, and VetZ 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 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 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; 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.

Use of Non-GAAP Financial MeasuresIn addition to financial measures presented on the basis of accounting principles generally accepted in the U.S. ("U.S. GAAP"), we also present third quarter 2021 and 2020 EBITDA (net 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.

HESKA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF LOSS (in thousands, except per share amounts) (unaudited)



Three Months Ended Nine Months Ended September 30, September 30,

2021 2020 2021 2020

Revenue, net $60,240 $56,636 $185,671$133,001

Cost of revenue 34,996 33,232 107,685 78,285

Gross profit 25,244 23,404 77,986 54,716



Operating expenses:

Selling and marketing 10,785 10,751 34,141 27,714

Research and development 1,955 2,197 5,089 6,021

General and administrative 14,937 10,253 40,867 29,852

Total operating expenses 27,677 23,201 80,097 63,587

Operating (loss) income (2,433) 203 (2,111) (8,871)

Interest and other (income) expense, net (30) 2,011 1,075 6,353

Loss before income taxes and equity in losses of unconsolidated (2,403) (1,808) (3,186) (15,224) affiliates

Income tax (benefit) expense:

Current income tax (benefit) expense (63) 370 614 425

Deferred income tax (benefit) expense (750) 3,043 (4,043) 1,268

Total income tax (benefit) expense (813) 3,413 (3,429) 1,693



Net (loss) income before equity in losses of unconsolidated (1,590) (5,221) 243 (16,917) affiliates

Equity in losses of unconsolidated affiliates (308) (83) (837) (300)

Net loss after equity in losses of unconsolidated affiliates (1,898) (5,304) (594) (17,217)

Net loss attributable to redeemable non-controlling interest- (85) - (353)

Net loss attributable to Heska Corporation $(1,898)$(5,219)$(594) $(16,864)



Basic loss per share attributable to Heska Corporation $(0.19) $(0.57) $(0.06) $(1.99)

Diluted loss per share attributable to Heska Corporation $(0.19) $(0.57) $(0.06) $(1.99)



Weighted average outstanding shares used to compute basic loss 10,195 9,123 9,949 8,486 per share attributable to Heska Corporation

Weighted average outstanding shares used to compute diluted loss 10,195 9,123 9,949 8,486 per share attributable to Heska Corporation

HESKA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)



September 30,December 31,

2021 2020



ASSETS

Current Assets:

Cash and cash equivalents $ 222,900 $ 86,334

Accounts receivable, net of allowance for losses of $893 and $769, respectively 25,286 31,080

Inventories 45,036 40,037

Net investment in leases, current, net of allowance for losses of $116 and 5,703 4,794 $192, respectively

Prepaid expenses 5,518 3,875

Other current assets 7,177 5,155

Total current assets 311,620 171,275



Property and equipment, net 33,727 35,542

Operating lease right-of-use assets 5,664 5,457

Goodwill 119,584 88,276

Other intangible assets, net 59,334 55,992

Deferred tax asset, net 18,601 5,694

Net investment in leases, non-current 17,188 15,789

Investments in unconsolidated affiliates 5,867 6,704

Related party convertible note receivable, net 6,853 6,671

Promissory note receivable from investee, net 8,861 -

Other non-current assets 9,895 8,439

Total assets $ 597,194 $ 399,839



LIABILITIES AND STOCKHOLDERS' EQUITY



Current liabilities:

Accounts payable $ 12,064 $ 15,119

Accrued liabilities 17,860 18,055

Operating lease liabilities, current 2,251 2,087

Deferred revenue, current, and other 5,759 6,854

Total current liabilities 37,934 42,115



Convertible note, non-current, net 83,928 48,459

Notes payable 15,900 -

Deferred revenue, non-current 3,870 4,667

Other long-term borrowings 18 554

Operating lease liabilities, non-current 3,933 3,858

Deferred tax liability 12,206 11,856

Other liabilities 4,563 1,277

Total liabilities 162,352 112,786



Total stockholders' equity 434,842 287,053

Total liabilities and stockholders' equity $ 597,194 $ 399,839

HESKA CORPORATION AND SUBSIDIARIES RECONCILIATION OF GAAP NET (LOSS) INCOME TO NON-GAAP ADJUSTED EBITDA ($ in thousands) (unaudited)



Three Months Ended Nine Months Ended September 30, September 30,

2021 2020 2021 2020

Net (loss) income^(1) $(1,590) $(5,221) $243 $(16,917)

Income tax (benefit) expense (813) 3,413 (3,429) 1,693

Interest expense, net 439 2,216 1,425 6,542

Depreciation and amortization 3,404 3,337 10,084 8,041

EBITDA $1,440 $3,745 $8,323 $(641)

Acquisition-related and other one-time (benefits) costs^(2)(896) 776 121 7,379

Stock-based compensation 5,404 4,132 14,861 6,930

Equity in losses of unconsolidated affiliates (308) (83) (837) (300)

Net loss attributable to non-controlling interest - 85 - 353

Adjusted EBITDA $5,640 $8,655 $22,468 $13,721

Net (loss) income margin^(3) (2.6) %(9.2) %0.1 %(12.7) %

Adjusted EBITDA margin^(3) 9.4 %15.3 %12.1 %10.3 %

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

^(2) To exclude the effect of one-time net benefits of $0.9 million andone-time charges of $0.1 million for the three and nine months ending September30, 2021, and the one-time charges of $0.8 million and $7.4 million for thethree and nine months ending September 30, 2020. These costs were incurredprimarily as a result of acquisition-related charges, as well as litigationsettlement proceeds of $1.2 million and a reduction of contingent considerationof $0.7 million in three and nine months ended September 30, 2021.

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

HESKA CORPORATION AND SUBSIDIARIES RECONCILIATION OF GAAP TO NON-GAAP NET INCOME (LOSS) PER DILUTED SHARE ($ in thousands) (unaudited)



Three Months Ended Nine Months Ended September 30, September 30,

2021 2020 2021 2020

GAAP net loss attributable to Heska per diluted share $(0.19)$(0.57)$(0.06)$(1.99)

Acquisition-related and other one-time (benefits) costs^(1) (0.08) 0.08 0.01 0.87

Amortization of acquired intangibles^(2) 0.15 0.16 0.45 0.42

Purchase accounting adjustments related to inventory and fixed asset step-up^ 0.01 0.03 0.03 0.07 (3)

Amortization of debt discount and issuance costs - 0.16 - 0.54

Stock-based compensation 0.51 0.44 1.44 0.82

Loss on equity investee transactions 0.03 0.01 0.08 0.04

Estimated income tax effect of above non-GAAP adjustments^(4) (0.23) (0.23) (0.68) (0.63)

Non-GAAP net income per diluted share $0.20 $0.08 $1.27 $0.14



Shares used in diluted per share calculations 10,580 9,447 10,321 8,486

^(1) To exclude the effect of one-time net benefits of $0.9 million andone-time charges of $0.1 million for the three and nine months ending September30, 2021, and $0.8 million and $7.4 million for the three and nine monthsending September 30, 2020. These costs were incurred primarily as a result ofacquisition related charges, as well as litigation settlement proceeds of $1.2million and a reduction of contingent consideration of $0.7 million in threeand nine months ended September 30, 2021.

^(2) To exclude the effect of amortization of acquired intangibles of $1.6million and $4.6 million in the three and nine months ended September 30, 2021,compared to $1.5 million and $3.6 million in the three and nine months endedSeptember 30, 2020. These costs were incurred as part of the purchaseaccounting adjustments for recent acquisitions.

^(3) To exclude the effect of purchase accounting adjustments for inventorystep up amortization of $0.1 million and $0.3 million for the three and ninemonths ended September 30, 2021, compared to $0.2 million and $0.6 million inthe three and nine months ended September 30, 2020.

^(4) Represents income tax expense utilizing an estimated effective tax ratethat adjusts for non-GAAP measures including: acquisition-related and otherone-time costs (excluding items which are not deductible for tax of $0.7million and $0.6 million benefit for the three and nine months ended September30, 2021, respectively, compared to $30 thousand and $4.0 million cost for thethree and nine months ended September 30, 2020, respectively), amortization ofacquired intangibles, purchase accounting adjustments, amortization of debtdiscount and issuance costs, and stock-based compensation. This incorporatesthe discrete tax benefits related to stock-based compensation of $0.7 millionand $1.7 million for the three and nine months ended September 30, 2021,respectively, compared to $0.1 million and $0.5 million for the three and ninemonths ended September 30, 2020, respectively. Adjusted effective tax rates areapproximately 25% for all periods presented.

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SOURCE Heska Corporation