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

For the quarterly period ended March 31, 2022
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-20220331_g1.jpg
HESKA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware77-0192527
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

3760 Rocky Mountain Avenue
Loveland, Colorado


80538
(Address of principal executive offices)(Zip Code)

Registrant's telephone number, including area code: (970493-7272

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock, $0.01 par valueHSKAThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated filer
Accelerated filer ☐
Non-accelerated filer
Smaller Reporting Company
Emerging growth company






If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   No 
10,790,622 shares of the Registrant's Public Common Stock, $0.01 par value, were outstanding at May 5, 2022.





TABLE OF CONTENTS 
   Page
PART I - FINANCIAL INFORMATION
 Item 1.
       Note 2, Revenue
       Note 5, Income Taxes
       Note 6, Leases
       Note 10, Inventories
Item 2.
 Item 3.
 Item 4.
PART II - OTHER INFORMATION
 Item 1.
 Item 1A.
Item 2.
 Item 6.
 
HESKA, scil, ALLERCEPT, HemaTrue, Solo Step, Element DC, Element HT5, Element POC, Element i, Element i+, Element COAG, Element DC5X and Element RC, Element RCX, Element RCX3, Element AIM, 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. Nu.Q is a registered trademark of Belgian Volition SPRL. This quarterly report on Form 10-Q also refers to trademarks and trade names of other organizations.
-i-




Our Certificate of Incorporation, as amended (the “Charter”), authorizes three classes of stock: Original Common Stock, Public Common Stock, and Preferred Stock. Pursuant to an NOL Protective Amendment to the Charter adopted in 2010, all shares of Original Common Stock then outstanding were automatically reclassified into shares of Public Common Stock. Our Public Common Stock trades on the Nasdaq Stock Market LLC. In this Quarterly Report on Form 10-Q, references to “Public Common Stock” and “Common Stock” are references to our Public Common Stock, unless the context otherwise requires.
-ii-



Statement Regarding Forward Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For this purpose, any statements contained herein that are not statements of current or historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "scheduled," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ materially from those expressed or forecasted in any such forward-looking statements as a result of certain factors. Such factors are set forth in "Risk Factors," in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2021, as well as in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q and include, among others, risks and uncertainties related to:

the impact of the COVID-19 pandemic on 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;
our ability to service our convertible notes and comply with their terms.

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

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



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
 March 31,December 31,
 20222021
ASSETS
Current assets:  
Cash and cash equivalents$172,744 $223,574 
Accounts receivable, net of allowance for losses of $858 and $874, respectively
26,541 27,995 
Inventories55,222 49,361 
Net investment in leases, current, net of allowance for losses of $119 and $137, respectively
6,544 6,175 
Prepaid expenses5,389 5,244 
Other current assets6,309 7,206 
Total current assets272,749 319,555 
Property and equipment, net33,818 33,413 
Operating lease right-of-use assets8,154 5,198 
Goodwill139,990 118,826 
Other intangible assets, net71,839 56,705 
Deferred tax asset, net21,503 19,429 
Net investment in leases, non-current21,972 20,128 
Investments in unconsolidated affiliates5,043 5,424 
Related party convertible note receivable, net 6,880 6,800 
Promissory note receivable from investee, net8,464 8,448 
Other non-current assets11,259 10,146 
Total assets$601,671 $604,072 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:  
Accounts payable$12,375 $15,374 
Accrued liabilities19,774 19,424 
Operating lease liabilities, current2,504 2,227 
Deferred revenue, current, and other5,878 6,901 
Total current liabilities40,531 43,926 
Convertible note, non-current, net84,140 84,034 
Notes payable15,900 15,900 
Deferred revenue, non-current3,711 3,854 
Operating lease liabilities, non-current6,211 3,509 
Deferred tax liability17,461 12,667 
Other liabilities5,122 4,328 
Total liabilities173,076 168,218 
Stockholders' equity:  
Preferred stock, $0.01 par value, 2,500,000 shares authorized, none issued or outstanding
  
Common stock, $0.01 par value, 20,000,000 shares authorized, respectively, none issued or outstanding
  
Public common stock, $0.01 par value, 20,000,000 shares authorized, 10,785,620 and 10,712,347 shares issued and outstanding, respectively
108 107 
Additional paid-in capital585,123 579,354 
Accumulated other comprehensive income1,994 5,037 
Accumulated deficit(158,630)(148,644)
Total stockholders' equity428,595 435,854 
Total liabilities and stockholders' equity$601,671 $604,072 

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



HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(in thousands, except per share amounts)
(unaudited)
 Three Months Ended March 31,
 20222021
Revenue, net$64,800 $60,503 
Cost of revenue35,655 35,033 
Gross profit29,145 25,470 
Operating expenses: 
Selling and marketing11,997 10,907 
Research and development12,456 1,186 
General and administrative16,146 12,359 
Total operating expenses40,599 24,452 
Operating (loss) income(11,454)1,018 
Interest and other expense, net359 526 
Net (loss) income before taxes and equity in losses of unconsolidated affiliates(11,813)492 
Income tax (benefit) expense: 
Current income tax expense158 641 
Deferred income tax benefit(2,366)(2,206)
Total income tax benefit(2,208)(1,565)
Net (loss) income before equity in losses of unconsolidated affiliates(9,605)2,057 
Equity in losses of unconsolidated affiliates(381)(186)
Net (loss) income attributable to Heska Corporation$(9,986)$1,871 
Basic (loss) earnings per share attributable to Heska Corporation$(0.97)$0.20 
Diluted (loss) earnings per share attributable to Heska Corporation$(0.97)$0.19 
Weighted average outstanding shares used to compute basic (loss) earnings per share attributable to Heska Corporation10,273 9,478 
Weighted average outstanding shares used to compute diluted (loss) earnings per share attributable to Heska Corporation10,273 9,844 
 
See accompanying notes to condensed consolidated financial statements.
-2-



HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands) 
(unaudited)
Three Months Ended March 31,
 20222021
Net (loss) income attributable to Heska Corporation$(9,986)$1,871 
Other comprehensive loss: 
Translation adjustments and losses from intra-entity transactions(3,043)(5,383)
Comprehensive loss attributable to Heska Corporation$(13,029)$(3,512)
 
See accompanying notes to condensed consolidated financial statements.






-3-



HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands) 
(unaudited)
 Preferred StockCommon Stock 
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
 
 
Accumulated
Deficit
 
Total
Stockholders'
Equity
Three Months Ended March 31, 2022 and 2021SharesAmountSharesAmount
Balances, December 31, 2020 $ 9,476 $95 $423,650 $14,169 $(150,861)$287,053 
Adoption of accounting standards— — — — (29,834)— 3,365 (26,469)
Balances, January 1, 2021, as adjusted  9,476 95 393,816 14,169 (147,496)260,584 
Net income attributable to Heska Corporation— — — — — — 1,871 1,871 
Issuance of common stock, net of forfeitures and shares withheld for employee taxes— — 1  178 — — 178 
Equity offering, net of issuance costs— — 941 9 164,177 — — 164,186 
Stock-based compensation— — — — 3,837 — — 3,837 
Other comprehensive loss— — — — — (5,383)— (5,383)
Balances, March 31, 2021 $ 10,418 $104 $562,008 $8,786 $(145,625)$425,273 
Balances, December 31, 2021 $ 10,712 $107 $579,354 $5,037 $(148,644)$435,854 
Net loss attributable to Heska Corporation— — — — — — (9,986)(9,986)
Issuance of common stock, net of forfeitures and shares withheld for employee taxes— — 74 1 (3,201)— — (3,200)
Stock-based compensation— — — — 5,110 — — 5,110 
Equity contingent consideration— — — — 3,860 — — 3,860 
Other comprehensive loss— — — — — (3,043)— (3,043)
Balances, March 31, 2022 $ 10,786 $108 $585,123 $1,994 $(158,630)$428,595 
See accompanying notes to condensed consolidated financial statements.
-4-



HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Three Months Ended
March 31,
 20222021
Cash flows from operating activities:   
Net (loss) income attributable to Heska Corporation$(9,986)$1,871 
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:  
Depreciation and amortization3,300 3,571 
Non-cash impact of operating leases673 526 
Deferred tax benefit(2,366)(2,206)
Stock-based compensation5,110 3,837 
Change in fair value of contingent consideration(236) 
Equity in losses of unconsolidated affiliates381 186 
Accretion of discounts and issuance costs11 22 
Other (gains) losses(473)207 
Changes in operating assets and liabilities (net of the effect of acquisitions):  
Accounts receivable2,060 858 
Inventories(6,528)(1,818)
Lease receivables(2,248)49 
Other assets(288)(942)
Accounts payable(3,069)153 
Other liabilities(4,006)(4,977)
Net cash (used in) provided by operating activities(17,665)1,337 
Cash flows from investing activities:  
Acquisition of Lacuna, net of cash acquired (3,882)
Acquisition of VetZ, net of cash acquired(29,509) 
Promissory note receivable issuance (9,000)
Capital expenditures(334)(262)
Proceeds from disposition of property and equipment 13 
Net cash used in investing activities(29,843)(13,131)
Cash flows from financing activities:  
Payment of stock issuance costs (217)
Proceeds from issuance of common stock1,761 165,357 
Payments for taxes related to shares withheld for employee taxes(4,961)(679)
Repayments of other debt(62)(106)
Net cash (used in) provided by financing activities(3,262)164,355 
Foreign exchange effect on cash and cash equivalents(60)(440)
Net (decrease) increase in cash and cash equivalents(50,830)152,121 
Cash and cash equivalents, beginning of period223,574 86,334 
Cash and cash equivalents, end of period$172,744 $238,455 
Supplemental disclosure of cash flow information:
Non-cash transfers of equipment between inventory and property and equipment, net$749 $1,549 
Contingent consideration for acquisitions$3,860 $1,700 
Indemnity holdback and net working capital adjustment for acquisitions$1,608 $370 
Accrued preferred issuance costs$ $97 
See accompanying notes to condensed consolidated financial statements.
-5-


HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Heska Corporation and its wholly-owned subsidiaries ("Heska", the "Company", "we" or "our") sell advanced veterinary diagnostic and specialty products. Our offerings include Point of Care ("POC") laboratory instruments and consumables, single-use offerings such as in-clinic diagnostics tests; Point of Care digital imaging diagnostic instruments and veterinary practice information management software solutions (“PIMS”); digital cytology services; vaccines; local and cloud-based data services; allergy testing and immunotherapy; and heartworm preventive products. Our core focus is on supporting veterinarians in the canine and feline healthcare space.
Basis of Presentation and Consolidation
The accompanying interim Condensed Consolidated Financial Statements are unaudited. The interim unaudited Condensed Consolidated Financial Statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include normal, recurring adjustments, necessary to present fairly the financial position of the Company as of March 31, 2022, and the results of our operations and statements of stockholders' equity for the three months ended March 31, 2022 and 2021, and cash flows for the three months ended March 31, 2022 and 2021.
The unaudited Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. Our unaudited Condensed Consolidated Financial Statements include our accounts and the accounts of our wholly-owned subsidiaries since their respective dates of acquisitions. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year or any future period, particularly in light of the COVID-19 pandemic and its effects on the domestic and global economies as described below. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2021 and other financial information filed with the SEC.
Beginning in the first quarter of 2020, to limit the spread of COVID-19, governments took various actions including the issuance of stay-at-home policies and social distancing procedures and guidelines, causing some businesses to adjust, reduce or suspend business and operating activities. Veterinary care is widely recognized as an "essential" service for pet owners, and veterinarians continued to deliver essential medical care for sick and injured pets. The stay-at-home policies deployed early in 2020 to combat the spread of COVID-19 resulted in a decrease in companion animal clinical visits, including delay of elective procedures and wellness visits and as a result, 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. In some part, and of different degrees depending on the geography, due to the introduction and acceptance of COVID-19 vaccines, restrictions have eased in many of the countries in which we operate. Global diagnostic animal health demand continued throughout 2021 and into the first quarter of 2022. While this trend is encouraging, with the rise in COVID-19 variants, the extent to which the continuation, or another wave, of COVID-19, or an outbreak of other health epidemics could impact our business, results of operations and financial condition, including the potential for write-offs or impairments of assets and suspension of capital investments, will depend on future developments. We are unable to predict with certainty the effects of the COVID-19 pandemic on our customers, suppliers and vendors, as well as the
-6-


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


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.
Fair Value of Financial Instruments
In accordance with ASC 820, Fair Value Measurements (“ASC 820”), the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Quoted prices in active markets for similar assets and liabilities, quoted prices for identically similar assets or liabilities in markets that are not active and models for which all significant inputs are observable either directly or indirectly.
Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs for inactive markets.
The Company's financial instruments consist of cash and cash equivalents, short-term trade receivables and payables, long-term note receivables with embedded derivative assets, contingent consideration liabilities, notes payable for acquisitions and its 3.75% Convertible Senior Notes due 2026 (the "Notes"). The carrying values of cash and cash equivalents and short-term trade receivables and payables approximate fair value because of the short-term nature of the instruments.
-7-


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



The fair values of our financial instruments at March 31, 2022 and December 31, 2021 were (in thousands):
 TotalLevel 1Level 2Level 3
2022
Financial Assets
Convertible note receivable embedded derivative$888 $ $ $888 
Promissory note receivable derivative337   337 
Financial Liabilities
BiEsseA contingent consideration1,955   1,955 
Notes payable15,900   15,900 
Balances, March 31, 2022$19,080 $ $ $19,080 
2021TotalLevel 1Level 2Level 3
Financial Assets
Convertible note receivable embedded derivative$888 $ $ $888 
Promissory note receivable embedded derivative337   337 
Financial Liabilities
BiEsseA contingent consideration2,334   2,334 
Notes payable15,900   15,900 
Balances, December 31, 2021$19,459 $ $ $19,459 
The Company's financial assets based upon Level 3 inputs include embedded derivatives relating to its note receivables. The Company determined the redemption features of its convertible note receivable represents an embedded derivative. The estimated fair value of the embedded derivative asset is evaluated through Level 3 inputs using a probability-weighted scenario analysis. The Company determined the warrant associated with its promissory note receivable represents a derivative. The estimated fair value of the derivative asset is evaluated through Level 3 inputs, using an enterprise valuation model. For additional information regarding the Company's note receivables and derivatives, refer to Note 17, Notes Receivable.
The estimated fair value of the Company's 3.75% Convertible Senior Notes due in 2026 (the "Notes"), is disclosed at each reporting period and is evaluated through Level 2 inputs with consideration of quoted market prices in less active markets. For additional information regarding the Company's accounting treatment for the issuance of the Notes, refer to Note 16, Convertible Notes.
The Company's financial liabilities based upon Level 3 inputs include contingent consideration arrangements and notes payable relating to its acquisitions of Lacuna Diagnostics, Inc. ("Lacuna"), BiEsse A-Laboratorio die Analisi Veterinarie S.r.l. (“BSA”), and Biotech Laboratories U.S.A. LLC ("Biotech"). The Company is obligated to pay contingent consideration payments of $2.0 million in connection with the Lacuna acquisition based on the achievement of certain performance metrics within a twelve month period ("Initial Earn Out Period"), reducing to $1.0 million if such metrics were met in a twelve month period subsequent to the Initial Earn Out Period. The fair value of the Lacuna contingent consideration was $0 as of both December 31, 2021 and March 31, 2022. The Company is obligated to pay contingent consideration payments of $2.9 million in connection with the BSA acquisition based on the achievement of certain revenue metrics within three annual periods after 2021. The Company is obligated to pay contingent notes of up to $17.5 million in connection
-8-


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


with the Biotech acquisition based on the achievement of certain product development milestones or at a predetermined date in the future. Refer to Note 3, Acquisitions and Related Party Items for further discussion.
The fair value of our contingent consideration and notes payable arrangements are determined based on a probability-weighted outcome analysis. The fair value of the contingent consideration and notes payable liabilities associated with future payments were based on several factors, the most significant of which are the financial and product development performance of the acquired businesses. For the contingent consideration liabilities, the Company will update its assumptions each reporting period based on new developments and record such amounts at fair value based on the revised assumptions until the agreements expire. Changes in fair value are recorded in the Condensed Consolidated Statements of (Loss) Income within general and administrative expenses. The note payable associated with the Biotech acquisition is not adjusted to fair value each period.
The following table presents the changes of our Level 3 assets and liabilities as of March 31, 2022 (in thousands):
Derivative AssetsContingent Consideration LiabilityNotes Payable
Convertible note receivablePromissory note receivableBSABiotech
Balances, December 31, 2021$888 $337 $2,334 $15,900 
Acquisition value    
Cash payments    
Changes in fair value, including foreign currency adjustments  (379) 
Balances, March 31, 2022$888 $337 $1,955 $15,900 
Significant Accounting Policies
Our accounting policies are described in our audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2021, and other than the recently adopted accounting pronouncements and revenue recognition updates described below, have not changed materially since such filing.
Revenue Recognition
With the acquisition of VetZ GmbH (“VetZ”) on January 3, 2022, the Company entered the market for veterinary practice information management software solutions (“PIMS”). Revenue for the sale of software licenses is recognized at a point in time upon delivery of the software. The software has significant stand-alone functionality, and provides the customer with the right to use the intellectual property as it exists at the point in time at which the license is granted. Revenue for support services, cloud-based services, and installation and training is recognized over time as the services are performed. Refer to Note 3 for further details regarding the VetZ acquisition.
-9-


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


Adoption of New Accounting Pronouncements
Effective January 1, 2022, we adopted ASU 2021-05, Leases (Topic 842), Lessors- Certain Leases with Variable Lease Payments. This guidance amends the lease classification accounting for lessors for certain leases with variable lease payments that do not depend on a reference index or a rate and would have resulted in the recognition of a loss at lease commencement if classified as a sale-type or direct financing lease. Under the new guidance, these leases will be classified as an operating lease. We evaluated the impact of the standard on our consolidated financial statements and the adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures.
Effective January 1, 2022, we early adopted ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This guidance requires an acquiring entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, the acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. We evaluated the impact of the standard on our consolidated financial statements and the adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures.

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.

The following table summarizes our segment revenue (in thousands):
Three Months Ended March 31,
20222021
North America Revenue:
POC Lab Instruments & Other$4,647 $2,988 
POC Lab Consumables18,637 16,951 
POC Imaging & Informatics6,051 6,688 
PVD4,576 6,864 
OVP3,463 3,781 
Total North America Revenue$37,374 $37,272 
International Revenue:
POC Lab Instruments & Other$3,733 $3,014 
POC Lab Consumables11,748 12,225 
POC Imaging & Informatics10,962 6,658 
PVD983 1,334 
Total International Revenue$27,426 $23,231 
Total Revenue$64,800 $60,503 

-10-


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



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.

As of March 31, 2022, the aggregate amount of the transaction price allocated to remaining minimum performance obligations was approximately $178.1 million. As of March 31, 2022, the Company expects to recognize revenue as follows (in thousands):
Year Ending December 31,Revenue
2022 (remaining)$32,055 
202340,330 
202435,663 
202529,854 
202624,315 
Thereafter15,888 
$178,105 

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled contract assets, deferred revenue, and customer deposits and billings in excess of revenue recognized. In addition, the Company defers certain costs incurred to obtain contracts.

Contract Assets

Certain unbilled amounts related to long-term contracts for which we provide a free term to the customer are recorded in "Other current assets" and "Other non-current assets" on the accompanying Condensed Consolidated Balance Sheets. The collection of these balances occurs over the term of the underlying contract. The balances as of March 31, 2022 were $1.5 million and $5.3 million for current and non-current assets, respectively, shown net of related unearned interest. The balances as of December 31, 2021 were $1.5 million and $5.1 million for current and non-current assets, respectively, shown net of related unearned interest.

-11-


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


Contract Liabilities

The Company receives cash payments from customers for licensing fees or other arrangements that extend for a specified term. These contract liabilities are classified as either current or long-term in the Condensed Consolidated Balance Sheets based on the timing of when the Company expects to recognize revenue. As of March 31, 2022 and December 31, 2021, contract liabilities were $9.1 million and $9.6 million, respectively, and are included within "Deferred revenue, current, and other" and "Deferred revenue, non-current" in the accompanying Condensed Consolidated Balance Sheets. The decrease in the contract liability balance during the three-month period ended March 31, 2022 is approximately $2.7 million of revenue recognized during the period, offset by approximately $1.5 million of additional deferred sales in 2022, and the acquisition of VetZ contract liabilities of approximately $0.7 million. Contract liabilities are reported on the accompanying Condensed Consolidated Balance Sheets on a contract-by-contract basis.

3.    ACQUISITIONS AND RELATED PARTY ITEMS
VetZ Acquisition
On January 3, 2022, the Company acquired 100% of the equity of VetZ GmbH (“VetZ”), a European leader in veterinary practice information management software solutions (“PIMS”), for an aggregate purchase price of approximately $36.2 million. The purchase price consisted of approximately $32.4 million in cash, including a general indemnity holdback of approximately $1.4 million to be released within 18 months of closing, a net working capital adjustment of $0.2 million, and contingent consideration as described below.
As additional consideration for the acquisition, the Company agreed to a contingent earn-out of $15.5 million in Heska stock, which will be issued in tranches based on future financial and non-financial milestones. The fair value of the contingent consideration as of the acquisition date was approximately $3.9 million, determined using a Monte-Carlo simulation model. The contingent consideration was determined to be classified as equity, and therefore is not subsequently remeasured each reporting period and subsequent settlement of the obligation will be accounted for within equity.
The purchase price exceeded the fair value of the identifiable net assets, resulting in goodwill of $22.6 million, all of which is attributable to our International segment. The goodwill resulting from this acquisition consists of new product offerings from entering the PIMS market. All of the goodwill is tax deductible for purposes of calculating Controlled Foreign Corporation tested income, which may result in a decrease to the Company's future U.S. federal tax liability.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of January 3, 2022. The total purchase consideration is subject to customary working capital adjustments.
-12-


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


The information below represents the preliminary purchase price allocation as of the acquisition date (in thousands):
January 3, 2022
Purchase price in cash$32,368 
Fair value of equity contingent consideration3,860 
Total purchase consideration$36,228 
Cash and cash equivalents$1,251 
Inventory359 
Accounts receivable911 
Prepaid expenses and other assets318 
Property and equipment, net602 
Operating lease right-of-use assets2,962 
Intangible assets18,504 
Total assets acquired24,907 
Accounts payable607 
Accrued liabilities1,260 
Operating lease liabilities, current247 
Deferred revenue, current695 
Operating lease liabilities, non-current2,714 
Deferred tax liabilities5,408 
Other liabilities318 
Net assets acquired13,658 
Goodwill22,570 
Total fair value of consideration transferred$36,228 

The Company's preliminary estimates of fair values of the net assets acquired are based on the information that was available at the date of the acquisition, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the date of the acquisition. A decrease in the fair value of assets acquired or an increase in the fair value of liabilities assumed in the acquisition from those valuations would result in a corresponding increase in the amount of goodwill from the acquisition.

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

Weighted- Average Useful LifeAmortization
Method
Fair Value
Customer relationships12 yearsStraight-line$12,941 
Trade name8 yearsStraight-line1,816 
Developed technology4.3 yearsStraight-line3,747 
Total intangible assets acquired$18,504 

VetZ generated net revenue of $3.3 million and a net loss of $0.3 million for the period from January 3, 2022 to March 31, 2022.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



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

Unaudited Pro Forma Financial Information

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

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

Biotech Acquisition
On September 1, 2021, Heska acquired 65% of the equity of Biotech Laboratories U.S.A. LLC ("Biotech"), a developer of rapid assay diagnostic testing, in exchange for approximately $16.3 million in cash. As part of the purchase, Heska entered into put and call options in order to purchase the remaining 35% ownership in future years. The counterparty, Chinta Lamichhane, DVM, Ph.D, maintains an interest in Biotech and is an employee of the Company, thus commencing a related party relationship. Aside from the acquisition described herein, there were no financial or non-financial transactions between the Company and the counterparty.
In conjunction with the acquisition, the Company entered into various put and call options which are classified on the Condensed Consolidated Balance Sheets as Notes Payable. The written put options can be exercised after June 30, 2024, at a valuation identical to the initial purchase price. The written call options can be exercised at any time prior to June 30, 2026, at an amount equal to two times the initial valuation or after June 30, 2026, at a valuation identical to the initial purchase price. Additionally, if certain product development milestones are met, the shares may be bought in various tranches at two times the initial valuation. The Company evaluated the put and call options embedded in the shares representing the non-controlling interest under the guidance in ASC 480, Distinguishing Liabilities from Equity, and determined the instrument met the criteria to be recorded as a liability because the fixed price of the put and call options are identical starting after June 30, 2026. As a result, the Company recorded the transaction as a financing arrangement of the purchase of the non-controlling interest, and will record 100% of the income and loss of Biotech in our Condensed Consolidated Statements of (Loss) Income. The options were not redeemable as of the acquisition date or as of the period ending March 31, 2022. The estimated fair value of the Notes Payable of $15.9 million is inclusive of the probability weighted outcomes of the options described herein.
The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in goodwill of $25.8 million, all of which is attributable to our North America segment. In connection with the acquisition and pursuant to the elections under Section 754 of the Internal Revenue Code, the Company expects to obtain an increase with respect to the tax basis in the assets of Biotech.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of September 1, 2021.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The information below represents the preliminary purchase price allocation as of the acquisition date (in thousands):
September 1, 2021
Purchase price$16,250 
Notes payable15,900 
Total purchase consideration$32,150 
Accounts receivables18 
Other current assets1 
Inventories190 
Property and equipment, net148 
Operating lease right-of-use assets1,033 
Other intangible assets, net6,000 
Other non-current assets15 
  Total assets acquired7,405 
Accounts payable11 
Accrued liabilities33 
Operating lease liabilities, current188 
Operating lease liabilities, non-current845 
Net assets acquired6,328 
Goodwill25,822 
  Total fair value of consideration transferred$32,150 

The Company's preliminary estimates of fair values of the net assets acquired are based on the information that was available at the date of the acquisition, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the date of the acquisition. A decrease in the fair value of assets acquired or an increase in the fair value of liabilities assumed in the acquisition from those valuations would result in a corresponding increase in the amount of goodwill from the acquisition.
Intangible assets acquired, amortization method and estimated useful life as of September 1, 2021, were as follows (dollars in thousands):
Useful LifeAmortization
Method
Fair Value
Development technology6 yearsStraight-line$6,000 
Total intangible assets acquired$6,000 
Pro forma financial information related to the acquisition of Biotech has not been provided as it is not material to our consolidated results of operations.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


BiEsseA Acquisition
On July 1, 2021, the Company completed the acquisition of BiEsse A-Laboratorio die Analisi Veterinarie S.r.l. (“BSA”). The Company acquired 100% of the issued and outstanding shares of BSA for an aggregate purchase price of $7.2 million. On January 1, 2022, BSA was merged into scil animal care company Srl, a wholly owned subsidiary of scil animal care company GmbH ("scil").
As additional consideration for the shares, the Company agreed to a contingent earn-out of $2.8 million based on the achievement of certain performance metrics within three annual periods after 2021, each of which can pay up to one third of the total earn-out. The fair value of the contingent consideration as of the acquisition date was $2.3 million, and as of March 31, 2022, was $2.0 million.
The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in $4.6 million of goodwill, all of which is attributable to our International segment. All of the goodwill is tax deductible for purposes of calculating Controlled Foreign Corporation tested income, which may result in a decrease to the Company's future U.S. federal income tax liability.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of July 1, 2021. The total purchase consideration is subject to customary working capital adjustments, which were finalized as of December 31, 2021.
Per the tax indemnification included in the purchase agreement of BSA, the seller has indemnified the Company for $0.5 million related to uncertain tax positions taken in prior years. The outcome of this arrangement will either be settled or expire due to lapse of statute of limitations by 2025. As of March 31, 2022, approximately $0.5 million of the indemnification agreement remains outstanding.


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


The information below represents the preliminary purchase price allocation as of the acquisition date (in thousands):
July 1, 2021
Purchase price$4,835 
Fair value of contingent consideration2,334 
Total purchase consideration$7,169 
Cash and cash equivalents322 
Accounts receivables152 
Other receivables497 
Prepaid expenses8 
Other current assets275 
Property and equipment, net89 
Operating lease right-of-use assets44 
Other intangible assets, net3,329 
  Total assets acquired4,716 
Accounts payable208 
Accrued liabilities334 
Operating lease liabilities, current37 
Deferred revenue, current, and other85 
Operating lease liabilities, non-current20 
Deferred tax liability925 
Other liabilities500 
Net assets acquired2,607 
Goodwill4,562 
  Total fair value of consideration transferred$7,169 

The Company's preliminary estimates of fair values of the net assets acquired are based on the information that was available at the date of the acquisition, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the date of the acquisition. A decrease in the fair value of assets acquired or an increase in the fair value of liabilities assumed in the acquisition from those valuations would result in a corresponding increase in the amount of goodwill from the acquisition.
Intangible assets acquired, amortization method and estimated useful life as of July 1, 2021, were as follows (dollars in thousands):
Useful LifeAmortization MethodFair Value
Customer relationships14 yearsStraight-line$3,329 
Total intangible assets acquired$3,329 
Pro forma financial information related to the acquisition of BSA has not been provided as it is not material to our consolidated results of operations.


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


Lacuna Acquisition
On February 1, 2021, the Company completed the acquisition of Lacuna Diagnostics, Inc. ("Lacuna"), a veterinary digital cytology company, to broaden the Company's point of care diagnostic offerings. The Company acquired 100% of the issued and outstanding shares of Lacuna for a purchase price of $4.3 million. The Company then dissolved Lacuna on February 1, 2021. In accordance with the purchase agreement, the Company is required to hold a $0.4 million general indemnity holdback that is intended to provide a non-exclusive source of funds for the payment of any losses identified and shall be released within 18 months of closing. As of March 31, 2022, $0.1 million of the indemnification holdback was released for licensing fees and $0.3 million of the indemnification holdback remains outstanding. As additional consideration for the shares, the Company agreed to a contingent earn-out of $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, and subsequently decreased to $0 million as of March 31, 2022 and December 31, 2021.
The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in $4.2 million of goodwill, primarily related to expanded opportunities with our offerings. All of the goodwill is allocated to the North America segment and is not tax deductible for income tax purposes.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of February 1, 2021.
The information below represents the purchase price allocation as of the acquisition date (in thousands):
February 1, 2021
Purchase price$4,255 
Fair value of contingent consideration1,700 
Total purchase consideration$5,955 
Cash and cash equivalents$3 
Accounts receivable170 
Property and equipment, net530 
Other intangible assets, net1,185 
Total assets acquired1,888 
Deferred tax liability 133 
Net assets acquired1,755 
Goodwill4,200 
Total fair value of consideration transferred$5,955 



-18-


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


Intangible assets acquired, amortization method and estimated useful life as of February 1, 2021, were as follows (dollars in thousands):
Useful LifeAmortization
Method
Fair Value
Developed technology3 yearsStraight-line$1,000 
Customer relationships6 monthsStraight-line150 
Trade name11 monthsStraight-line35 
Total intangible assets acquired$1,185 
Pro forma financial information related to the acquisition of Lacuna has not been provided as it is not material to our consolidated results of operations.
Other Related Party Activities
In connection with the VetZ acquisition, the Company entered into a related party building lease agreement with the former owners, who are now employees of the Company. The Company recorded operating lease expense of $75 thousand related to this lease for the three months ended March 31, 2022. The right-of-use asset and lease liability related to the building lease were both approximately $2.6 million as of March 31, 2022.
Prior to the closing of the VetZ acquisition, the former owners who are now employees of the Company purchased vehicles and bicycles from VetZ. As of January 3, 2022, a receivable of approximately $165 thousand was included in the preliminary purchase price allocation related to these transactions. These receivables were settled in full on January 7, 2022.

4.    INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The carrying values of investments in unconsolidated affiliates, categorized by type of investment, is as follows (in thousands):
March 31, 2022December 31, 2021
Equity method investment$2,025 $2,406 
Non-marketable equity security investment3,018 3,018 
Investments in unconsolidated affiliates$5,043 $5,424 
Equity Method Investment
On September 24, 2018, we invested approximately $5.1 million, including costs, to acquire an equity interest in a business as part of our product development strategy. As of March 31, 2022, the Company's ownership interest in the business was 26.0%. In connection with the investment, the Company entered into a Manufacturing Supply Agreement that grants the Company global exclusivity to specified products to be delivered under the agreement for a 15-year period that begins upon the Company's receipt and acceptance of an initial order under the agreement. The Company accounts for this investment using the equity method of accounting. Under the equity method, the carrying value of the investment is adjusted for the Company's proportionate share of the investee's reported earnings or losses with the corresponding share of earnings or losses reported as Equity in losses of unconsolidated affiliates, listed below Net (loss) income before equity in losses of unconsolidated affiliates within the Condensed Consolidated Statements of (Loss) Income.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Non-Marketable Equity Security Investment

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

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

Both parties in this arrangement are active participants and are exposed to significant risks and rewards dependent on the commercial success of the activities of the collaboration. The parties are actively working on developing and testing the product as well as funding the research and development. Heska classifies the amounts paid for research and development work within the North America segment research and development operating expenses. Expense is recognized when incurred and in accordance with the development plan.
5.    INCOME TAXES

The Company's total income tax benefit for our (loss) income before income taxes were as follows (in thousands):
 Three Months Ended March 31,
 20222021
(Loss) income before income taxes and equity in losses of unconsolidated affiliates$(11,813)$492 
Total income tax benefit$(2,208)$(1,565)
        
There were cash payments for income taxes, net of refunds, of $0.5 million for the three months ended March 31, 2022 and there were cash payments of $0.5 million for income taxes for the three months ended March 31, 2021. The Company had a tax benefit of $2.2 million for the three months ended March 31, 2022 compared to the tax benefit of $1.6 million for the three months ended March 31, 2021. The increase in tax benefit in the three month period is due to an increased loss for financial reporting. The Company recognized $0.6 million in excess tax benefits related to employee share-based compensation for the three months ended March 31, 2022, compared to $0.5 million recognized for the three months ended March 31, 2021.

As of December 31, 2021, the Company had a deferred tax asset of approximately $5.7 million from net operating losses and tax credits. The Company has a valuation allowance recorded on statutory deferred tax assets in Germany and a partial valuation allowance recorded on state net operating losses in the US. In the first quarter, the Company forecasts an increase of approximately $0.5 million of the valuation allowance through the annual effective tax rate used to estimate income tax expense. The increase is due to forecasted future financial losses in Germany. After the increase, the net valuation allowance is forecasted to be approximately $