hska-20200630


UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _______________________

Commission file number: 000-22427

HESKA CORPORATION

(Exact name of registrant as specified in its charter)


Delaware			77-0192527
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
3760 Rocky Mountain Avenue Loveland, Colorado			80538
(Address of principal executive offices)			(Zip Code)
Registrant's telephone number, including area code: (970) 493-7272

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock, $0.01 par value	HSKA	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐			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 ☒

9,443,718 shares of the Registrant's Public Common Stock, $.01 par value, were outstanding at August 6, 2020.

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION
	Item 1.	Financial Statements	1
		Condensed Consolidated Balance Sheets	1
		Condensed Consolidated Statements of Income	2
		Condensed Consolidated Statements of Comprehensive Income	3
		Condensed Consolidated Statements of Stockholders' Equity	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6
		Note 1, Operations and Summary of Significant Accounting Policies	6
		Note 2, Revenue	8
		Note 3, Acquisitions and Related Party Items	10
		Note 4, Investments in Unconsolidated Affiliates	15
		Note 5, Income Taxes	16
		Note 6, Leases	17
		Note 7, Earnings Per Share	19
		Note 8, Goodwill and Other Intangibles	20
		Note 9, Property and Equipment, Net	21
		Note 10, Inventories, Net	21
		Note 11, Accrued Liabilities	22
		Note 12, Capital Stock	22
		Note 13, Accumulated Other Comprehensive Income	23
		Note 14, Commitments and Contingencies	23
		Note 15, Interest and Other Income, Net	24
		Note 16, Convertible Notes and Credit Facility	25
		Note 17, Segment Reporting	26

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
	Item 4.	Controls and Procedures	40
PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings	40
	Item 1A.	Risk Factors	40
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
	Item 6.	Exhibits	42
		Signatures	45

HESKA, scil, scil vet, ALLERCEPT, HemaTrue, Solo Step, Element DC, Element HT5, Element POC, Element i, Element COAG, Element DC5X and Element RC are registered trademarks of Heska Corporation. DRI-CHEM is a registered trademark of FUJIFILM Corporation. TRI-HEART is a registered trademark of Intervet Inc., d/b/a Merck Animal Health, formerly known as Schering-Plough Animal Health Corporation ("Merck Animal Health"), which is a unit of Merck & Co., Inc., in the United States and is a registered trademark of Heska Corporation in other countries. This quarterly report on Form 10-Q also refers to trademarks and trade names of other organizations.

-i-

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

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 "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, as well as in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q and include, among others, risks and uncertainties related to:

•the impact of the COVID-19 pandemic on consumer demand, our global supply chain and our financial and operational results;

•the success of third parties in marketing our products;

•outside business interests of our Chief Executive Officer;

•our reliance on third party suppliers and collaborative partners;

•our dependence on key personnel;

•our dependence upon a number of significant customers;

•competitive conditions in our industry;

•our 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.

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.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)


	June 30,		December 31,
	2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	79,189	$	89,030
Accounts receivable, net of allowance for doubtful accounts of $696 and $186, respectively	26,312		15,161
Inventories	40,772		26,601
Net investment in leases, current, net of allowance for doubtful accounts of $93 and $105, respectively	4,565		3,856
Prepaid expenses	3,077		2,219
Other current assets	4,467		3,000
Total current assets	158,382		139,867

Property and equipment, net	33,873		15,469
Operating lease right-of-use assets	5,988		5,726
Goodwill	84,741		36,204
Other intangible assets, net	54,782		11,472
Deferred tax asset, net	8,205		6,429
Net investment in leases, non-current	15,307		14,307
Investments in unconsolidated affiliates	7,265		7,424
Other non-current assets	8,356		7,526
Total assets	$	376,899	$	244,424

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	11,891	$	6,600
Accrued liabilities	13,211		6,345
Accrued purchase consideration payable	—		14,579
Operating lease liabilities, current	2,108		1,745
Deferred revenue, current, and other	5,644		2,930
Total current liabilities	32,854		32,199

Convertible note, non-current, net	48,396		45,348
Deferred revenue, non-current	5,204		5,966
Other long-term borrowings	507		1,121
Related party loan	1,134		—
Operating lease liabilities, non-current	4,341		4,413
Deferred tax liability	14,071		691
Other liabilities	434		152
Total liabilities	106,941		89,890



Redeemable non-controlling interest and mezzanine equity	(89)		170

Stockholders' equity:
Preferred stock, $.01 par value, 2,500,000 shares authorized, none issued or outstanding	—		—
Common stock, $.01 par value, 13,250,000 and 10,250,000 shares authorized, respectively, none issued or outstanding	—		—
Public common stock, $.01 par value, 13,250,000 and 10,250,000 shares authorized, 9,414,834 and 7,881,928 shares issued and outstanding, respectively	94		79
Additional paid-in capital	415,687		290,216
Accumulated other comprehensive income	2,373		513
Accumulated deficit	(148,107)		(136,444)
Total stockholders' equity	270,047		154,364
Total liabilities, mezzanine equity and stockholders' equity	$	376,899	$	244,424

See accompanying notes to condensed consolidated financial statements.

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HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenue, net	$	45,712	$	28,146	$	76,366	$	57,657
Cost of revenue	27,847		15,734		45,053		32,702
Gross profit	17,865		12,412		31,313		24,955

Operating expenses:
Selling and marketing	9,583		6,715		16,963		13,748
Research and development	1,696		2,239		3,824		3,605
General and administrative	11,040		4,024		19,599		8,243
Total operating expenses	22,319		12,978		40,386		25,596
Operating loss	(4,454)		(566)		(9,073)		(641)
Interest and other expense (income), net	2,145		21		4,343		5
Loss before income taxes and equity in losses of unconsolidated affiliates	(6,599)		(587)		(13,416)		(646)
Income tax expense (benefit):
Current income tax expense	31		28		56		72
Deferred income tax benefit	(243)		(454)		(1,776)		(1,508)
Total income tax benefit	(212)		(426)		(1,720)		(1,436)

Net (loss) income before equity in losses of unconsolidated affiliates	(6,387)		(161)		(11,696)		790
Equity in losses of unconsolidated affiliates	(87)		(127)		(217)		(308)
Net (loss) income after equity in losses of unconsolidated affiliates	(6,474)		(288)		(11,913)		482
Net loss attributable to redeemable non-controlling interest	(117)		(47)		(268)		(91)
Net (loss) income attributable to Heska Corporation	$	(6,357)	$	(241)	$	(11,645)	$	573

Basic (loss) earnings per share attributable to Heska Corporation	$	(0.72)	$	(0.03)	$	(1.43)	$	0.08
Diluted (loss) earnings per share attributable to Heska Corporation	$	(0.72)	$	(0.03)	$	(1.43)	$	0.07

Weighted average outstanding shares used to compute basic (loss) earnings per share attributable to Heska Corporation	8,776		7,486		8,165		7,463
Weighted average outstanding shares used to compute diluted (loss) earnings per share attributable to Heska Corporation	8,776		7,486		8,165		7,956

See accompanying notes to condensed consolidated financial statements.

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HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net (loss) income after equity in losses of unconsolidated affiliates	$	(6,474)	$	(288)	$	(11,913)	$	482
Other comprehensive (loss) income:
Foreign currency translation	2,216		83		1,860		21
Comprehensive (loss) income	(4,258)		(205)		(10,053)		503

Comprehensive loss attributable to redeemable non-controlling interest	(117)		(47)		(268)		(91)
Comprehensive (loss) income attributable to Heska Corporation	$	(4,141)	$	(158)	$	(9,785)	$	594

See accompanying notes to condensed consolidated financial statements.

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HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

(unaudited)


	Preferred Stock				Common Stock						Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit	Total Stockholders' Equity
Three Months Ended June 30, 2019 and 2020	Shares	Amount		Shares	Amount
Balances, March 31, 2019	—	$	—	7,747	$	77	$	255,150	$	215	$	(134,165)	$	121,277
Net loss attributable to Heska Corporation	—	—		—	—		—		—		(241)		(241)
Issuance of common stock, net of shares withheld for employee taxes	—	—		47	1		607		—		—		608
Stock-based compensation	—	—		—	—		1,195		—		—		1,195
Other comprehensive income	—	—		—	—		—		83		—		83
Balances, June 30, 2019	—	$	—	7,794	$	78	$	256,952	$	298	$	(134,406)	$	122,922

Balances, March 31, 2020	122	$	1	7,843	$	78	$	412,152	$	157	$	(141,750)	$	270,638
Net loss attributable to Heska Corporation											(6,357)		(6,357)
Issuance of common stock, net of shares withheld for employee taxes				63	1		1,105						1,106
Conversion of preferred stock to common stock	(122)	(1)		1,509	15		(14)						—
Stock-based compensation							2,444						2,444
Other comprehensive income									2,216				2,216
Balances, June 30, 2020	—	$	—	9,415	$	94	$	415,687	$	2,373	$	(148,107)	$	270,047

Note: Excludes amounts related to redeemable non-controlling interests recorded in mezzanine equity.

	Preferred Stock				Common Stock						Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit	Total Stockholders' Equity
Six Months Ended June 30, 2019 and 2020	Shares	Amount		Shares	Amount
Balances, December 31, 2018	—	$	—	7,676	$	77	$	257,034	$	277	$	(134,979)	$	122,409
Net income attributable to Heska Corporation	—	—		—	—		—		—		573		573
Issuance of common stock, net of shares withheld for employee taxes	—	—		118	1		(2,462)		—		—		(2,461)
Stock-based compensation	—	—		—	—		2,380		—		—		2,380
Other comprehensive income	—	—		—	—		—		21		—		21
Balances, June 30, 2019	—	$	—	7,794	$	78	$	256,952	$	298	$	(134,406)	$	122,922

Balances, December 31, 2019	—	$	—	7,882	$	79	$	290,216	$	513	$	(136,444)	$	154,364
Adoption of accounting standards	—	—		—	—		—		—		(18)		(18)
Balances, January 1, 2020	—	—		7,882	79		290,216		513		(136,462)		154,346
Net loss attributable to Heska Corporation	—	—		—	—		—		—		(11,645)		(11,645)
Issuance of common stock, net of shares withheld for employee taxes	—	—		24	—		904		—		—		904
Issuance of preferred stock, net of issuance costs	122	1		—	—		121,784		—		—		121,785
Conversion of preferred stock to common stock	(122)	(1)		1,509	15		(14)		—		—		—
Stock-based compensation	—	—		—	—		2,797		—		—		2,797
Other comprehensive income	—	—		—	—		—		1,860		—		1,860
Balances, June 30, 2020	—	$	—	9,415	$	94	$	415,687	$	2,373	$	(148,107)	$	270,047

Note: Excludes amounts related to redeemable non-controlling interests recorded in mezzanine equity.

See accompanying notes to condensed consolidated financial statements.

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HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Six Months Ended June 30,
	2020		2019
Cash flows from operating activities:
Net (loss) income after equity in losses from unconsolidated affiliates	$	(11,913)	$	482
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Depreciation and amortization	4,704		2,522
Non-cash impact of operating leases	840		750
Deferred income tax benefit	(1,776)		(1,508)
Stock-based compensation	2,797		2,380
Equity in losses of unconsolidated affiliates	217		308
Amortization of debt discount and issuance costs	3,049		—
Other losses	65		245
Changes in operating assets and liabilities (net of the effect of acquisitions):
Accounts receivable	(1,268)		3,764
Inventories	(4,094)		(2,978)
Lease receivable, current	(733)		(392)
Other current assets	670		(531)
Accounts payable	(2,732)		(707)
Due to related parties	—		(226)
Accrued liabilities and other	(932)		(7,680)
Lease receivable, non-current	242		(1,090)
Other non-current assets	(235)		28
Deferred revenue and other	(1,996)		(723)
Net cash used in operating activities	(13,095)		(5,356)
Cash flows from investing activities:
Investment in subsidiary, net of cash acquired	—		(622)
Acquisition of CVM	(14,420)		—
Purchases of property and equipment	(316)		(629)
Acquisition of scil, net of cash acquired	(105,190)		—
Net cash used in investing activities	(119,926)		(1,251)
Cash flows from financing activities:
Borrowings on line of credit	—		6,750
Payment of preferred stock issuance costs	(214)		—
Preferred stock proceeds	122,000		—
Proceeds from issuance of common stock	1,514		1,018
Repurchase of common stock	(610)		(3,480)
Repayments of other debt	(109)		(1,083)
Borrowings on other debts	410		—
Net cash provided by financing activities	122,991		3,205
Foreign exchange effect on cash and cash equivalents	189		5
Net increase (decrease) in cash and cash equivalents	(9,841)		(3,397)
Cash and cash equivalents, beginning of period	89,030		13,389
Cash and cash equivalents, end of period	$	79,189	$	9,992

Supplemental disclosure of cash flow information:
Non-cash transfers of equipment between inventory and property and equipment, net	$	1,560	$	878
Non-cash conversion of preferred stock to common stock	$	122,000	$	—
Consideration payable for scil acquisition	$	537	$	—

See accompanying notes to condensed consolidated financial statements.

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HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Heska Corporation and its wholly-owned subsidiaries ("Heska", the "Company", "we" or "our") sell veterinary and animal health diagnostic and specialty products. Our offerings include Point of Care diagnostic laboratory instruments and supplies; digital imaging diagnostic products, software and services; vaccines; local and cloud-based data services; allergy testing and immunotherapy; and single-use offerings such as in-clinic diagnostic tests and heartworm preventive products. Our core focus is on supporting veterinarians in the canine and feline healthcare space.

Basis of Presentation and Consolidation

The accompanying interim Condensed Consolidated Financial Statements are unaudited. The interim unaudited Condensed Consolidated Financial Statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include normal, recurring adjustments, necessary to present fairly the financial position of the Company as of June 30, 2020, and the results of our operations and statements of stockholders' equity for the three and six months ended June 30, 2020 and 2019, and cash flows for the six months ended June 30, 2020 and 2019.

The unaudited Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. Our unaudited Condensed Consolidated Financial Statements include our accounts and the accounts of our wholly-owned subsidiaries since their respective dates of acquisitions. All intercompany accounts and transactions have been eliminated in consolidation. Where our ownership of a subsidiary is less than 100%, the non-controlling interest is reported on our Condensed Consolidated Balance Sheets. The non-controlling interest in our consolidated net income is reported as "Net loss attributable to redeemable non-controlling interest" on our Condensed Consolidated Statements of Income. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and other financial information filed with the SEC.

Reclassification

To maintain consistency and comparability, certain amounts in the financial statements have been reclassified to conform to current year presentation.

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 doubtful accounts 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 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 value of the non-controlling interest

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HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

in a business combination; and determining the fair value of the liability component associated with the issuance of convertible debt.