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

For the quarterly period ended June 30, 2020
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-20200630_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 
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.
       Note 2, Revenue
       Note 5, Income Taxes
       Note 6, Leases
Item 2.
 Item 3.
 Item 4.
PART II - OTHER INFORMATION
 Item 1.
 Item 1A.
Item 2.
 Item 6.
 

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.
-ii-



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,
 20202019
ASSETS
Current assets:  
Cash and cash equivalents$79,189  $89,030  
Accounts receivable, net of allowance for doubtful accounts of $696 and $186, respectively26,312  15,161  
Inventories40,772  26,601  
Net investment in leases, current, net of allowance for doubtful accounts of $93 and $105, respectively4,565  3,856  
Prepaid expenses3,077  2,219  
Other current assets4,467  3,000  
Total current assets158,382  139,867  
Property and equipment, net33,873  15,469  
Operating lease right-of-use assets5,988  5,726  
Goodwill84,741  36,204  
Other intangible assets, net54,782  11,472  
Deferred tax asset, net8,205  6,429  
Net investment in leases, non-current15,307  14,307  
Investments in unconsolidated affiliates7,265  7,424  
Other non-current assets8,356  7,526  
Total assets$376,899  $244,424  
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY
Current liabilities:  
Accounts payable$11,891  $6,600  
Accrued liabilities13,211  6,345  
Accrued purchase consideration payable  14,579  
Operating lease liabilities, current2,108  1,745  
Deferred revenue, current, and other5,644  2,930  
Total current liabilities32,854  32,199  
Convertible note, non-current, net48,396  45,348  
Deferred revenue, non-current5,204  5,966  
Other long-term borrowings507  1,121  
Related party loan1,134    
Operating lease liabilities, non-current4,341  4,413  
Deferred tax liability14,071  691  
Other liabilities434  152  
Total liabilities106,941  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, respectively94  79  
Additional paid-in capital415,687  290,216  
Accumulated other comprehensive income2,373  513  
Accumulated deficit(148,107) (136,444) 
Total stockholders' equity270,047  154,364  
Total liabilities, mezzanine equity and stockholders' equity$376,899  $244,424  

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



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,
 2020201920202019
Revenue, net$45,712  $28,146  $76,366  $57,657  
Cost of revenue27,847  15,734  45,053  32,702  
Gross profit17,865  12,412  31,313  24,955  
Operating expenses: 
Selling and marketing9,583  6,715  16,963  13,748  
Research and development1,696  2,239  3,824  3,605  
General and administrative11,040  4,024  19,599  8,243  
Total operating expenses22,319  12,978  40,386  25,596  
Operating loss(4,454) (566) (9,073) (641) 
Interest and other expense (income), net2,145  21  4,343  5  
Loss before income taxes and equity in losses of unconsolidated affiliates(6,599) (587) (13,416) (646) 
Income tax expense (benefit): 
Current income tax expense31  28  56  72  
Deferred income tax benefit(243) (454) (1,776) (1,508) 
Total income tax benefit(212) (426) (1,720) (1,436) 
Net (loss) income before equity in losses of unconsolidated affiliates(6,387) (161) (11,696) 790  
Equity in losses of unconsolidated affiliates(87) (127) (217) (308) 
Net (loss) income after equity in losses of unconsolidated affiliates(6,474) (288) (11,913) 482  
Net loss attributable to redeemable non-controlling interest(117) (47) (268) (91) 
Net (loss) income attributable to Heska Corporation$(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 Corporation8,776  7,486  8,165  7,463  
Weighted average outstanding shares used to compute diluted (loss) earnings per share attributable to Heska Corporation8,776  7,486  8,165  7,956  
 
See accompanying notes to condensed consolidated financial statements.
-2-



HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands) 
(unaudited)
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Net (loss) income after equity in losses of unconsolidated affiliates$(6,474) $(288) $(11,913) $482  
Other comprehensive (loss) income: 
Foreign currency translation2,216  83  1,860  21  
Comprehensive (loss) income(4,258) (205) (10,053) 503  
Comprehensive loss attributable to redeemable non-controlling interest(117) (47) (268) (91) 
Comprehensive (loss) income attributable to Heska Corporation$(4,141) $(158) $(9,785) $594  
 
See accompanying notes to condensed consolidated financial statements.






-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 June 30, 2019 and 2020SharesAmountSharesAmount
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, 2020122  $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 taxes63  1  1,105  1,106  
Conversion of preferred stock to common stock(122) (1) 1,509  15  (14)   
Stock-based compensation2,444  2,444  
Other comprehensive income2,216  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 StockCommon StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
Stockholders'
Equity
Six Months Ended June 30, 2019 and 2020SharesAmountSharesAmount
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 costs122  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.
-4-



HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six Months Ended
June 30,
 20202019
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 amortization4,704  2,522  
Non-cash impact of operating leases840  750  
Deferred income tax benefit(1,776) (1,508) 
Stock-based compensation2,797  2,380  
Equity in losses of unconsolidated affiliates217  308  
Amortization of debt discount and issuance costs3,049    
Other losses65  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 assets670  (531) 
Accounts payable(2,732) (707) 
Due to related parties  (226) 
Accrued liabilities and other(932) (7,680) 
Lease receivable, non-current242  (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 proceeds122,000    
Proceeds from issuance of common stock1,514  1,018  
Repurchase of common stock(610) (3,480) 
Repayments of other debt(109) (1,083) 
Borrowings on other debts410    
Net cash provided by financing activities122,991  3,205  
Foreign exchange effect on cash and cash equivalents189  5  
Net increase (decrease) in cash and cash equivalents(9,841) (3,397) 
Cash and cash equivalents, beginning of period89,030  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.
-5-


HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Heska Corporation and its wholly-owned subsidiaries ("Heska", the "Company", "we" or "our") sell veterinary and animal health diagnostic and specialty products. Our offerings include Point of Care diagnostic laboratory instruments and supplies; digital imaging diagnostic products, software and services; 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
-6-


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.