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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 September 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
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 
9,454,771 shares of the Registrant's Public Common Stock, $.01 par value, were outstanding at November 4, 2020.





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, scil vet, scil vet academy, scil VIP, Vet ABC, ALLERCEPT, HemaTrue, Solo Step, Element DC, Element HT5, Element POC, Element i, 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 "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, 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)
 September 30,December 31,
 20202019
ASSETS
Current assets:  
Cash and cash equivalents$84,508 $89,030 
Accounts receivable, net of allowance for doubtful accounts of $693 and $186, respectively27,062 15,161 
Inventories39,348 26,601 
Net investment in leases, current, net of allowance for doubtful accounts of $110 and $105, respectively4,726 3,856 
Prepaid expenses4,735 2,219 
Other current assets5,848 3,000 
Total current assets166,227 139,867 
Property and equipment, net34,997 15,469 
Operating lease right-of-use assets5,804 5,726 
Goodwill85,302 36,204 
Other intangible assets, net55,295 11,472 
Deferred tax asset, net5,170 6,429 
Net investment in leases, non-current15,527 14,307 
Investments in unconsolidated affiliates7,185 7,424 
Other non-current assets8,368 7,526 
Total assets$383,875 $244,424 
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY
Current liabilities:  
Accounts payable$12,277 $6,600 
Accrued liabilities13,290 6,345 
Accrued purchase consideration payable 14,579 
Operating lease liabilities, current2,099 1,745 
Deferred revenue, current, and other5,853 2,930 
Total current liabilities33,519 32,199 
Convertible note, non-current, net49,921 45,348 
Deferred revenue, non-current4,689 5,966 
Other long-term borrowings621 1,121 
Related party loan1,186  
Operating lease liabilities, non-current4,177 4,413 
Deferred tax liability14,653 691 
Other liabilities398 152 
Total liabilities109,164 89,890 
Redeemable non-controlling interest and mezzanine equity(171)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, 9,454,771 and 7,881,928 shares issued and outstanding, respectively95 79 
Additional paid-in capital420,314 290,216 
Accumulated other comprehensive income7,799 513 
Accumulated deficit(153,326)(136,444)
Total stockholders' equity274,882 154,364 
Total liabilities, mezzanine equity and stockholders' equity$383,875 $244,424 

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 September 30,Nine Months Ended September 30,
 2020201920202019
Revenue, net$56,636 $31,237 $133,001 $88,894 
Cost of revenue33,232 17,573 78,285 50,275 
Gross profit23,404 13,664 54,716 38,619 
Operating expenses: 
Selling and marketing10,751 6,709 27,714 20,457 
Research and development2,197 2,532 6,021 6,137 
General and administrative10,253 4,230 29,852 12,473 
Total operating expenses23,201 13,471 63,587 39,067 
Operating income (loss)203 193 (8,871)(448)
Interest and other expense, net2,011 927 6,353 932 
Loss before income taxes and equity in losses of unconsolidated affiliates(1,808)(734)(15,224)(1,380)
Income tax expense (benefit): 
Current income tax expense370 40 425 112 
Deferred income tax expense (benefit)3,043 (570)1,268 (2,078)
Total income tax expense (benefit)3,413 (530)1,693 (1,966)
Net (loss) income before equity in losses of unconsolidated affiliates(5,221)(204)(16,917)586 
Equity in losses of unconsolidated affiliates(83)(147)(300)(455)
Net (loss) income after equity in losses of unconsolidated affiliates(5,304)(351)(17,217)131 
Net loss attributable to redeemable non-controlling interest(85)(41)(353)(132)
Net (loss) income attributable to Heska Corporation$(5,219)$(310)$(16,864)$263 
Basic (loss) earnings per share attributable to Heska Corporation$(0.57)$(0.04)$(1.99)$0.04 
Diluted (loss) earnings per share attributable to Heska Corporation$(0.57)$(0.04)$(1.99)$0.03 
Weighted average outstanding shares used to compute basic (loss) earnings per share attributable to Heska Corporation9,123 7,501 8,486 7,461 
Weighted average outstanding shares used to compute diluted (loss) earnings per share attributable to Heska Corporation9,123 7,501 8,486 7,960 
 
See accompanying notes to condensed consolidated financial statements.
-2-



HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands) 
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Net (loss) income after equity in losses of unconsolidated affiliates$(5,304)$(351)$(17,217)$131 
Other comprehensive (loss) income: 
Translation adjustments and gains (losses) from intra-entity transactions5,426 (158)7,286 (137)
Comprehensive (loss) income122 (509)(9,931)(6)
Comprehensive loss attributable to redeemable non-controlling interest(85)(41)(353)(132)
Comprehensive (loss) income attributable to Heska Corporation$207 $(468)$(9,578)$126 
 
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 September 30, 2019 and 2020SharesAmountSharesAmount
Balances, June 30, 2019 $ 7,794 $78 $256,952 $298 $(134,406)$122,922 
Net loss attributable to Heska Corporation— — — — — — (310)(310)
Issuance of common stock, net of shares withheld for employee taxes— — 30  213 — — 213 
Stock-based compensation— — — — 1,246 — — 1,246 
Convertible notes, equity— — — — 29,770 — — 29,770 
Other comprehensive loss— — — — — (158)— (158)
Balances, September 30, 2019 $ 7,824 $78 $288,181 $140 $(134,716)$153,683 
Balances, June 30, 2020 $ 9,415 $94 $415,687 $2,373 $(148,107)$270,047 
Net loss attributable to Heska Corporation— — — — — — (5,219)(5,219)
Issuance of common stock, net of shares withheld for employee taxes— — 40 1 495 — — 496 
Stock-based compensation— — — — 4,132 — — 4,132 
Other comprehensive income— — — — — 5,426 — 5,426 
Balances, September 30, 2020 $ 9,455 $95 $420,314 $7,799 $(153,326)$274,882 
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
Nine Months Ended September 30, 2019 and 2020SharesAmountSharesAmount
Balances, December 31, 2018 $ 7,676 $77 $257,034 $277 $(134,979)$122,409 
Net income attributable to Heska Corporation— — — — — — 263 263 
Issuance of common stock, net of shares withheld for employee taxes— — 148 1 (2,248)— — (2,247)
Stock-based compensation— — — — 3,625 — — 3,625 
Convertible notes, equity— — — — 29,770 — — 29,770 
Other comprehensive loss— — — — — (137)— (137)
Balances, September 30, 2019 $ 7,824 $78 $288,181 $140 $(134,716)$153,683 
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— — — — — — (16,864)(16,864)
Issuance of common stock, net of shares withheld for employee taxes— — 64 1,397 — — 1,398 
Issuance of preferred stock, net of issuance costs122 1 121,785 — — 121,786 
Conversion of preferred stock to common stock(122)(1)1,509 15 (14)— —  
Stock-based compensation— — — — 6,930 — — 6,930 
Other comprehensive income— — — — — 7,286 — 7,286 
Balances, September 30, 2020 $ 9,455 $95 $420,314 $7,799 $(153,326)$274,882 
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)
 Nine Months Ended
September 30,
 20202019
Cash flows from operating activities:   
Net (loss) income after equity in losses from unconsolidated affiliates$(17,217)$131 
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:  
Depreciation and amortization8,041 3,759 
Non-cash impact of operating leases1,431 1,126 
Deferred income tax expense (benefit)1,268 (2,078)
Stock-based compensation6,930 3,625 
Equity in losses of unconsolidated affiliates300 455 
Amortization of debt discount and issuance costs4,573 282 
Other losses62 340 
Changes in operating assets and liabilities (net of the effect of acquisitions):  
Accounts receivable(1,813)2,808 
Inventories(3,901)(438)
Other assets(1,423)(3,113)
Accounts payable(2,708)(2,491)
Due to related parties (226)
Other liabilities(3,644)(7,456)
Net cash used in operating activities(8,101)(3,276)
Cash flows from investing activities:  
Investment in subsidiary, net of cash acquired (622)
Acquisition of CVM(14,420) 
Purchases of property and equipment(486)(722)
Acquisition of scil, net of cash acquired(105,137) 
Net cash used in investing activities(120,043)(1,344)
Cash flows from financing activities:  
Borrowings on line of credit 6,750 
Repayments of line of credit borrowings (12,750)
Payment of debt issuance costs (3,072)
Payment of preferred stock issuance costs(214) 
Preferred stock proceeds122,000  
Convertible debt proceeds 86,250 
Proceeds from issuance of common stock2,050 1,233 
Repurchase of common stock(652)(3,480)
Repayments of other debt(193)(1,164)
Borrowings on other debts508  
Net cash provided by financing activities123,499 73,767 
Foreign exchange effect on cash and cash equivalents123 (31)
Net increase (decrease) in cash and cash equivalents(4,522)69,116 
Cash and cash equivalents, beginning of period89,030 13,389 
Cash and cash equivalents, end of period$84,508 $82,505 
Supplemental disclosure of cash flow information:
Non-cash transfers of equipment between inventory and property and equipment, net$3,328 $1,118 
Non-cash conversion of preferred stock to common stock$122,000 $ 
Accrued debt issuance costs$ $105 
Purchase price adjustment receivable for scil$1,273 $ 
Capex purchases - accrued but unpaid$40 $ 

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 September 30, 2020, and the results of our operations and statements of stockholders' equity for the three and nine months ended September 30, 2020 and 2019, and cash flows for the nine months ended September 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 (Loss) Income. The results of operations for the three and nine months ended September 30, 2020 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 fiscal year ended December 31, 2019 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 lowers demand for diagnostic testing services. During the second and third quarters 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. The extent to which the continuation, or a possible second-wave outbreak 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 actions of governments, and
-6-


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


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 as a result of any economic impact that has occurred or 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 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 in a business combination; and determining the fair value of the liability component associated with the issuance of convertible debt. We have made estimates of the impact of the COVID-19 pandemic within our financial statements, and our actual results may differ from these estimates and there may be changes to those estimates in future periods.
Critical 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, 2019, and other than the recently adopted accounting pronouncements described below have not changed materially since such filing.

Adoption of New Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based upon historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. Subsequent to the issuance of ASU 2016-13, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, in November 2018. This ASU clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which further clarifies and improves guidance related to accounting for credit losses. In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326). This ASU provides relief to certain entities adopting ASU 2016-13. The amendment provides entities with an option to irrevocably elect the fair value option for certain financial assets.

The Company adopted ASU 2016-13 with a cumulative-effect adjustment in retained earnings as of January 1, 2020. The impact of the adoption was not material to the Company's consolidated financial statements. We
-7-


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


continuously monitor our customers' credit worthiness and establish allowances for estimated credit losses related to our accounts receivable, net investment in leases, and promissory notes. Our allowances are established based on factors surrounding the credit risk of specific customers, historical experience including collections and write-off history, and current economic conditions. Account balances are considered past due if payments have not been received within agreed upon invoice and/or contract terms and the Company may employ collection agencies and legal counsel to pursue recovery of defaulted amounts. Account balances are written off against the allowance after all collection efforts have been exhausted and it is probable the receivable will not be recovered. The Company also performs a qualitative assessment, on a quarterly basis, to monitor economic factors and other uncertainties that may require additional adjustments for the expected credit loss allowance. The Company will continue to actively monitor the impact of the recent coronavirus ("COVID-19") pandemic on expected credit losses.
Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740, and also clarifies and amends existing guidance to improve consistent application. This guidance will be effective for interim and annual periods beginning after December 15, 2020, and early adoption is permitted. We are currently evaluating the impact of this update on our consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The amendments in this ASU clarify the interaction between the accounting for investments in equity securities, investment in equity method and certain derivatives instruments. The ASU is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. This guidance will be effective for fiscal years beginning after December 15, 2021. We are currently evaluating the impact of this update on our consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), which simplifies the accounting for certain convertible instruments. The update reduces the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible debt will be accounted for as a single liability measured at its amortized cost and convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. The update also requires the if-converted method to be used for convertible instruments and the effect of potential share settlement be included in the diluted earnings per share calculation when an instrument may be settled in cash or shares. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.

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, including Australia, France, Germany, Italy, Malaysia, Spain and Switzerland
-8-


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



Refer to Note 17 for further detail regarding the change in reportable segments which required recast of prior period presentation.

The following table summarizes our segment revenue (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
North America Revenue:
POC Lab Instruments & Other$2,458 $1,916 $5,772 $5,222 
     Sales-type leases1,310 1,587 3,574 4,821 
POC Lab Consumables16,071 13,953 43,294 39,452 
POC Imaging5,268 4,550 12,912 13,781 
PVD5,437 2,702 14,821 8,093 
OVP3,906 4,897 10,708 13,123 
Total North America Revenue$34,450 $29,605 $91,081 $84,492 
International Revenue:
POC Lab Instruments & Other$2,643 $1 $4,759 $17 
Sales-type leases277  601  
POC Lab Consumables11,387 70 21,418 94 
POC Imaging7,029 785 12,791 2,194 
PVD850 776 2,351 2,097 
OVP    
Total International Revenue$22,186 $1,632 $41,920 $4,402 
Total Revenue$56,636 $31,237 $133,001 $88,894 


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 non-cancelable 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 obligation 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.

-9-


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


As of September 30, 2020, the aggregate amount of the transaction price allocated to remaining minimum performance obligations was approximately $135.5 million. As of September 30, 2020, the Company expects to recognize revenue as follows (in thousands):
Year Ending December 31,Revenue
2020 (remaining)$7,773 
202130,342 
202227,155 
202324,349 
202420,007 
Thereafter25,843 
$135,469 

Contract Balances

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

Contract Asset

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 September 30, 2020 were $1.3 million and $4.0 million for current and non-current assets, respectively, shown net of related unearned interest. The balances as of December 31, 2019 were $1.1 million and $3.7 million for current and non-current assets, respectively, shown net of related unearned interest.

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 September 30, 2020 and December 31, 2019, contract liabilities were $8.2 million and $8.7 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 nine-month period ended September 30, 2020 is approximately $3.4 million of revenue recognized during the period, offset by approximately $2.3 million of additional deferred sales in 2020 and the acquisition of scil contract liabilities of $0.6 million. Contract liabilities are reported on the accompanying Condensed Consolidated Balance Sheets on a contract-by-contract basis.

3.    ACQUISITIONS AND RELATED PARTY ITEMS
scil Acquisition
On April 1, 2020, the Company completed the acquisition of scil animal care company GmbH (“scil”) from Covetrus, Inc. At closing, the Company paid approximately $111.0 million in cash to acquire 100% of the
-10-


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


capital stock of scil. The acquisition represents a key milestone in the Company's long-term strategic plan creating a global veterinary diagnostics company with leadership positions in key geographic markets.

The acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on a preliminary estimate of their fair values as of April 1, 2020. The total purchase consideration is subject to customary working capital adjustments.

In the third quarter of 2020, the estimated purchase consideration decreased to approximately $109.8 million as a result of post-closing adjustments to the settlement exchange rate, the net working capital and other adjustments. The resulting goodwill represents the excess of the purchase price over the fair value of the net assets acquired and is primarily attributable to the synergies expected from the expanded market opportunities with our offerings and the experienced workforce acquired. Of the $45.8 million of goodwill acquired, $37.3 million is allocated to our International segment and $8.5 million is allocated to our North America segment. All of the goodwill is tax deductible for U.S. federal income tax purposes which may result in a decrease to the Company's future U.S. federal tax liability.

The information below represents the preliminary purchase price allocation of scil (in thousands):
April 1, 2020
Total purchase consideration$109,753 
Cash and cash equivalents5,889 
Accounts receivable10,707 
Inventories11,349 
Net investment in leases, current311 
Prepaid expenses1,404 
Other current assets405 
Property and equipment, net19,320 
Operating lease right-of-use assets877 
Other intangible assets, net44,517 
Net investment in leases, non-current1,027 
Investments in unconsolidated affiliates55 
Other non-current assets291 
Total assets acquired96,152 
Accounts payable8,221 
Accrued liabilities6,355 
Operating lease liabilities, current356 
Deferred revenue, current, and other3,220 
Deferred revenue, non-current94 
Operating lease liabilities, non-current529 
Deferred tax liability13,147 
Other liabilities276 
Net assets acquired63,954 
Goodwill45,799 
Total fair value of consideration transferred$109,753 

-11-


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


The Company's preliminary estimates of fair values of the assets acquired and the liabilities assumed are based on the information currently available, 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. Among items still being evaluated is an existing uncertain tax position of approximately $1.0 million that scil had prior to acquisition. The uncertain tax position may or may not change based on the results of the evaluation. 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 change in the amount of goodwill from the acquisition. During the third quarter of 2020, the Company reclassified certain assets and liabilities to align with the presentation of our Condensed Consolidated Balance Sheet. There were no significant measurement period adjustments to the fair value of assets acquired and liabilities assumed.

Intangible assets acquired, amortization method and estimated useful life as of April 1, 2020, was as follows (dollars in thousands):
Useful LifeAmortization
Method
Fair Value
Customer relationships10 yearsStraight-line$36,272 
Internally developed software7 yearsStraight-line353 
Backlog0.2 yearsStraight-line210 
Non-compete agreements2 yearsStraight-line60 
Trade name subject to amortization0.8 yearsStraight-line66 
Trademarks and trade names not subject to amortizationn/aIndefinite7,556 
Total intangible assets acquired$44,517 

scil generated net revenue of $37.7 million and a net loss of $0.2 million for the period from April 1, 2020 to September 30, 2020.

The Company incurred acquisition related costs of approximately $0.7 million and $5.7 million for the three and nine months ended September 30, 2020, respectively, which are included within general and administrative expenses on our Condensed Consolidated Statements of (Loss) Income.

Unaudited Pro Forma Financial Information
The following tables present unaudited supplemental pro forma financial information as if the acquisition had occurred on January 1, 2019 (in thousands):
Nine Months Ended September 30, 2020
Revenue, net$151,522 
Net (loss) income before equity in losses of unconsolidated affiliates$(17,733)
Net (loss) income attributable to Heska Corporation$(17,680)

Three Months Ended September 30, 2019Nine Months Ended September 30, 2019
Revenue, net$49,346 $144,372 
Net (loss) income before equity in losses of unconsolidated affiliates$(451)$(1,407)
Net (loss) income attributable to Heska Corporation$(557)$(1,730)

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


The pro forma financial information presented above has been prepared by combining our historical results and the historical results of scil and further reflects the effect of purchase accounting adjustments, including: (i) amortization of acquired intangible assets, (ii) the impact of certain fair value adjustments such as depreciation on the acquired property, plant and equipment, and (iii) historical intercompany sales between the Company and scil. The unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what actual results of operations would have been if the acquisition had occurred as the beginning of the period presented, nor are they indicative of future results of operations.

CVM
On December 5, 2019, Heska entered into a definitive agreement to purchase 100% of the outstanding shares of CVM Diagnostico Veternario S.L. and CVM Ecografia S.L. (collectively, “CVM”), primarily to expand international operations in Europe. CVM is headquartered in Tudela, outside of Madrid, Spain. CVM mainly operates in Spain. The terms of the agreement transferred control of CVM upon signing, and the transfer of the purchase price of approximately $14.4 million and shares occurred in January 2020. The purchase price exceeded the fair value of the identifiable net assets and, accordingly, $9.0 million was allocated to goodwill within the International segment based on the preliminary purchase price allocation, all of which is tax deductible for U.S. federal income tax purposes.
The preliminary fair values allocated to CVM's assets and liabilities as of the acquisition date, as well as the purchase price, are reflected in the table below (in thousands):
December 5, 2019
Consideration paid to former owners$14,420 
Cash and cash equivalents1,226 
Accounts receivable583 
Inventories1,621 
Other current assets1,186 
Property and equipment345 
Other intangible assets2,608 
Other non-current assets460 
Total assets acquired8,029 
Accounts payable(94)
Accrued liabilities(471)
Current portion of deferred revenue, and other(54)
Deferred tax liability(683)
Other long-term borrowings(1,109)
Other liabilities(157)
Net assets acquired5,461 
Goodwill8,959 
Total fair value of consideration transferred$14,420 

The Company's preliminary estimates of fair values of the assets acquired and the liabilities assumed 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
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


acquisition. During the nine months ended September 30, 2020, the Company made certain valuation adjustments to provisional amounts previously recognized. These adjustments resulted in a net $110 thousand increase of goodwill, primarily due to fair value adjustments resulting in a decrease in net identifiable assets acquired.
Intangible assets acquired, amortization method and estimated useful life as of December 5, 2019, was as follows (dollars in thousands):
Useful LifeAmortization MethodFair Value
Customer relationships6 yearsStraight-line$2,440 
Trade name4 yearsStraight-line111 
Developed technologyn/aIndefinite57 
$2,608 
CVM generated net revenue of $0.8 million and net income of $0.1 million, for the period from December 6, 2019 to December 31, 2019. CVM generated net revenue of $2.2 million and $5.2 million and net income of $0.3 million and $0.4 million for the three and nine months ended September 30, 2020, respectively.
The Company incurred acquisition related costs of approximately $44 thousand and $0.3 million for the three and nine months ended September 30, 2020, respectively, 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 CVM acquisition had occurred on January 1, 2019 (in thousands):
Three Months Ended September 30, 2019Nine Months Ended September 30, 2019
Revenue, net$32,910 $94,462 
Net (loss) income before equity in losses of unconsolidated affiliates$164 $789 
Net (loss) income attributable to Heska Corporation$58 $466 

The pro forma financial information presented above has been prepared by combining our historical results and the historical results of CVM and further reflects the effect of purchase accounting adjustments. The unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what actual results of operations would have been if the acquisition had occurred as the beginning of the period presented, nor are they indicative of future results of operations.

CVM management conducts related party activities with Practice Clinicas Veterinarias Moviles, S.L. ("CVM Practice"), which is owned by CVM's management. CVM leases