HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
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|
|
|
|
|
|
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|
|
|
|
|
|
|
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Preferred Stock
|
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Common Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comprehensive
Income
|
|
Accumulated
Deficit
|
|
Total
Stockholders'
Equity
|
Three Months Ended September 30, 2020 and 2021
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Balances, June 30, 2020
|
|
—
|
|
|
$
|
—
|
|
|
9,415
|
|
|
$
|
94
|
|
|
$
|
415,687
|
|
|
$
|
2,373
|
|
|
$
|
(148,107)
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|
|
$
|
270,047
|
|
Net loss attributable to Heska Corporation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,219)
|
|
|
(5,219)
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|
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
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|
—
|
|
|
$
|
—
|
|
|
9,455
|
|
|
$
|
95
|
|
|
$
|
420,314
|
|
|
$
|
7,799
|
|
|
$
|
(153,326)
|
|
|
$
|
274,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Balances, June 30, 2021
|
|
—
|
|
|
$
|
—
|
|
|
10,646
|
|
|
$
|
106
|
|
|
$
|
569,214
|
|
|
$
|
10,638
|
|
|
$
|
(146,192)
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|
|
$
|
433,766
|
|
Net loss attributable to Heska Corporation
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|
—
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|
|
—
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|
|
—
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|
|
—
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|
|
—
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|
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—
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|
(1,898)
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|
(1,898)
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|
Issuance of common stock, net of shares withheld for employee taxes
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|
—
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|
|
—
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|
|
55
|
|
|
1
|
|
|
1,000
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|
|
—
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|
|
—
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|
|
1,001
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,404
|
|
|
—
|
|
|
—
|
|
|
5,404
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,431)
|
|
|
—
|
|
|
(3,431)
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|
Balances, September 30, 2021
|
|
—
|
|
|
$
|
—
|
|
|
10,701
|
|
|
$
|
107
|
|
|
$
|
575,618
|
|
|
$
|
7,207
|
|
|
$
|
(148,090)
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|
|
$
|
434,842
|
|
Note: The quarter ended September 30, 2020 excludes amounts related to redeemable non-controlling interests recorded in mezzanine equity.
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|
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|
|
|
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|
|
Preferred Stock
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comprehensive
Income
|
|
Accumulated
Deficit
|
|
Total
Stockholders'
Equity
|
Nine Months Ended September 30, 2020 and 2021
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
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
|
|
|
1,397
|
|
|
—
|
|
|
—
|
|
|
1,398
|
|
Issuance of preferred stock, net of issuance costs
|
|
122
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
121,785
|
|
|
—
|
|
|
—
|
|
|
121,786
|
|
Conversion of preferred stock to common stock
|
|
(122)
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|
|
(1)
|
|
|
1,509
|
|
|
15
|
|
|
(14)
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|
|
—
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|
|
—
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|
|
—
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2020
|
|
—
|
|
|
$
|
—
|
|
|
9,476
|
|
|
$
|
95
|
|
|
$
|
423,650
|
|
|
$
|
14,169
|
|
|
$
|
(150,861)
|
|
|
$
|
287,053
|
|
Adoption of accounting standards
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29,834)
|
|
|
—
|
|
|
3,365
|
|
|
(26,469)
|
|
Balances, January 1, 2021
|
|
—
|
|
|
—
|
|
|
9,476
|
|
|
95
|
|
|
393,816
|
|
|
14,169
|
|
|
(147,496)
|
|
|
260,584
|
|
Net loss attributable to Heska Corporation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(594)
|
|
|
(594)
|
|
Issuance of common stock, net of forfeitures and shares withheld for employee taxes
|
|
—
|
|
|
—
|
|
|
284
|
|
|
3
|
|
|
2,764
|
|
|
—
|
|
|
—
|
|
|
2,767
|
|
Equity offering, net of issuance costs
|
|
—
|
|
|
—
|
|
|
941
|
|
|
9
|
|
|
164,177
|
|
|
—
|
|
|
—
|
|
|
164,186
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,861
|
|
|
—
|
|
|
—
|
|
|
14,861
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,962)
|
|
|
—
|
|
|
(6,962)
|
|
Balances, September 30, 2021
|
|
—
|
|
|
$
|
—
|
|
|
10,701
|
|
|
$
|
107
|
|
|
$
|
575,618
|
|
|
$
|
7,207
|
|
|
$
|
(148,090)
|
|
|
$
|
434,842
|
|
Note: The nine months ended September 30, 2020 excludes amounts related to redeemable non-controlling interests recorded in mezzanine equity.
|
See accompanying notes to condensed consolidated financial statements.
HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
2021
|
|
2020
|
Cash flows from operating activities:
|
|
|
|
|
Net loss after equity in losses from unconsolidated affiliates
|
|
$
|
(594)
|
|
|
$
|
(17,217)
|
|
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
10,084
|
|
|
8,041
|
|
Non-cash impact of operating leases
|
|
1,582
|
|
|
1,431
|
|
Deferred income tax (benefit) expense
|
|
(4,043)
|
|
|
1,268
|
|
Stock-based compensation
|
|
14,861
|
|
|
6,930
|
|
Change in fair value of contingent consideration
|
|
(744)
|
|
|
—
|
|
Equity in losses of unconsolidated affiliates
|
|
837
|
|
|
300
|
|
Accretion of discounts and issuance costs
|
|
48
|
|
|
4,573
|
|
Other losses
|
|
1,057
|
|
|
62
|
|
Changes in operating assets and liabilities (net of the effect of acquisitions):
|
|
|
|
|
Accounts receivable
|
|
5,504
|
|
|
(1,813)
|
|
Inventories
|
|
(9,286)
|
|
|
(3,901)
|
|
Other assets
|
|
(6,885)
|
|
|
(1,423)
|
|
Accounts payable
|
|
(2,913)
|
|
|
(2,708)
|
|
Other liabilities
|
|
(4,236)
|
|
|
(3,644)
|
|
Net cash provided by (used in) operating activities
|
|
5,272
|
|
|
(8,101)
|
|
Cash flows from investing activities:
|
|
|
|
|
Acquisition of CVM
|
|
—
|
|
|
(14,420)
|
|
Acquisition of Lacuna, net of cash acquired
|
|
(3,882)
|
|
|
—
|
|
Acquisition of Biotech
|
|
(16,250)
|
|
|
—
|
|
Acquisition of BiEssA, net of cash acquired
|
|
(4,513)
|
|
|
—
|
|
Promissory note receivable issuance
|
|
(9,000)
|
|
|
—
|
|
Purchases of property and equipment
|
|
(993)
|
|
|
(486)
|
|
Proceeds from disposition of property and equipment
|
|
42
|
|
|
—
|
|
Acquisition of scil, net of cash acquired
|
|
—
|
|
|
(105,137)
|
|
Net cash used in investing activities
|
|
(34,596)
|
|
|
(120,043)
|
|
Cash flows from financing activities:
|
|
|
|
|
Payment of stock issuance costs
|
|
(314)
|
|
|
(214)
|
|
Preferred stock proceeds
|
|
—
|
|
|
122,000
|
|
Proceeds from issuance of common stock
|
|
168,770
|
|
|
2,050
|
|
Repurchase of common stock
|
|
(1,503)
|
|
|
(652)
|
|
Repayments of other debt
|
|
(821)
|
|
|
(193)
|
|
Borrowings on other debts
|
|
—
|
|
|
508
|
|
Net cash provided by financing activities
|
|
166,132
|
|
|
123,499
|
|
Foreign exchange effect on cash and cash equivalents
|
|
(242)
|
|
|
123
|
|
Net increase (decrease) in cash and cash equivalents
|
|
136,566
|
|
|
(4,522)
|
|
Cash and cash equivalents, beginning of period
|
|
86,334
|
|
|
89,030
|
|
Cash and cash equivalents, end of period
|
|
$
|
222,900
|
|
|
$
|
84,508
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
Non-cash transfers of equipment between inventory and property and equipment, net
|
|
$
|
3,678
|
|
|
$
|
3,328
|
|
Non-cash conversion of preferred stock to common stock
|
|
$
|
—
|
|
|
$
|
122,000
|
|
Contingent consideration for acquisitions
|
|
$
|
3,290
|
|
|
$
|
—
|
|
Notes payable
|
|
$
|
15,900
|
|
|
$
|
—
|
|
Purchase price adjustment receivable for scil
|
|
$
|
—
|
|
|
$
|
1,273
|
|
Indemnity holdback for acquisition
|
|
$
|
346
|
|
|
$
|
—
|
|
See accompanying notes to condensed consolidated financial statements.
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; digital cytology 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, 2021, and the results of our operations and statements of stockholders' equity for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 2021 and 2020.
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 (loss) income is reported as "Net loss attributable to redeemable non-controlling interest" on our Condensed Consolidated Statements of Loss. The results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the full year or any future period, particularly in light of the COVID-19 pandemic and its effects on the domestic and global economies as described below. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2020 and other financial information filed with the SEC.
Beginning in the first quarter of 2020, to limit the spread of COVID-19, governments took various actions including the issuance of stay-at-home policies and social distancing procedures and guidelines, causing some businesses to adjust, reduce or suspend business and operating activities. Veterinary care is widely recognized as an "essential" service for pet owners, and veterinarians continued to deliver essential medical care for sick and injured pets. The stay-at-home policies deployed early in 2020 to combat the spread of COVID-19 resulted in a decrease in companion animal clinical visits, including delay of elective procedures and wellness visits and as a result, lower demand for diagnostic testing services. Beginning in the second quarter of 2020, certain local, state and federal governments began to ease the stay-at-home policies and allowed more businesses and facilities to re-open, leading to a recovery in companion animal clinical visits and associated demand for our diagnostic products. During the fourth quarter of 2020 and into the first quarters of 2021, increased restrictions in countries in which we operate, mainly in the European Union, and certain parts of Canada and Australia, re-emerged. In some part due to the introduction and acceptance of COVID-19 vaccines, restrictions eased in many of the countries in which we operate during the second and third quarter of 2021; however, with the rise in COVID-19 variants, the extent to which the continuation, or another wave,
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 when and to what extent normal economic and operating conditions can resume; these effects may differ from those assumed in our projected estimates. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business, mainly in our ability to place new capital equipment, primarily under long-term contracts, and manage supply chain shortages and increased costs, as a result of any economic impact that may occur in the future.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are required when establishing the allowance for credit losses and the net realizable value of inventory; determining future costs associated with warranties provided; determining the period over which our obligations are fulfilled under agreements to license product rights and/or technology rights; evaluating long-lived and intangible assets and investments for estimated useful lives and impairment; estimating the useful lives and standalone selling prices of instruments under leasing arrangements; determining the allocation of purchase price under purchase accounting; estimating the expense associated with the granting of stock; determining the need for, and the amount of a valuation allowance on deferred tax assets; determining the fair value of our embedded derivatives; and determining the value of the non-controlling interest in a business combination. Our actual results may differ from these estimates and there may be changes to those estimates in future periods.
Fair Value of Financial Instruments
In accordance with ASC 820, Fair Value Measurements (“ASC 820”), the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Quoted prices in active markets for similar assets and liabilities, quoted prices for identically similar assets or liabilities in markets that are not active and models for which all significant inputs are observable either directly or indirectly.
Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs for inactive markets.
The Company's financial instruments consist of cash and cash equivalents, short-term trade receivables and payables, long-term note receivables with embedded derivative assets, contingent consideration liabilities, notes payable for acquisitions and its 3.75% Convertible Senior Notes due 2026 (the "Notes"). The carrying values of cash and cash equivalents and short-term trade receivables and payables approximate fair value because of the short-term nature of the instruments.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair values of our financial instruments at September 30, 2021 and December 31, 2020 were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
2021
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
Convertible note receivable embedded derivative
|
|
$
|
987
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
987
|
|
Promissory note receivable derivative
|
|
396
|
|
|
—
|
|
|
—
|
|
|
396
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
Lacuna Contingent Consideration
|
|
956
|
|
|
—
|
|
|
—
|
|
|
956
|
|
BiEsseA Contingent Consideration
|
|
2,334
|
|
|
—
|
|
|
—
|
|
|
2,334
|
|
Notes payable
|
|
15,900
|
|
|
—
|
|
|
—
|
|
|
15,900
|
|
Balances, September 30, 2021
|
|
$
|
20,573
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,573
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
Convertible note receivable embedded derivative
|
|
$
|
1,194
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2020
|
|
$
|
1,194
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,194
|
|
The Company's financial assets based upon Level 3 inputs include embedded derivatives relating to its note receivables. The Company determined the redemption features of its convertible note receivable represents an embedded derivative. The estimated fair value of the embedded derivative asset is evaluated through Level 3 inputs using a probability-weighted scenario analysis. The Company determined the warrant associated with its promissory note receivable represents a derivative. The estimated fair value of the derivative asset is evaluated through Level 3 inputs, using an enterprise valuation model. For additional information regarding the Company's note receivables and derivatives, refer to Note 17, Notes Receivable.
The estimated fair value of the Company's 3.75% Convertible Senior Notes due in 2026 (the "Notes"), is disclosed at each reporting period and is evaluated through Level 2 inputs with consideration of quoted market prices in less active markets. For additional information regarding the Company's accounting treatment for the issuance of the Notes, refer to Note 16, Convertible Notes.
The Company's financial liabilities based upon Level 3 inputs include contingent consideration arrangements and notes payable relating to its acquisitions of Lacuna, BiEsseA and Biotech. The Company is obligated to pay contingent consideration payments of $2.0 million in connection with the Lacuna acquisition based on the achievement of certain performance metrics within a twelve month period ("Initial Earn Out Period"), reducing to $1.0 million if such metrics were met in a twelve month period subsequent to the Initial Earn Out Period. The Company is obligated to pay contingent consideration payments of $2.9 million in connection with the BiEsseA acquisition based on the achievement of certain revenue metrics within three annual periods after 2021. The Company is obligated to pay contingent notes of up to $17.5 million in connection with the Biotech acquisition based on the achievement of certain product development milestones or at a predetermined date in the future. Refer to Note 3, Acquisitions and Related Party Items for further discussion.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of our contingent consideration and notes payable arrangements are determined based on a probability-weighted outcome analysis. The fair value of the contingent consideration and notes payable liabilities associated with future payments were based on several factors, the most significant of which are the financial and product development performance of the acquired businesses. The Company will update its assumptions each reporting period based on new developments and record such amounts at fair value based on the revised assumptions until the agreements expire. Changes in fair value are recorded in the Consolidated Statements of Loss within general and administrative expenses.
The following table presents the changes of our Level 3 assets and liabilities as of September 30, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Contingent Consideration Liabilities
|
|
Notes Payable
|
|
|
Convertible note receivable
|
|
Promissory note receivable
|
|
Lacuna
|
|
BiEsseA
|
|
Biotech
|
Balances, December 31, 2020
|
|
$
|
1,194
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Acquisition value
|
|
—
|
|
|
307
|
|
|
1,700
|
|
|
2,334
|
|
|
15,900
|
|
Cash payments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Changes in fair value
|
|
(207)
|
|
|
89
|
|
|
(744)
|
|
|
—
|
|
|
—
|
|
Balances, September 30, 2021
|
|
$
|
987
|
|
|
$
|
396
|
|
|
$
|
956
|
|
|
$
|
2,334
|
|
|
$
|
15,900
|
|
Significant Accounting Policies
Our accounting policies are described in our audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2020, and other than the recently adopted accounting pronouncements and options embedded in a non-controlling interest described below, have not changed materially since such filing.
Options Embedded in Non-controlling Interest
The Company applies the guidance in ASC 480, Distinguishing Liabilities from Equity, to determine whether the put and call options embedded in shares representing a non-controlling interest represent a liability. If the fixed price of the embedded put and call options are identical at a stated future date, the embedded options and the non-controlling interest are accounted for on a combined basis as a financing arrangement of the purchase of the non-controlling interest and are recorded as a liability at fair value on the reporting date. The Company fully consolidates the subsidiary, including 100 percent of the subsidiary net income or loss, in its Condensed Consolidated Statements of Loss.
Adoption of New Accounting Pronouncements
Effective January 1, 2021, we adopted 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. We evaluated the impact of the standard on our consolidated financial statements and the adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures.
Effective January 1, 2021, we adopted 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, investments in
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
equity method and certain derivatives instruments. The ASU is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. We evaluated the impact of the standard on our consolidated financial statements and the adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures.
Effective January 1, 2021, we early adopted 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 Company's 3.75% Convertible Senior Notes due 2026 (the "Notes") are a convertible instrument with a cash-conversion feature that is accounted for within the scope of ASC 470-20 and impacted by the adoption of ASU 2020-06. The Company has elected to apply the modified retrospective method wherein the Company recognized a cumulative-effect adjustment to the opening balance of retained earnings (January 1, 2021). Further, the Company will not restate EPS in prior periods. The Company calculated the cumulative-effect adjustment as of January 1, 2021 by comparing (i) the historical amortization schedule for the Notes through December 31, 2020 and (ii) an updated amortization schedule wherein the conversion feature within the Notes would not be separated as an equity component and subsequently recognized as non-cash interest expense under ASC 835-30. As a result of ASU 2020-06, while cash interest expense is not impacted, non-cash interest accretion is limited to the amortization of debt issuance costs under ASC 835-30. Therefore, the Company prepared its transition journal entries by (i) reversing the conversion feature amount recorded in APIC and (ii) reversing the difference in non-cash interest expense via retained earnings. The adoption resulted in a decrease to accumulated deficit of $3.4 million, a decrease to additional paid-in capital of $29.8 million, and an increase to convertible note, non-current, net of $35.2 million. Additionally, due to the adoption, the Company reversed the remaining balance of the net deferred tax liability of $8.8 million, which was initially recorded in connection with the Notes.
Effective January 1, 2021, we adopted ASU 2020-10, Codification Improvements, which updates various codification topics by clarifying or improving disclosure requirements to align with the SEC's regulations. We evaluated the impact of the standard on our consolidated financial statements and the adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures.
In July 2021, the Financial Accounting Standards Board (the "FASB") issued ASU 2021-05, Leases (Topic 842), Lessors- Certain Leases with Variable Lease Payments. This guidance amends the lease classification accounting for lessors for certain leases with variable lease payments that do not depend on a reference index or a rate and would have resulted in the recognition of a loss at lease commencement if classified as a sale-type or direct financing lease. Under the new guidance, these leases will be classified as an operating lease. The amendment is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. We do not expect adoption of the new guidance to have a material impact on our financial statements.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. REVENUE
We separate our goods and services among two reportable segments, North America and International. The two segments consist of revenue originating from:
•North America: including the United States, Canada and Mexico
•International: all geographies outside North America, currently consisting primarily of Australia, France, Germany, Italy, Malaysia, Spain and Switzerland
Refer to Note 18 for further detail regarding the Company's reportable segments.
The following table summarizes our segment revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
North America Revenue:
|
|
|
|
|
|
|
|
POC Lab Instruments & Other
|
$
|
3,547
|
|
|
$
|
3,768
|
|
|
$
|
10,017
|
|
|
$
|
9,346
|
|
POC Lab Consumables
|
17,694
|
|
|
16,071
|
|
|
53,942
|
|
|
43,294
|
|
POC Imaging
|
7,433
|
|
|
5,268
|
|
|
21,222
|
|
|
12,912
|
|
PVD
|
4,297
|
|
|
5,437
|
|
|
17,370
|
|
|
14,821
|
|
OVP
|
4,838
|
|
|
3,906
|
|
|
13,063
|
|
|
10,708
|
|
Total North America Revenue
|
$
|
37,809
|
|
|
$
|
34,450
|
|
|
$
|
115,614
|
|
|
$
|
91,081
|
|
International Revenue:
|
|
|
|
|
|
|
|
POC Lab Instruments & Other
|
$
|
3,800
|
|
|
$
|
2,920
|
|
|
$
|
10,801
|
|
|
$
|
5,360
|
|
POC Lab Consumables
|
11,223
|
|
|
11,387
|
|
|
35,383
|
|
|
21,418
|
|
POC Imaging
|
5,849
|
|
|
7,029
|
|
|
19,783
|
|
|
12,791
|
|
PVD
|
1,559
|
|
|
850
|
|
|
4,090
|
|
|
2,351
|
|
OVP
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total International Revenue
|
$
|
22,431
|
|
|
$
|
22,186
|
|
|
$
|
70,057
|
|
|
$
|
41,920
|
|
Total Revenue
|
$
|
60,240
|
|
|
$
|
56,636
|
|
|
$
|
185,671
|
|
|
$
|
133,001
|
|
Remaining Performance Obligations
Remaining performance obligations represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year which are fully or partially unsatisfied at the end of the period. Remaining performance obligations include noncancellable purchase orders, the non-lease portion of minimum purchase commitments under long-term supply arrangements, extended warranty, service and other long-term contracts. Remaining performance obligations do not include revenue from contracts with customers with an original term of one year or less, revenue from long-term supply arrangements with no minimum purchase requirements, revenue expected from purchases made in excess of the minimum purchase requirements, or revenue from instruments leased to customers. While the remaining performance obligations disclosure is similar in concept to backlog, the definition of remaining performance obligations excludes leases and contracts that provide the customer with the right to cancel or terminate for convenience with no substantial penalty, even if historical experience indicates the likelihood of cancellation or termination is remote. Additionally, the Company has elected to exclude contracts with customers with an original term of one year or less from remaining performance obligations.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of September 30, 2021, the aggregate amount of the transaction price allocated to remaining minimum performance obligations was approximately $163.0 million. As of September 30, 2021, the Company expects to recognize revenue as follows (in thousands):
|
|
|
|
|
|
Year Ending December 31,
|
Revenue
|
2021 (remaining)
|
$
|
10,118
|
|
2022
|
38,259
|
|
2023
|
34,304
|
|
2024
|
29,424
|
|
2025
|
23,651
|
|
Thereafter
|
27,254
|
|
|
$
|
163,010
|
|
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled contract assets, deferred revenue, and customer deposits and billings in excess of revenue recognized. In addition, the Company defers certain costs incurred to obtain contracts.
Contract Assets
Certain unbilled amounts related to long-term contracts for which we provide a free term to the customer are recorded in "Other current assets" and "Other non-current assets" on the accompanying Condensed Consolidated Balance Sheets. The collection of these balances occurs over the term of the underlying contract. The balances as of September 30, 2021 were $1.4 million and $4.6 million for current and non-current assets, respectively, shown net of related unearned interest. The balances as of December 31, 2020 were $1.2 million and $4.1 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, 2021 and December 31, 2020, contract liabilities were $7.5 million and $8.9 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, 2021 is approximately $4.9 million of revenue recognized during the period, offset by approximately $3.5 million of additional deferred sales in 2021. Contract liabilities are reported on the accompanying Condensed Consolidated Balance Sheets on a contract-by-contract basis.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. ACQUISITIONS AND RELATED PARTY ITEMS
Biotech Acquisition
On September 1, 2021, Heska acquired 65% of the equity of Biotech Laboratories U.S.A. LLC ("Biotech"), a developer of rapid assay diagnostic testing, in exchange for approximately $16.3 million in cash. As part of the purchase, Heska entered into put and call options in order to purchase the remaining 35% ownership in future years. The counterparty, Chinta Lamichhane, DVM, Ph.D, maintains an interest in Biotech and is an employee of the Company, thus commencing a related party relationship. Aside from the acquisition described herein, there were no financial or non-financial transactions between the Company and the counterparty.
In conjunction with the acquisition, the Company entered into various put and call options which are classified on the Condensed Consolidated Balance Sheets as Notes Payable. The written put options can be exercised after June 30, 2024, at a valuation identical to the initial purchase price. The written call options can be exercised at any time prior to June 30, 2026, at an amount equal to two times the initial valuation or after June 30, 2026, at a valuation identical to the initial purchase price. Additionally, if certain product development milestones are met, the shares may be bought in various tranches at two times the initial valuation. The Company evaluated the put and call options embedded in the shares representing the non-controlling interest under the guidance in ASC 480, Distinguishing Liabilities from Equity, and determined the instrument met the criteria to be recorded as a liability because the fixed price of the put and call options are identical starting after June 30, 2026. As a result, the Company recorded the transaction as a financing arrangement of the purchase of the non-controlling interest, and will record 100% of the income and loss of Biotech in our Condensed Consolidated Statements of Loss. The options were not redeemable as of the acquisition date or as of the period ending September 30, 2021. The estimated fair value of the Notes Payable of $15.9 million is inclusive of the probability weighted outcomes of the options described herein.
The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in goodwill of $25.8 million, all of which is attributable to our North America segment. In connection with the acquisition and pursuant to the elections under Section 754 of the Internal Revenue Code, the Company expects to obtain an increase with respect to the tax basis in the assets of Biotech.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of September 1, 2021.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The information below represents the preliminary purchase price allocation as of the acquisition date (in thousands):
|
|
|
|
|
|
|
September 1, 2021
|
Purchase price
|
$
|
16,250
|
|
Notes payable
|
15,900
|
|
Total purchase consideration
|
$
|
32,150
|
|
Accounts receivables
|
18
|
|
Other current assets
|
1
|
|
Inventories
|
173
|
|
Property and equipment, net
|
167
|
|
Operating lease right-of-use assets
|
1,014
|
|
Other intangible assets, net
|
6,000
|
|
Other non-current assets
|
15
|
|
Total assets acquired
|
7,388
|
|
Accounts payable
|
11
|
|
Accrued liabilities
|
33
|
|
Operating lease liabilities, current
|
193
|
|
Operating lease liabilities, non-current
|
821
|
|
Net assets acquired
|
6,330
|
|
Goodwill
|
25,820
|
|
Total fair value of consideration transferred
|
$
|
32,150
|
|
The Company's preliminary estimates of fair values of the net assets acquired are based on the information that was available at the date of the acquisition, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the date of the acquisition. A decrease in the fair value of assets acquired or an increase in the fair value of liabilities assumed in the acquisition from those valuations would result in a corresponding increase in the amount of goodwill from the acquisition.
Intangible assets acquired, amortization method and estimated useful life as of September 1, 2021, was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
Amortization
Method
|
|
Fair Value
|
Development technology
|
6 years
|
|
Straight-line
|
|
$
|
6,000
|
|
Total intangible assets acquired
|
|
|
|
|
$
|
6,000
|
|
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Pro forma financial information related to the acquisition of Biotech has not been provided as it is not material to our consolidated results of operations.
BiEsseA Acquisition
On July 1, 2021, the Company completed the acquisition of BiEsse A-Laboratorio die Analisi Veterinarie S.r.l. (“BSA”). The Company acquired 100% of the issued and outstanding shares of BSA for an aggregate purchase price of $7.2 million.
As additional consideration for the shares, the Company agreed to a contingent earn-out of an additional $2.9 million based on the achievement of certain performance metrics within three annual periods after 2021, each of which can pay up to one third of the total earn-out. The fair value of the contingent consideration as of the acquisition date, and as of September 30, 2021 was $2.3 million.
The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in $4.6 million of goodwill, all of which is attributable to our International segment. All of the goodwill is tax deductible for purposes of calculating Controlled Foreign Corporation tested income, which may result in a decrease to the Company's future U.S. federal income tax liability.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of July 1, 2021. The total purchase consideration is subject to customary working capital adjustments.
Per the tax indemnification included in the purchase agreement of BSA, the seller has indemnified the Company for $0.5 million related to uncertain tax positions taken in prior years. The outcome of this arrangement will either be settled or expire due to lapse of statute of limitations by 2025. As of September 30, 2021, approximately $0.5 million of the indemnification agreement remains outstanding.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The information below represents the preliminary purchase price allocation as of the acquisition date (in thousands):
|
|
|
|
|
|
|
July 1, 2021
|
Purchase price
|
$
|
4,835
|
|
Fair value of contingent consideration
|
2,334
|
|
Total purchase consideration
|
$
|
7,169
|
|
|
|
Cash and cash equivalents
|
322
|
|
Accounts receivables
|
152
|
|
Other receivables
|
497
|
|
Prepaid expenses
|
8
|
|
Other current assets
|
275
|
|
Property and equipment, net
|
89
|
|
Operating lease right-of-use assets
|
44
|
|
Other intangible assets, net
|
3,329
|
|
Deferred tax asset, net
|
19
|
|
Total assets acquired
|
4,735
|
|
Accounts payable
|
208
|
|
Accrued liabilities
|
334
|
|
Operating lease liabilities, current
|
37
|
|
Deferred revenue, current, and other
|
85
|
|
Operating lease liabilities, non-current
|
20
|
|
Deferred tax liability
|
944
|
|
Other liabilities
|
500
|
|
Net assets acquired
|
2,607
|
|
Goodwill
|
4,562
|
|
Total fair value of consideration transferred
|
$
|
7,169
|
|
The Company's preliminary estimates of fair values of the net assets acquired are based on the information that was available at the date of the acquisition, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the date of the acquisition. A decrease in the fair value of assets acquired or an increase in the fair value of liabilities assumed in the acquisition from those valuations would result in a corresponding increase in the amount of goodwill from the acquisition.
Intangible assets acquired, amortization method and estimated useful life as of July 1, 2021, was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
Amortization Method
|
|
Fair Value
|
Customer relationships
|
14 years
|
|
Straight-line
|
|
$
|
3,329
|
|
Total intangible assets acquired
|
|
|
|
|
$
|
3,329
|
|
Pro forma financial information related to the acquisition of Biotech has not been provided as it is not material to our consolidated results of operations.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Lacuna Acquisition
On February 1, 2021, the Company completed the acquisition of Lacuna Diagnostics, Inc. ("Lacuna"), a veterinary digital cytology company, to broaden the Company's point of care diagnostic offerings. The Company acquired 100% of the issued and outstanding shares of Lacuna for a purchase price of $4.3 million. The Company then dissolved Lacuna on February 1, 2021. In accordance with the purchase agreement, the Company is required to hold a $0.4 million general indemnity holdback that is intended to provide a non-exclusive source of funds for the payment of any losses identified and shall be released within 18 months of closing. As of September 30, 2021, $0.4 million of the indemnification holdback remains outstanding. As additional consideration for the shares, the Company agreed to a contingent earn-out of an additional $2.0 million based on the achievement of certain performance metrics within a twelve month period ("Initial Earn Out Period"), reducing to $1.0 million if such metrics were met in a twelve month period subsequent to the Initial Earn Out Period. The fair value of the contingent consideration as of the acquisition date was $1.7 million, and subsequently decreased to $1.0 million in the quarter ending September 30, 2021.
The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in $3.9 million of goodwill, primarily related to expanded opportunities with our offerings. All of the goodwill is allocated to the North America segment and is not tax deductible for income tax purposes.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of February 1, 2021.
The information below represents the preliminary purchase price allocation as of the acquisition date (in thousands):
|
|
|
|
|
|
|
February 1, 2021
|
Purchase price
|
$
|
4,255
|
|
Fair value of contingent consideration
|
1,700
|
|
Total purchase consideration
|
$
|
5,955
|
|
|
|
Cash and cash equivalents
|
$
|
3
|
|
Accounts receivable
|
170
|
|
Property and equipment, net
|
530
|
|
Other intangible assets, net
|
1,185
|
|
Deferred tax asset
|
167
|
|
Total assets acquired
|
2,055
|
|
Goodwill
|
3,900
|
|
Total fair value of consideration transferred
|
$
|
5,955
|
|
The Company's preliminary estimates of fair values of the net assets acquired are based on the information that was available at the date of the acquisition, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the date of the acquisition.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Intangible assets acquired, amortization method and estimated useful life as of February 1, 2021, was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
Amortization
Method
|
|
Fair Value
|
Developed technology
|
3 years
|
|
Straight-line
|
|
$
|
1,000
|
|
Customer relationships
|
6 months
|
|
Straight-line
|
|
150
|
|
Trade name
|
11 months
|
|
Straight-line
|
|
35
|
|
Total intangible assets acquired
|
|
|
|
|
$
|
1,185
|
|
Pro forma financial information related to the acquisition of Lacuna has not been provided as it is not material to our consolidated results of operations.
scil Acquisition
On April 1, 2020, the Company completed the acquisition of scil animal care company GmbH (“scil”) from Covetrus, Inc. The Company purchased 100% of the capital stock of scil for an aggregate price of $110.3 million in cash. 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 purchase price exceeded the identifiable net assets, resulting in goodwill of $46.0 million, primarily attributable to the synergies expected from the expanded market opportunities with our offerings and the experienced workforce acquired. Of the goodwill acquired, $37.3 million is allocated to our International segment and $8.7 million is allocated to our North America segment. All of the goodwill is tax deductible for purposes of calculating Controlled Foreign Corporation tested income, which may result in a decrease to the Company's future U.S. federal tax liability.
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 their fair values as of April 1, 2020. The Company finalized the accounting for the acquisition as of March 31, 2021.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The information below represents the final purchase price allocation of scil (in thousands):
|
|
|
|
|
|
|
April 1, 2020
|
Total purchase consideration
|
$
|
110,290
|
|
|
|
Cash and cash equivalents
|
$
|
5,889
|
|
Accounts receivable
|
10,707
|
|
Inventories
|
11,278
|
|
Net investment in lease, current
|
311
|
|
Prepaid expenses
|
1,692
|
|
Other current assets
|
1,338
|
|
Property and equipment, net
|
19,320
|
|
Operating lease right-of-use assets
|
877
|
|
Other intangible assets, net
|
44,517
|
|
Net investment in leases, non-current
|
1,027
|
|
Investments in unconsolidated affiliates
|
55
|
|
Other non-current assets
|
291
|
|
Total assets acquired
|
97,302
|
|
Accounts payable
|
8,221
|
|
Accrued liabilities
|
7,067
|
|
Operating lease liabilities, current
|
356
|
|
Deferred revenue, current, and other
|
3,220
|
|
Deferred revenue, non-current
|
94
|
|
Operating lease liabilities, non-current
|
529
|
|
Deferred tax liability
|
13,249
|
|
Other liabilities
|
276
|
|
Net assets acquired
|
64,290
|
|
Goodwill
|
46,000
|
|
Total fair value of consideration transferred
|
$
|
110,290
|
|
Per the tax indemnification included in the purchase agreement of scil, the seller has indemnified the Company for $1.1 million related to uncertain tax positions taken in prior years. The outcome of this arrangement will either be settled or expire due to lapse of statute of limitations by 2027. As of September 30, 2021, approximately $0.4 million of the indemnification agreement remains outstanding.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Intangible assets acquired, amortization method and estimated useful life as of April 1, 2020, was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
Amortization
Method
|
|
Fair Value
|
Customer relationships
|
10 years
|
|
Straight-line
|
|
$
|
36,272
|
|
Internally developed software
|
7 years
|
|
Straight-line
|
|
353
|
|
Backlog
|
0.2 years
|
|
Straight-line
|
|
210
|
|
Non-compete agreements
|
2 years
|
|
Straight-line
|
|
60
|
|
Trade name subject to amortization
|
0.8 years
|
|
Straight-line
|
|
66
|
|
Trademarks and trade names not subject to amortization
|
n/a
|
|
Indefinite
|
|
7,556
|
|
Total intangible assets acquired
|
|
|
|
|
$
|
44,517
|
|
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
|
|
|
|
$
|
151,552
|
|
Net (loss) income before equity in losses of unconsolidated affiliates
|
|
|
|
$
|
(17,733)
|
|
|
|
|
|
|
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.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Related Party Activities
CVM Diagnostico Veternario S.L. and CVM Ecografia S.L. (“CVM”, collectively) conducted related party activities with Practice Clinicas Veterinarias Moviles, S.L. ("CVM Practice"), the owner of which was part of CVM management through June 1, 2021. CVM continues to lease two warehouses from CVM Practice, however the related party relationship was terminated as of June 1, 2021. CVM Practice charged CVM $24 thousand and $23 thousand during the nine months ended September 30, 2021 and nine months ended September 30, 2020, respectively, all of which is related to lease payments. The right-of-use asset and lease liability amounts related to the warehouse leases were approximately $0.2 million as of both September 30, 2021 and December 31, 2020.
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The carrying values of investments in unconsolidated affiliates, categorized by type of investment, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
Equity method investment
|
$
|
2,849
|
|
|
$
|
3,686
|
|
Non-marketable equity security investment
|
3,018
|
|
|
3,018
|
|
Investments in unconsolidated affiliates
|
$
|
5,867
|
|
|
$
|
6,704
|
|
Equity Method Investment
On September 24, 2018, the Company invested approximately $5.1 million, including costs, to acquire an equity interest in a business as part of its product development strategy. As of September 30, 2021, the Company's ownership interest in the business was 29.1%. In connection with the investment, the Company entered into a Manufacturing Supply Agreement that grants the Company global exclusivity to specified products to be delivered under the agreement for a 15-year period that begins upon the Company's receipt and acceptance of an initial order under the agreement. The Company accounts for this investment using the equity method of accounting. Under the equity method, the carrying value of the investment is adjusted for the Company's proportionate share of the investee's reported earnings or losses with the corresponding share of earnings or losses reported as Equity in losses of unconsolidated affiliates, listed below Net (loss) income before equity in losses of unconsolidated affiliates within the Condensed Consolidated Statements of Loss.
Non-Marketable Equity Security Investment
On August 8, 2018, the Company invested approximately $3.0 million, including costs, in exchange for preferred stock. The Company’s investment is a non-marketable equity security, recorded using the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes.
As part of the agreement, the Company entered into a Supply and License Agreement, which provides that the investee produce and commercialize products that will enhance the Company's diagnostic portfolio. As part of this agreement, the Company made an upfront payment of $1.0 million related to a worldwide exclusive license agreement over a 20-year period, recorded in both short and long-term other assets. In addition, the agreement provides for an additional contingent payment of $10.0 million, relating to the successful achievement of sales milestones. This potential future milestone payment has not yet been accrued as it is not deemed by the Company to be probable at this time.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Both parties in this arrangement are active participants and are exposed to significant risks and rewards dependent on the commercial success of the activities of the collaboration. The parties are actively working on developing and testing the product as well as funding the research and development. Heska classifies the amounts paid for research and development work within the North America segment research and development operating expenses. Expense is recognized ratably when incurred and in accordance with the development plan.
5. INCOME TAXES
The Company's total income tax (benefit) expense for our loss before income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Loss before income taxes and equity in losses of unconsolidated affiliates
|
|
$
|
(2,403)
|
|
|
$
|
(1,808)
|
|
|
$
|
(3,186)
|
|
|
$
|
(15,224)
|
|
Total income tax (benefit) expense
|
|
$
|
(813)
|
|
|
$
|
3,413
|
|
|
$
|
(3,429)
|
|
|
$
|
1,693
|
|
There were cash payments for income taxes of $0.4 million and $1.6 million for the three and nine months ended September 30, 2021, respectively, and there were cash payments of $0.5 million and $0.8 million, respectively, for income taxes for the three and nine months ended September 30, 2020. The Company had a tax benefit of $0.8 million and tax benefit of $3.4 million for the three and nine months ended September 30, 2021, respectively, compared to the tax expense of $3.4 million and tax expense of $1.7 million for the three and nine months ended September 30, 2020, respectively. The increase in tax benefit in the nine month period is due to excess tax benefits recognized from employee stock compensation, partially offset by non-deductible executive compensation and a release in the partial valuation allowance further discussed below. The Company recognized $0.7 million in excess tax benefits related to employee share-based compensation for the three months ended September 30, 2021, compared to $0.1 million recognized for the three months ended September 30, 2020. The Company recognized $1.7 million in excess tax benefits related to employee share-based compensation for the nine months ended September 30, 2021, compared to $0.5 million recognized for the nine months ended September 30, 2020.
As of September 30, 2021, the Company had a deferred tax asset of approximately $9.4 million from net operating losses and tax credits and a net partial valuation allowance recorded against these deferred tax assets. During the current year, the Company forecasts the release of approximately $0.3 million of the partial valuation allowance through the annual effective tax rate used to estimate tax expense. The release is due to an increase in non-deductible executive compensation and capitalization of research and development expenses that results in the projected utilization of net operating losses in the current year. After the release, the net partial valuation allowance is forecasted to be approximately $4.1 million as of December 31, 2021.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. LEASES
Lessee Accounting
The Company leases buildings, office equipment, and vehicles. The following table summarizes the Company's operating and finance lease balances (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
Balance Sheet Location
|
|
September 30, 2021
|
|
December 31, 2020
|
Assets
|
|
|
|
|
|
|
Operating
|
|
Operating lease right-of-use assets
|
|
$
|
5,664
|
|
|
$
|
5,457
|
|
Finance
|
|
Property and equipment, net
|
|
1,625
|
|
|
1,907
|
|
Total Leased Assets
|
|
|
|
$
|
7,289
|
|
|
$
|
7,364
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Operating
|
|
Operating lease liabilities, current
|
|
$
|
2,251
|
|
|
$
|
2,087
|
|
|
|
Operating lease liabilities, non-current
|
|
3,933
|
|
|
3,858
|
|
Finance
|
|
Deferred revenue, current, and other
|
|
200
|
|
|
295
|
|
|
|
Other liabilities
|
|
244
|
|
|
261
|
|
Total Lease Liabilities
|
|
|
|
$
|
6,628
|
|
|
$
|
6,501
|
|
Lessor Accounting
The following table summarizes the profit recognized on the commencement date for sales-type leases and lease income for equipment-only operating leases (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Sales-type lease revenue
|
$
|
3,086
|
|
|
$
|
1,622
|
|
|
$
|
8,212
|
|
|
$
|
4,211
|
|
Sales-type lease cost of revenue
|
2,417
|
|
|
1,048
|
|
|
6,378
|
|
|
2,834
|
|
Profit recognized at commencement for sales-type leases
|
$
|
669
|
|
|
$
|
574
|
|
|
$
|
1,834
|
|
|
$
|
1,377
|
|
|
|
|
|
|
|
|
|
Operating lease income
|
$
|
514
|
|
|
$
|
476
|
|
|
$
|
1,655
|
|
|
$
|
918
|
|
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. EARNINGS PER SHARE
The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted earnings per share ("EPS") for the three and nine months ended September 30, 2021 and 2020 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net loss attributable to Heska Corporation
|
$
|
(1,898)
|
|
|
$
|
(5,219)
|
|
|
$
|
(594)
|
|
|
$
|
(16,864)
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
10,195
|
|
|
9,123
|
|
|
9,949
|
|
|
8,486
|
|
Dilutive effect of stock options and restricted stock awards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted-average common shares outstanding
|
10,195
|
|
|
9,123
|
|
|
9,949
|
|
|
8,486
|
|
|
|
|
|
|
|
|
|
Basic loss per share attributable to Heska Corporation
|
$
|
(0.19)
|
|
|
$
|
(0.57)
|
|
|
$
|
(0.06)
|
|
|
$
|
(1.99)
|
|
Diluted loss per share attributable to Heska Corporation
|
$
|
(0.19)
|
|
|
$
|
(0.57)
|
|
|
$
|
(0.06)
|
|
|
$
|
(1.99)
|
|
The following potentially outstanding common shares from convertible preferred stock, convertible senior notes, stock options and restricted stock awards were excluded from the computation of diluted EPS because the effect would have been antidilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Convertible preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
|
611
|
|
Convertible Senior Notes
|
996
|
|
|
123
|
|
|
996
|
|
|
56
|
|
Stock options and restricted stock
|
404
|
|
|
312
|
|
|
381
|
|
|
329
|
|
|
1,400
|
|
|
435
|
|
|
1,377
|
|
|
996
|
|
As more fully described in Note 16, the Notes are convertible under certain circumstances, as defined in the indenture, into a combination of cash and shares of the Company's common stock. As discussed in Note 1, the Company early adopted ASU 2020-06, effective January 1, 2021, which amends certain guidance on the computation of EPS for convertible instruments. Prior to the adoption of ASU 2020-06, the Company used the treasury stock method when calculating the potential dilutive effect of the conversion feature of the Notes on earnings per share, if any. Under ASU 2020-06, the treasury stock method is no longer available, and entities must apply the if-converted method for convertible instruments and the effect of potential share settlement must be included in the diluted earnings per share calculation when an instrument may be settled in cash or shares. To determine the dilutive effect to earnings per share using the if-converted method, interest expense on the outstanding Notes is added back to the diluted earnings per share numerator and all of the potentially dilutive shares are included in the diluted earnings per share denominator. For the three and nine months ended September 30, 2021, all of the potentially issuable shares with respect to the Notes were excluded from the calculation of diluted net earnings per share because the effect was anti-dilutive. The Company has elected to apply the modified retrospective method of adoption and will not restate EPS for the prior period.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. GOODWILL AND OTHER INTANGIBLES
The following summarizes the change in goodwill during the nine months ended September 30, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
International
|
|
Total
|
Carrying amount, December 31, 2020
|
$
|
35,414
|
|
|
$
|
52,862
|
|
|
$
|
88,276
|
|
Goodwill attributable to acquisitions (subject to change)
|
29,720
|
|
|
4,562
|
|
|
34,282
|
|
Foreign currency adjustments
|
91
|
|
|
(3,065)
|
|
|
(2,974)
|
|
Carrying amount, September 30, 2021
|
$
|
65,225
|
|
|
$
|
54,359
|
|
|
$
|
119,584
|
|
Other intangibles consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Gross Carrying Amount
|
|
Accum. Amortiz.
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accum. Amortiz.
|
|
Net Carrying Amount
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships and other
|
$
|
48,412
|
|
|
$
|
(10,045)
|
|
|
$
|
38,367
|
|
|
$
|
46,989
|
|
|
$
|
(6,436)
|
|
|
$
|
40,553
|
|
Developed technology
|
15,643
|
|
|
(2,665)
|
|
|
12,978
|
|
|
8,669
|
|
|
(1,696)
|
|
|
6,973
|
|
Trade names
|
225
|
|
|
(151)
|
|
|
74
|
|
|
197
|
|
|
(105)
|
|
|
92
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
7,915
|
|
|
—
|
|
|
7,915
|
|
|
8,374
|
|
|
—
|
|
|
8,374
|
|
Total intangible assets
|
$
|
72,195
|
|
|
$
|
(12,861)
|
|
|
$
|
59,334
|
|
|
$
|
64,229
|
|
|
$
|
(8,237)
|
|
|
$
|
55,992
|
|
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Amortization expense relating to other intangibles was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Amortization expense
|
$
|
1,567
|
|
|
$
|
1,502
|
|
|
$
|
4,623
|
|
|
$
|
3,556
|
|
The remaining weighted-average amortization period for intangible assets is approximately 7.7 years.
Estimated amortization expense related to intangibles for each of the five years from 2021 (remaining) through 2025 and thereafter is as follows (in thousands):
|
|
|
|
|
|
Year Ending December 31,
|
|
2021 (remaining)
|
$
|
1,858
|
|
2022
|
7,362
|
|
2023
|
6,999
|
|
2024
|
6,571
|
|
2025
|
6,516
|
|
Thereafter
|
22,113
|
|
Total amortization related to finite-lived intangible assets
|
$
|
51,419
|
|
Indefinite-lived intangible assets
|
7,915
|
|
Net intangible assets
|
$
|
59,334
|
|
9. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
Land
|
$
|
2,468
|
|
|
$
|
2,590
|
|
Building
|
12,209
|
|
|
12,737
|
|
Machinery and equipment
|
42,298
|
|
|
40,411
|
|
Office furniture and equipment
|
2,236
|
|
|
2,047
|
|
Computer hardware and software
|
5,362
|
|
|
4,773
|
|
Leasehold and building improvements
|
10,765
|
|
|
10,728
|
|
Construction in progress
|
88
|
|
|
4
|
|
Property and equipment, gross
|
75,426
|
|
|
73,290
|
|
Less accumulated depreciation
|
(41,699)
|
|
|
(37,748)
|
|
Total property and equipment, net
|
$
|
33,727
|
|
|
$
|
35,542
|
|
The Company has subscription agreements whereby its instruments in inventory may be placed at a customer's location on a rental basis. For instruments classified as operating leases, the cost of these instruments is transferred to machinery and equipment and depreciated, typically over a 5 to 7 year period depending on the circumstance under which the instrument is placed with the customer. Our cost of instruments under operating leases as of September 30, 2021 and December 31, 2020, was $15.0 million and $13.6 million, respectively, before accumulated depreciation of $5.5 million and $4.7 million, respectively.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation expense was $1.7 million and $1.7 million for the three months ended September 30, 2021 and 2020, respectively, and $5.2 million and $4.3 million for the nine months ended September 30, 2021 and 2020, respectively.
10. INVENTORIES
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
Raw materials
|
$
|
14,393
|
|
|
$
|
14,454
|
|
Work in process
|
4,854
|
|
|
4,262
|
|
Finished goods
|
25,789
|
|
|
21,321
|
|
Total inventories
|
$
|
45,036
|
|
|
$
|
40,037
|
|
Inventories are measured on a first-in, first-out basis and stated at lower of cost or net realizable value.
11. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
Accrued payroll and employee benefits
|
$
|
7,878
|
|
|
$
|
7,949
|
|
Accrued property taxes
|
499
|
|
|
659
|
|
Accrued purchase orders
|
2,028
|
|
|
1,549
|
|
Accrued taxes
|
3,521
|
|
|
3,731
|
|
Other
|
3,934
|
|
|
4,167
|
|
Total accrued liabilities
|
$
|
17,860
|
|
|
$
|
18,055
|
|
Other accrued liabilities consist of items that are individually less than 5% of total current liabilities.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. CAPITAL STOCK
During the nine months ended September 30, 2021, the Company granted the following stock options, restricted stock awards, and restricted stock units:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2021
|
|
Options/Awards/Units
Granted
|
|
Weighted-Average Grant Date Fair Value
(per option/award)
|
Stock options
|
54,300
|
|
|
$
|
78.19
|
|
Restricted stock awards
|
243,369
|
|
|
$
|
207.24
|
|
Restricted stock units
|
6,000
|
|
|
$
|
172.11
|
|
The Company used the Black-Scholes option pricing model to determine the grant date fair value of stock options with service and/or company performance conditions. For stock options with market conditions, we utilized a Monte Carlo simulation model to estimate grant date fair value. Compensation cost is recognized ratably over the vesting periods of the options and based on probability of achievement of performance metrics.
We valued the restricted stock awards and restricted stock units related to service and/or company performance targets based on grant date fair value and will expense over the requisite service period when achievement of those conditions is deemed probable. For restricted stock awards and restricted stock units related to market conditions, we utilized a Monte Carlo simulation model to estimate grant date fair value and expense over the requisite period.
2021 Equity Offering
On March 5, 2021, the Company completed a public offering of 940,860 shares of common stock, $0.01 par value per share, at a public offering price of $186.00 per share. The Company received net proceeds of approximately $164.2 million after deducting underwriting discounts and commissions and issuance costs. The Company granted the underwriters an option to purchase up to an additional 141,129 shares of common stock from the Company at the offering price of $186.00 per share (less the underwriting discounts and commissions), within 30 days of the Prospectus Supplement dated March 2, 2021. The Company evaluated the accounting treatment of the option under ASC 815-40, Derivatives and Hedging - Contracts on an Entity's Own Equity, and determined that it met the criteria for equity treatment thereunder. The underwriters’ option was not exercised and expired on April 1, 2021. The Company is using the net proceeds of the offering for general corporate purposes, including working capital, further development and potential commercialization of current and future product initiatives, collaborations, and capital expenditures. The Company may also use a portion of the net proceeds of this offering to fund possible investments in or acquisitions of complementary businesses, products or technologies, or to repay indebtedness. See the Condensed Consolidated Statements of Cash Flows for further details regarding investing activities completed thus far.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Adjustments
|
|
Foreign Currency Translation1
|
|
Foreign Currency Gain (Loss)
on Intra-Entity
Transactions2
|
|
Total Accumulated Other Comprehensive Income
|
Balances at December 31, 2020
|
$
|
(386)
|
|
|
$
|
5,872
|
|
|
$
|
8,683
|
|
|
$
|
14,169
|
|
Current period other comprehensive loss
|
—
|
|
|
(3,049)
|
|
|
(3,913)
|
|
|
(6,962)
|
|
Balances at September 30, 2021
|
$
|
(386)
|
|
|
$
|
2,823
|
|
|
$
|
4,770
|
|
|
$
|
7,207
|
|
1 Foreign currency gains and losses related to translation of foreign subsidiary financial statements.
2 The Company has intercompany loans of a long-term investment nature that are denominated in a foreign currency. These transactions are considered to be of a long-term nature if settlement is not planned or anticipated in the foreseeable future.
14. COMMITMENTS AND CONTINGENCIES
Warranties
The Company's current terms and conditions of sale include a limited warranty that its products and services will conform to published specifications at the time of shipment and a more extensive warranty related to certain products. The Company also sells a renewal warranty for certain of its products. The typical remedy for breach of warranty is to repair or replace any defective product, and if not possible or practical, the Company will accept the return of the defective product and refund the amount paid. Historically, the Company has incurred minimal warranty costs. The Company's warranty reserve was $0.5 million and $0.5 million as of September 30, 2021 and December 31, 2020, respectively.
Litigation
From time to time, the Company may be involved in litigation relating to claims arising out of its operations. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred, and the amount can be reasonably estimated.
On February 18, 2020, a former managing director of scil filed a claim disputing the effective date of the termination of his management service agreement and the validity of the Company´s waiver of his two-year post-contractual non-compete obligation. The Company intends to defend itself against the claim. Whether or not this will be successful depends on complex facts and circumstances. The Company is, based on the advice of its legal counsel, confident that it will be successful in evidencing the effective date of the termination of the management service agreement. Additionally, the Company is indemnified by the scil acquisition agreement for this claim.
As of September 30, 2021, the Company was not a party to any other legal proceedings that were expected, individually or in the aggregate, to have a material adverse effect on its business, financial condition, or operating results.
Litigation Settlement
On November 1, 2019, Heska filed a civil complaint against Qorvo US, Inc, Qorvo Biotechnologies, LLC (together with Qorvo US, Inc, "Qorvo"), and Zomedica Inc. d/b/a Zomedica Corp ("Zomedica") in the United
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
States District Court for the Middle District of North Carolina, asserting claims for trade secret misappropriation, unfair and deceptive trade practices, unjust enrichment, tortious interference with business relations, and injunctive relief. In the litigation, Qorvo and Zomedica moved to assert counterclaims against Heska for unfair and deceptive trade practices and attempted monopolization. Both parties denied one another’s allegations, contentions, claims and counterclaims asserted in the litigation. The parties resolved these allegations through a negotiated settlement on September 20, 2021. In consideration for negotiation of the rights and obligations asserted by the parties, Qorvo agreed to pay the Company $1.2 million. The case was dismissed with prejudice and the matter is considered closed by the parties. The Company realized $1.2 million of other income during the period ended September 30, 2021 and collected the payment on October 5, 2021.
Off-Balance Sheet Commitments
We have no off-balance sheet arrangements or variable interest entities.
Purchase Obligations
The Company has contractual obligations with suppliers for unconditional annual minimum inventory purchases in the amounts of $43.8 million as of September 30, 2021.
15. INTEREST AND OTHER (INCOME) EXPENSE, NET
Interest and other (income) expense, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
Interest income
|
$
|
(479)
|
|
|
$
|
(123)
|
|
|
$
|
(1,335)
|
|
|
$
|
(476)
|
|
|
|
|
Interest expense
|
918
|
|
|
2,339
|
|
|
2,760
|
|
|
7,018
|
|
|
|
|
Other expense (income), net
|
(469)
|
|
|
(205)
|
|
|
(350)
|
|
|
(189)
|
|
|
|
|
Total interest and other (income) expense, net
|
$
|
(30)
|
|
|
$
|
2,011
|
|
|
$
|
1,075
|
|
|
$
|
6,353
|
|
|
|
|
Cash paid for interest for the three months ended September 30, 2021 and 2020 was $1.6 million and $1.6 million, respectively. Cash paid for interest for the nine months ended September 30, 2021 and 2020 was $3.3 million and $3.2 million, respectively.
16. CONVERTIBLE NOTES
Convertible Notes
On September 17, 2019, the Company issued $86.25 million aggregate principal amount of 3.750% Convertible Senior Notes due 2026 (the "Notes"), which included the exercise in full of an $11.25 million purchase option, to certain financial institutions as the initial purchasers of the Notes (the "Initial Purchasers"). The Company pays interest on the Notes semiannually in arrears at a rate of 3.750% per annum on March 15 and September 15 of each year. The Notes are senior unsecured obligations of the Company. The Notes were issued pursuant to an Indenture, dated September 17, 2019, between the Company and U.S. Bank National Association, as trustee. The net proceeds from the sale of the Notes were approximately $83.7 million after deducting the Initial Purchasers' discounts and the offering expenses payable by the Company.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Refer to Note 16, Convertible Notes, in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company's 2020 Form 10-K for further information on the Notes.
No portion of the Notes was converted during the nine months ended September 30, 2021 and the liability component was classified as long-term debt on the Company's Condensed Consolidated Balance Sheet as of September 30, 2021.
As discussed in Note 1, the Company early adopted ASU 2020-06, effective January 1, 2021, which simplifies the accounting for certain convertible instruments. Under the new standard, qualifying convertible debt is accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. As a result of ASU 2020-06, the Company's cash interest expense is not impacted, however, the Company's non-cash interest accretion is limited to the amortization of debt issuance costs under ASC 835-30. The new effective interest rate of the Notes post-adoption is 4.35%. The Company also reversed the conversion feature amount recorded in APIC and reversed the difference in non-cash interest expense via retained earnings.
The following table summarizes the net carrying amount of the Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
Principal amount of the Notes
|
$
|
86,250
|
|
|
$
|
86,250
|
|
Unamortized debt discount
|
(2,322)
|
|
|
(37,791)
|
|
Net carrying amount
|
$
|
83,928
|
|
|
$
|
48,459
|
|
Interest expense related to the Notes is comprised of the amortization of debt discount and debt issuance costs and the contractual coupon interest as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Interest expense related to contractual coupon interest
|
$
|
809
|
|
|
$
|
809
|
|
|
$
|
2,426
|
|
|
$
|
2,426
|
|
Interest expense related to amortization of the debt discount
|
104
|
|
|
1,524
|
|
|
310
|
|
|
4,573
|
|
|
$
|
913
|
|
|
$
|
2,333
|
|
|
$
|
2,736
|
|
|
$
|
6,999
|
|
As of September 30, 2021, the remaining period over which the unamortized discount will be amortized is 60.0 months.
The estimated fair value of the Notes was $267.0 million and $156.9 million as of September 30, 2021 and December 31, 2020, respectively, determined through consideration of quoted market prices in less active markets. The fair value measurement is classified as Level 2 in the fair value hierarchy, which is defined in ASC 820 as inputs other than quoted prices in active markets that are either directly or indirectly observable. Based on our closing stock price of $258.54 on September 30, 2021, the if-converted value exceeded the aggregate principal amount of the Notes by $171.2 million.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. NOTE RECEIVABLES
Convertible Promissory Note
On December 9, 2020, the Company's equity method investee (the “Equity Method Investee”), issued a Convertible Promissory Note to the Company (the “Convertible Promissory Note”) with a principal amount of $6.65 million and a stated interest rate of 3.0% per annum that is payable monthly. The Convertible Promissory Note has a maturity date of December 9, 2023, or otherwise upon qualified redemption event or in the event of a default. Refer to Note 4 for additional information on our equity method investment.
The conversion of the Convertible Promissory Note is contingent upon certain events. Due to the convertible debt features included in the Convertible Promissory Note, it is not an equity security and is therefore not considered an additional investment in our Equity Method Investee. The Company accounted for the transaction as a note receivable, included in Related party convertible note receivable, net on the Consolidated Balance Sheets. The note receivable will be measured at amortized cost and evaluated for credit losses each reporting period. The Company determined that the redemption features described above met the definition of an embedded derivative that requires bifurcation from the note receivable host. The Company measured the redemption features at fair value, with the residual proceeds paid allocated to the note receivable host, creating a discount to the note receivable. The discount will be amortized over the contractual term of the Convertible Promissory Note using the effective interest method. The effective interest rate of the Convertible Promissory Note is 8.69%, and the amortization of the discount will be included as interest income within Interest and other (income) expense, net on the Consolidated Statements of Loss.
The carrying value of the note receivable, included in Related party convertible note receivable, net on the Consolidated Balance Sheets, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Principal amount
|
|
$
|
6,650
|
|
|
$
|
6,650
|
|
|
Unamortized discount
|
|
(751)
|
|
|
(977)
|
|
|
Net carrying amount
|
|
$
|
5,899
|
|
|
$
|
5,673
|
|
|
The fair value of the embedded derivative was $1.0 million as of September 30, 2021 and December 31, 2020, respectively, and is included in Related party convertible note receivable, net on the Consolidated Balance Sheets. The fair value of the derivative will be remeasured each reporting period, with the mark-to-market adjustment to be included in Interest and other (income) expense, net on the Consolidated Statements of Loss. In addition, the Company recorded an allowance for expected credit losses on the promissory note of $33 thousand as of September 30, 2021.
Promissory Note
On February 1, 2021, one of the Company's equity investees (the "Investee"), which the Company accounts for as a non-marketable equity security, issued a Promissory Note to the Company (the “Promissory Note”) with a principal amount of $9.0 million and a stated interest rate of 10.0% per annum that is payable monthly. The Promissory Note has a maturity date of December 1, 2024 and provides for interest only payments through December 1, 2023. Beginning on January 1, 2024, the Promissory Note requires repayment of the principal and interest over twelve consecutive monthly payments. As additional consideration, the Company
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
was also issued a warrant to acquire securities of the Investee that expires December 31, 2034. Refer to Note 4 for additional information on our equity investments.
The Company evaluated the accounting treatment of the warrant to acquire securities and determined it is a freestanding instrument that meets the definition of a derivative under ASC 815 and requires bifurcation from the note receivable host. The Company measured the warrant at fair value, with the residual proceeds paid allocated to the note receivable host, creating a discount to the note receivable. The discount will be amortized over the contractual term of the Promissory Note using the effective interest method. The effective interest rate of the Promissory Note is 10.99%, and the amortization of the discount will be included as interest income within Interest and other (income) expense, net on the Consolidated Statements of Loss.
The carrying value of the note receivable, included in Promissory note receivable from investee, net, on the Consolidated Balance Sheets, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
Principal amount
|
|
$
|
9,000
|
|
|
$
|
—
|
|
Unamortized discount
|
|
(269)
|
|
|
—
|
|
Net carrying amount
|
|
$
|
8,731
|
|
|
$
|
—
|
|
The fair value of the derivative was $0.3 million at issuance and $0.4 million as of September 30, 2021, and is included in Other non-current assets on our Consolidated Balance Sheets. The fair value of the derivative will be remeasured each reporting period, with the mark-to-market adjustment to be included in other Interest and other (income) expense, net on the Consolidated Statements of Loss. In addition, the Company recorded an allowance for expected credit losses on the note receivable of $0.3 million as of September 30, 2021.
18. SEGMENT REPORTING
On April 1, 2020, Heska completed the acquisition of scil. Following this acquisition, the Company restructured its operating segments based on how the Chief Operating Decision Maker (“CODM”) manages the business, allocates resources, makes operating decisions and evaluates operating performance. The CODM changed how he assesses performance and allocates resources based on geographic regions in order to better align with the global operations of the Company. Based on this change, the Company determined it has two reportable segments and revised prior comparative periods to conform to the current period segment presentation. The Company’s two segments are North America and International.
The North America segment is comprised of the Company's operations in the United States, Canada and Mexico and the International segment is comprised of geographies outside of North America, which are the Company's operations primarily in Australia, France, Germany, Italy, Malaysia, Spain and Switzerland. Certain expenses incurred at the Company’s headquarters located in the North America segment are allocated to each segment in a manner consistent with where the benefits from the expenses are derived. However, there are certain corporate expenses included in the North America segment that the Company does not allocate. Such expenses include research and development, certain selling, marketing, general, and administrative costs that support the global organization. Sales and transfers between operating segments are accounted for at market-based transaction prices and are eliminated in consolidation. The Company's sales are determined by the country of origin where the sale occurred. For a description of Heska's previous operating segments, refer to Note 17 to the consolidated financial statements included in Part II. Item 8 of Heska's Annual Report on Form 10-K for the year ended December 31, 2019.
Our CODM continues to evaluate segment performance and allocate resources based on Revenue, Cost of Revenue, Gross Profit, Gross Margin and Operating Income. The CODM does not evaluate operating
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
segments using asset information; however, we have included total asset information by segment below as there was a material change in total assets by segment as of September 30, 2021 due to the acquisition of scil.
Summarized financial information concerning the Company's reportable segments is shown in the following tables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2021
|
|
North America
|
|
International
|
|
Total
|
Total revenue
|
|
$
|
37,809
|
|
|
$
|
22,431
|
|
|
$
|
60,240
|
|
Cost of revenue
|
|
20,034
|
|
|
14,962
|
|
|
34,996
|
|
Gross profit
|
|
$
|
17,775
|
|
|
$
|
7,469
|
|
|
$
|
25,244
|
|
Gross margin
|
|
47
|
%
|
|
33
|
%
|
|
42
|
%
|
Operating loss
|
|
$
|
(1,645)
|
|
|
$
|
(788)
|
|
|
$
|
(2,433)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
North America
|
|
International
|
|
Total
|
Total revenue
|
|
$
|
34,450
|
|
|
$
|
22,186
|
|
|
$
|
56,636
|
|
Cost of revenue
|
|
17,820
|
|
|
15,412
|
|
|
33,232
|
|
Gross profit
|
|
$
|
16,630
|
|
|
$
|
6,774
|
|
|
$
|
23,404
|
|
Gross margin
|
|
48
|
%
|
|
31
|
%
|
|
41
|
%
|
Operating (loss) income
|
|
$
|
(10)
|
|
|
$
|
213
|
|
|
$
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2021
|
|
North America
|
|
International
|
|
Total
|
Total revenue
|
|
$
|
115,614
|
|
|
$
|
70,057
|
|
|
$
|
185,671
|
|
Cost of revenue
|
|
60,908
|
|
|
46,777
|
|
|
107,685
|
|
Gross profit
|
|
$
|
54,706
|
|
|
$
|
23,280
|
|
|
$
|
77,986
|
|
Gross margin
|
|
47
|
%
|
|
33
|
%
|
|
42
|
%
|
Operating loss
|
|
$
|
(484)
|
|
|
$
|
(1,627)
|
|
|
$
|
(2,111)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
North America
|
|
International
|
|
Total
|
Total revenue
|
|
$
|
91,081
|
|
|
$
|
41,920
|
|
|
$
|
133,001
|
|
Cost of revenue
|
|
49,187
|
|
|
29,098
|
|
|
78,285
|
|
Gross profit
|
|
$
|
41,894
|
|
|
$
|
12,822
|
|
|
$
|
54,716
|
|
Gross margin
|
|
46
|
%
|
|
31
|
%
|
|
41
|
%
|
Operating loss
|
|
$
|
(7,172)
|
|
|
$
|
(1,699)
|
|
|
$
|
(8,871)
|
|
Asset information by reportable segment as of September 30, 2021 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2021
|
|
North America
|
|
International
|
|
Total
|
Total assets
|
|
$
|
435,246
|
|
|
$
|
161,948
|
|
|
$
|
597,194
|
|
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Asset information by reportable segment as of December 31, 2020 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
North America
|
|
International
|
|
Total
|
Total assets
|
|
$
|
238,550
|
|
|
$
|
161,289
|
|
|
$
|
399,839
|
|
19. SUBSEQUENT EVENTS
On November 1, 2021 the Company entered a definitive agreement to acquire 100% of VetZ GmbH ("VetZ"), a European leader in veterinary practice information management software solutions ("PIMS"). The acquisition is expected to close in early 2022, subject to satisfaction or waiver of customary closing conditions. The initial purchase price is approximately $32.1 million, subject to potential purchase price adjustments. Additionally, the seller may earn an additional $15.9 million in Heska stock which will be issued in tranches based on future financial and non-financial milestones.