HESKA CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and related Notes included in Part I Item 1 of this Form 10-Q. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, that involve risks and uncertainties, and can generally be identified by our use of the words "scheduled," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions. Such statements, which include statements concerning future revenue sources and concentration, international market expansion, gross profit margins, selling and marketing expenses, remaining minimum performance obligations, research and development expenses, general and administrative expenses, capital resources, financings or borrowings and additional losses, are subject to risks and uncertainties, including, but not limited to, those discussed under the caption "Risk Factors" contained in Part II, Item 1A, of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K that could cause actual results to differ materially from those projected. The Risk Factors and others described in the Company's periodic and current reports filed with theSEC from time to time are not necessarily all of the important factors that could cause the Company's actual results to differ materially from those projected. The forward-looking statements set forth in this Form 10-Q are as of the close of business onNovember 4, 2020 and we undertake no duty and do not intend to update this information, except as required by applicable laws. If we updated one or more forward looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. See "Statement Regarding Forward Looking Statements." Overview We sell advanced veterinary diagnostic and specialty products. Our offerings include Point of Care laboratory instruments and consumables, Point of Care digital imaging diagnostic products; 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. -29- -------------------------------------------------------------------------------- Point of Care laboratory instruments and other sales include outright instrument sales, revenue recognized from sales-type lease treatment, and other revenue sources, such as charges for repairs. Revenue from Point of Care laboratory consumables primarily involves placing an instrument under contract in the field and generating future revenue from testing consumables, such as cartridges and reagents, as that instrument is used. Instruments placed under subscription agreements are considered operating or sales-type leases, depending on the duration and other factors of the underlying agreement. A loss of, or disruption in, the supply of consumables we are selling to an installed base of instruments could substantially harm our business. All of our Point of Care laboratory and other non-imaging instruments and consumables are supplied by third parties, who typically own the product rights and supply the product to us under marketing and/or distribution agreements. In many cases, we have collaborated with a third party to adapt a human instrument for veterinary use. Major products in this area include our instruments for chemistry, hematology, blood gas and immunodiagnostic testing and their affiliated operating consumable. Digital radiography is the largest product offering in Point of Care imaging, which also includes computed radiography and ultrasound instruments. Digital radiography solutions typically consist of a combination of hardware and software placed with a customer, often combined with an ongoing service and support contract. Our experience has been that most of the revenue is generated at the time of sale in this area, in contrast to the Point of Care diagnostic laboratory placements discussed above where ongoing consumable revenue is often a larger component of economic value as a given instrument is used. Pharmaceuticals, Vaccines and Diagnostic ("PVD") revenue, includes single use diagnostic and other tests, pharmaceuticals and biologicals as well as research and development, licensing and royalty revenue. Since items in this area are often single use by their nature, our typical aim is to build customer satisfaction and loyalty for each product, generate repeat annual sales from existing customers and expand our customer base in the future. Products in this area are both supplied by third parties and provided by us. Major products and services in this area include heartworm diagnostic tests and preventives, and allergy test kits, allergy immunotherapy and testing. Other Vaccines and Pharmaceuticals ("OVP") revenue is generated in ourUSDA , FDA and DEA licensed production facility inDes Moines, Iowa . We view this facility as an asset which could allow us to control our cost of goods on any pharmaceuticals and vaccines that we may commercialize in the future. We have increased integration of this facility with our operations elsewhere. For example, virtually all of ourU.S. inventory, excluding our imaging products, is now stored at this facility and related fulfillment logistics are managed there. Our OVP revenue includes vaccines and pharmaceuticals produced for third parties. OVP is attributable only to theNorth America segment. All of our products are ultimately sold primarily to or through veterinarians. In many cases, veterinarians will mark up their costs to their customers. The acceptance of our products by veterinarians is critical to our success. These products are sold directly to end users by us as well as through distribution relationships, such as the sale of kits to conduct blood testing to third-party veterinary diagnostic laboratories and sales to independent third-party distributors. Revenue from direct sales and distribution relationships represented 68.3% and 31.7%, respectively, ofNorth America revenue for the three months endedSeptember 30, 2020 and 67.3% and 32.7%, respectively, for the nine months endedSeptember 30, 2020 . Revenue from direct sales and distribution relationships represented 78.5% and 21.5%, respectively, of International revenue for the three months endedSeptember 30, 2020 and 75.2% and 24.8%, respectively, for the nine months endedSeptember 30, 2020 . Segment Change During the second quarter of 2020, following the scil acquisition, the chief operating decision maker ("CODM") changed how he assesses performance and allocates resources based on geographic regions. As a -30- -------------------------------------------------------------------------------- result, the Company determined it has two operating and reportable segments:North America and International.North America consists ofthe United States ,Canada andMexico . International consists of geographies outside ofNorth America , primarily our operations inAustralia ,France ,Germany ,Italy ,Malaysia ,Spain andSwitzerland . The Company's core strategic focus on point of care laboratory and imaging products are included in both segments. TheNorth America segment also includes the contract manufacturing of vaccines and pharmaceutical products. The Company revised prior comparative periods to conform to the current period segment presentation. Refer to Note 17 - Segment Reporting for further information. Impact of COVID-19 Pandemic and Current Economic Environment During the quarter, we experienced modest impact on our business resulting from government restrictions on the movement of people, goods, and services in connection with the COVID-19 pandemic. Fortunately, those we serve, veterinarians and herd animal health experts, are deemed essential services in areas of government mandated restrictions. To service them safely and efficiently, Heska teams quickly adjusted to a targeted, remote workforce posture and put the care and health of people and our brand first. Heska has not laid off or furloughed employees but did introduce limited salary reductions inEurope , which were removed during the quarter. Because of social distancing measures, on-site installations ofPOC Lab and Imaging equipment will experience intermittent delays. While not significant to the overall results of the of the year so far, on-site installations of equipment have been impacted since March. We anticipate the impact to on-site installations and capital equipment expenditures to continue for at least the remainder of 2020. Our financial position remains strong. OnApril 1, 2020 , we closed our acquisition of scil; the transaction was fully financed by a preferred stock offering. We have sufficient liquidity to sustain our operations and do not anticipate a need to access additional capital outside of the various programs available to our overseas subsidiaries. While we have experienced some intermittent delays in receiving supply, our supply chain has not been significantly impacted and we do not expect that to materially change over the remaining months of 2020. Our major research and development projects are continuing to progress substantially as planned but we have experienced sporadic delays in receiving validation samples and device components as well as inefficiencies in remote collaboration and field-testing. We anticipate these delays to result in total slippage of 90 to 120 days in our new products' commercial roll-out schedules, consistent with our disclosure in our Form 10-Q for the period endingJune 30, 2020 . We do not know how long COVID-19 related challenges will continue. The ultimate impact on our business will depend on many factors substantially beyond our control and difficult to predict. In the near-term and with asynchronous variation across geographies, we anticipate veterinary hospitals will temporarily: (1) realize lower average diagnostics use as a result of deferred and elective patient visits, and (2) delay capital equipment investments as a result of heightened conservatism and the effects of social distancing on in-clinic demonstrations and installations. Despite these headwinds, we believe we are well positioned because: (1) our customers and products are essential, (2) our main Point of Care laboratory business continues to show healthy consumables use and margin, (3) our subscriptions model metrics continue to show solid performance, (4) our vaccines and pharmaceuticals business continues to perform with minimal disruption, (5) our balance sheet is strong, and (6) our employees, logistics, supply chain, and operations continue to operate well in the current environment and they are fully prepared for both a phased return and an instant return to full capacity. Results of Operations Our analysis presented below is organized to provide the information we believe will facilitate an understanding of our historical performance and relevant trends going forward. -31- --------------------------------------------------------------------------------
The following table sets forth, for the periods indicated, certain data derived from our unaudited Condensed Consolidated Statements of (Loss) Income (in thousands, except per share):
Three Months Ended September
30, Nine Months Ended September 30,
2020 2019 2020 2019
Revenue, net $ 56,636 $ 31,237 $ 133,001 $ 88,894
Gross profit 23,404 13,664 54,716 38,619
Operating expenses 23,201 13,471 63,587 39,067
Operating income (loss) 203 193 (8,871) (448)
Interest and other expense, net 2,011 927 6,353 932
Loss before income taxes and equity in losses of
unconsolidated affiliates (1,808) (734) (15,224) (1,380)
Income tax expense (benefit) 3,413 (530) 1,693 (1,966)
Net (loss) income before equity in losses of
unconsolidated affiliates (5,221) (204) (16,917) 586
Equity in losses of unconsolidated affiliates (83) (147) (300) (455)
Net (loss) income after equity in losses of
unconsolidated affiliates (5,304) (351) (17,217) 131
Net loss attributable to redeemable
non-controlling interest (85) (41) (353) (132)
Net (loss) income attributable to Heska
Corporation $ (5,219) $
(310)
Diluted (loss) earnings per share attributable to Heska Corporation$ (0.57) $ (0.04) $ (1.99) $ 0.03 Non-GAAP net income per diluted share(1)(2)$ 0.08 $ 0.14 $ 0.14 $ 0.36 Adjusted EBITDA(1)$ 8,655 $ 1,995 $ 13,721 $ 6,034 Net (loss) income margin(1) (9.2) % (0.7) % (12.7) % 0.7 % Adjusted EBITDA margin(1) 15.3 % 6.4 % 10.3 % 6.8 % (1) See "Non-GAAP Financial Measures" for a reconciliation of Adjusted EBITDA to net income and Non-GAAP net income (loss) per diluted share to diluted (loss) earnings per share attributable toHeska Corporation , on the closest comparable GAAP measures, for each of the periods presented. (2) Shares used in the diluted per share calculation for non-GAAP net income per diluted share are (in thousands): 9,447 for the three months endedSeptember 30, 2020 compared to 7,969 for the three months endedSeptember 30, 2019 and 8,486 for the nine months endedSeptember 30, 2020 compared to 7,960 for the nine months endedSeptember 30, 2019 . Revenue Total revenue increased 81.3% to$56.6 million for the three months endedSeptember 30, 2020 , compared to$31.2 million for the three months endedSeptember 30, 2019 . Total revenue increased 49.6% to$133.0 million in the nine months endedSeptember 30, 2020 , compared to$88.9 million in the nine months endedSeptember 30, 2019 . The significant increases in revenue are driven mainly by the acquisitions of CVM and scil, which represented$23.3 million and$42.9 million in the three and nine months endedSeptember 30, 2020 , respectively, that was not included in the prior year periods. -32- -------------------------------------------------------------------------------- Gross Profit Gross profit increased 71.3% to$23.4 million in the three months endedSeptember 30, 2020 , compared to$13.7 million in the three months endedSeptember 30, 2019 . Gross margin decreased to 41.3% in the three months endedSeptember 30, 2020 , compared to 43.7% in the three months endedSeptember 30, 2019 . Gross profit increased 41.7% to$54.7 million in the nine months endedSeptember 30, 2020 , compared to$38.6 million in the nine months endedSeptember 30, 2019 . Gross margin decreased to 41.1% in the nine months endedSeptember 30, 2020 , compared to 43.4% in the nine months endedSeptember 30, 2019 . The increase in gross profit for both periods was due mainly to recent acquisitions. The decrease in gross margin percentage for both periods was due to lower margin in our newly acquired businesses. Operating Expenses Selling and marketing expenses increased 60.2% to$10.8 million in the three months endedSeptember 30, 2020 , compared to$6.7 million in the three months endedSeptember 30, 2019 . Selling and marketing expenses increased 35.5% to 27.7 million in the nine months endedSeptember 30, 2020 , compared to$20.5 million in the nine months endedSeptember 30, 2019 . The increases in both periods are a direct result of international expansion related to recent acquisitions and are in line with management expectations. Research and development expenses decreased 13.2% to$2.2 million in the three months endedSeptember 30, 2020 , compared to$2.5 million in the three months endedSeptember 30, 2019 . Research and development expenses decreased 1.9% to$6.0 million in the nine months endedSeptember 30, 2020 , compared to$6.1 million in the nine months endedSeptember 30, 2019 . The decrease in both periods is related to timing of spending on product development for urine and fecal diagnostic analyzer and enhanced immunodiagnostic offerings in the current year. As we invest in future growth of the Company, management anticipates increased research and development costs throughout 2020, which is consistent with strategic initiatives. General and administrative expenses increased 142.4% to$10.3 million in the three months endedSeptember 30, 2020 , compared to$4.2 million in the three months endedSeptember 30, 2019 . General and administrative expenses increased 139.3% to 29.9 million in the nine months endedSeptember 30, 2020 , compared to$12.5 million in the nine months endedSeptember 30, 2019 . The increase in both periods is driven by one-time costs related to the acquisition of scil, which were$0.8 million for the third quarter and$7.4 million for the year to date period. In addition, increased stock-based compensation expenses of$2.9 million in the third quarter and$3.3 million in the year to date period, and additional expenses related to the impact of international acquisitions compared to the prior year. Interest and Other Expense (Income), net Interest and other expense (income), net, was$2.0 million in the three months endedSeptember 30, 2020 , compared to$927 thousand in the three months endedSeptember 30, 2019 . Interest and other expense (income), net, was$6.4 million in the nine months endedSeptember 30, 2020 , compared to$932 thousand in the nine months endedSeptember 30, 2019 . The increase in interest and other expense was primarily driven by interest expense as a result of the Notes. -33- -------------------------------------------------------------------------------- Income Tax (Benefit) Expense For the three months endedSeptember 30, 2020 , we had a total income tax expense of$3.4 million , including$3.0 million of domestic deferred income tax expense and$370 thousand current income tax expense. In the three months endedSeptember 30, 2019 , we had a total income tax benefit of$0.5 million , including$0.6 million of domestic deferred income tax benefit and$40 thousand of current income tax expense. The increase in tax expense is due to an increased valuation allowance based on a realizability assessment of deferred tax assets relating to expiring net operating loss carry-forwards. The Company recognized$0.1 million in excess tax benefits related to employee share-based compensation in the three months endedSeptember 30, 2020 , compared to$0.1 million recognized in the three months endedSeptember 30, 2019 . The Company recognized$0.5 million in excess tax benefits related to employee share-based compensation in the nine months endedSeptember 30, 2020 , compared to$1.5 million recognized in the nine months endedSeptember 30, 2019 . Net (Loss) Income Attributable toHeska Corporation Net loss attributable to Heska was$5.2 million in the three months endedSeptember 30, 2020 , compared to net loss attributable to Heska of$0.3 million in the three months endedSeptember 30, 2019 . Net loss attributable to Heska was$16.9 million in the nine months endedSeptember 30, 2020 , compared to net income attributable to Heska of$0.3 million in the nine months endedSeptember 30, 2019 . The difference between this line item and "Net (loss) income after equity in losses of unconsolidated affiliates" is the net income or loss attributable to our minority interest in our French subsidiary, which we purchased inFebruary 2019 . Net income is lower in both comparative periods due to increases in operating expenses as discussed above, tax interest and amortization charges relating to the Notes, and increased deferred income tax expense. Adjusted EBITDA Adjusted EBITDA in the three months endedSeptember 30, 2020 was$8.7 million (15.3% adjusted EBITDA margin), compared to$2.0 million (6.4% adjusted EBITDA margin) in the three months endedSeptember 30, 2019 . Adjusted EBITDA was$13.7 million (10.3% adjusted EBITDA margin) in the nine months endedSeptember 30, 2020 , compared to$6.0 million (6.8% adjusted EBITDA margin) in the nine months endedSeptember 30, 2019 . The increase is driven by increased revenue and gross profit as discussed above. The increases in operating expenses are excluded from adjusted EBITDA. See "Non-GAAP Financial Measures" for a reconciliation of adjusted EBITDA to net income, the closest comparable GAAP measure, for each of the periods presented. Earnings Per Share Loss per share attributable to Heska was$0.57 per diluted share in the three months endedSeptember 30, 2020 compared to loss of$0.04 per diluted share in the three months endedSeptember 30, 2019 . In the nine months endedSeptember 30, 2020 we had a loss of$1.99 per diluted share compared to income of$0.03 per diluted share in the nine months endedSeptember 30, 2019 . The decline in both periods is primarily due to increases in operating expenses as discussed above, interest and amortization charges relating to the Notes, and increased deferred income tax expense. -34- -------------------------------------------------------------------------------- Non-GAAP Earnings Per Share Non-GAAP EPS was income of$0.08 per diluted share in the three months endedSeptember 30, 2020 compared to income of$0.14 per diluted share in the three months endedSeptember 30, 2019 . In the nine months endedSeptember 30, 2020 non-GAAP EPS was income of$0.14 per diluted share compared to income of$0.36 per diluted share in the nine months endedSeptember 30, 2019 . The decline in both periods is primarily due to cash interest related to the Notes and increased deferred income taxes. See "Non-GAAP Financial Measures" for a reconciliation of non-GAAP EPS to net (loss) income attributable to Heska per diluted share, the closest comparableU.S. GAAP measure, in each of the periods presented. Non-GAAP Financial Measures In addition to financial measures presented on the basis of accounting principles generally accepted in theU.S. ("U.S. GAAP"), we also present EBITDA, adjusted EBITDA, adjusted EBITDA margin, and non-GAAP net income (loss) per diluted share, which are non-GAAP measures. These measures should be viewed as a supplement to, not substitute for, our results of operations presented underU.S. GAAP. The non-GAAP financial measures presented may not be comparable to similarly titled measures of other companies because they may not calculate their measures in the same manner. Management uses EBITDA, adjusted EBITDA, adjusted EBITDA margin and non-GAAP net income (loss) per diluted share as key profitability measures, which are included in monthly or quarterly analyses of our operating results to our senior management team, our annual budget and related goal setting and other performance measurements. We believe these non-GAAP measures enhance our investors' understanding of our business performance and that not adjusting for the items included in the reconciliations below would hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses. The following tables reconcile our most directly comparable as-reported financial measures calculated in accordance with GAAP to our non-GAAP financial measures (in thousands, except percentages and per share amounts): Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Net (loss) income(1)$ (5,221) $ (204) $ (16,917) $ 586 Income tax expense (benefit) 3,413 (530) 1,693 (1,966) Interest expense 2,216 353 6,542 353 Depreciation and amortization 3,337 1,237 8,041 3,759 EBITDA$ 3,745 $ 856 $ (641) $ 2,732 Acquisition-related and other one-time costs(2) 776 - 7,379 - Stock-based compensation 4,132 1,245 6,930 3,625 Equity in losses of unconsolidated affiliates (83) (147) (300) (455) Net loss attributable to non-controlling interest 85 41 353 132 Adjusted EBITDA$ 8,655 $ 1,995 $ 13,721 $ 6,034 Net (loss) income margin(3) (9.2) % (0.7) % (12.7) % 0.7 % Adjusted EBITDA margin(3) 15.3 % 6.4 % 10.3 % 6.8 % (1) Net (loss) income used for reconciliation represents the "Net (loss) income before equity in losses of unconsolidated affiliates." (2) To exclude the effect of one-time charges of$0.8 million and$7.4 million for the three and nine months endingSeptember 30, 2020 incurred primarily as part of the acquisition of scil. (3) Net (loss) income margin and adjusted EBITDA margin are calculated as the ratio of net (loss) income and adjusted EBITDA to revenue. -35- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019GAAP net (loss) income attributable to Heska per diluted share
$ (0.57) $ (0.04) $ (1.99) $ 0.03 Acquisition-related and other one-time costs(1) 0.08 - 0.87 - Amortization of acquired intangibles(2) 0.16 0.04 0.42 0.12
Purchase accounting adjustments related to inventory and fixed asset step-up(3)
0.03 - 0.07 -
Amortization of debt discount and issuance costs 0.16 0.03 0.54 0.04
Stock-based compensation 0.44 0.16 0.82 0.46
Gain (loss) on equity investee transactions 0.01 0.02 0.04 0.06
Estimated income tax effect of above non-GAAP
adjustments(4) (0.23) (0.07) (0.63) (0.35)
Non-GAAP net income (loss) per diluted share $ 0.08 $ 0.14 $ 0.14 $ 0.36
Shares used in diluted per share calculations 9,447 7,969 8,486 7,960
1 To exclude the effect of one-time charges of $0.8 million and $7.4 million in
the three and nine months ending September 30, 2020 incurred primarily as part
of the acquisition of scil.
2 To exclude the effect of amortization of acquired intangibles of $1.5 million
and $3.6 million in the three and nine months ended September 30, 2020 , compared
to $0.3 million and $1.0 million in the three and nine months ended September
30, 2019 . These costs were incurred as part of the purchase accounting
adjustments for the acquisitions of scil, Optomed and CVM.
3 To exclude the effect of purchase accounting adjustments for inventory step up
amortization of $0.2 million and depreciation related to the step-up of fixed
assets of $0.6 million for the three and nine months ended September 30, 2020 .
4 Represents income tax expense utilizing an estimated effective tax rate that
adjusts for non-GAAP measures including: acquisition-related and other one-time
costs (excluding items which are not deductible for tax of $32 thousand benefit
and $4.0 million cost for the three and nine months ended September 30, 2020 ,
respectively), amortization of acquired intangibles, purchase accounting
adjustments, amortization of debt discount and issuance costs, and stock-based
compensation. This incorporates the discrete tax benefits related to stock-based
compensation of $0.1 million and $0.5 million for the three and nine months
ended September 30, 2020 , respectively, compared to $0.1 million and $1.5
million for the three and nine months ended September 30, 2019 , respectively.
Adjusted effective tax rates are approximately 25% for all periods presented.
Impact of Inflation
In recent years, inflation has not had a significant impact on our operations.
Analysis by Segment
The North America segment includes sales and costs from the United States ,
Canada and Mexico . The International segment includes sales and costs from
Australia , France , Germany , Italy , Malaysia , Spain and Switzerland .
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The North America segment represented approximately 60.8% and 68.5% of our
revenue for the three and nine months ended September 30, 2020 , respectively,
and the International segment represented approximately 39.2% and 31.5% of our
revenue for the three and nine months ended September 30, 2020 , respectively.
The following sections and tables set forth, for the periods indicated, certain
data derived from our unaudited Condensed Consolidated Statements of (Loss)
Income (in thousands).
North America Segment
Three Months Ended September
30, Change Nine Months Ended September 30, Change
Dollar
2020 2019 Change % Change 2020 2019 Dollar Change % Change
Point of Care
laboratory: $ 19,839 $ 17,456 $ 2,383 13.7 % $ 52,640 $ 49,495 $ 3,145 6.4 %
Instruments & Other 3,768 3,503 265 7.6 % 9,346 10,043 (697) (6.9) %
Consumables 16,071 13,953 2,118 15.2 % 43,294 39,452 3,842 9.7 %
Point of Care imaging 5,268 4,550 718 15.8 % 12,912 13,781 (869) (6.3) %
PVD 5,437 2,702 2,735 101.2 % 14,821 8,093 6,728 83.1 %
OVP 3,906 4,897 (991) (20.2) % 10,708 13,123 (2,415) (18.4) %
Total North America
revenue $ 34,450 $ 29,605 4,845 16.4 % $ 91,081 $ 84,492 $ 6,589 7.8 %
North America Gross
Profit 16,630 13,015 3,615 27.8 % 41,894 37,268 $ 4,626 12.4 %
North America Gross
Margin 48.3 % 44.0 % 46.0 % 44.1 %
North America Operating
Income (Loss) (10) 362 $ (372) (102.8) % (7,172) 203 $ (7,375) (3,633.0) %
North America Operating
Margin - % 1.2 % (7.9) % 0.2 %
North America segment revenue increased 16.4% to $34.5 million for the three
months ended September 30, 2020 , compared to $29.6 million for the three months
ended September 30, 2019 . The $4.8 million increase was driven by a $2.4 million
increase in PVD related to the contract manufactured heartworm preventive,
Tri-Heart®, which had reduced channel demand in 2019, and a 15.2% increase in
POC Lab Consumables. North America segment revenue increased 7.8% to $91.1
million for the nine months ended September 30, 2020 , compared to $84.5 million
for the nine months ended September 30, 2019 . The $6.6 million increase was
driven by a $6.5 million in Tri-Heart sales and 9.7% increase in POC Lab
Consumables. These increases were partially offset by a 18.4% decrease in OVP
related to reduced customer requirements during the period, a 6.3% decrease in
from Point of Care Imaging, and a 6.9% decrease in capital lease placements and
outright sales of Point of Care Lab Instruments, which were largely expected as
a result of the government restrictions in place relating to COVID-19.
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Gross profit for the North America segment was $16.6 million compared to $13.0
million for the three months ended September 30, 2020 and 2019, respectively.
Gross profit was $41.9 million compared to $37.3 million for the nine months
ended September 30, 2020 and 2019, respectively. The increase in gross profit
for both periods is primarily driven by increased revenue in the current year
periods, specifically related to PVD and POC Lab Consumables. Gross margin was
48.3% for the three months ended September 30, 2020 , compared to 44.0% in the
three months ended September 30, 2019 . Gross margin was 46.0% for the nine
months ended September 30, 2020 , compared to 44.1% in the nine months ended
September 30, 2019 . The increase is due to increased revenue and margins for
consumables, Tri-Heart and OVP, which had reduced production in the nine months
ended September 30, 2019 .
North America operating loss increased $0.4 million and $7.4 million for the
three and nine months ended September 30, 2020 compared to the prior year
periods. The increase is driven by one-time transaction related costs for the
acquisition of scil and increased stock-based compensation expenses in the
current year periods.
International Segment
Three Months Ended September Nine Months Ended September
30, Change 30, Change
Dollar % Dollar %
2020 2019 Change Change 2020 2019 Change Change
Point of Care
laboratory: $ 14,307 $ 71 $ 14,236 20,050.7 % $ 26,778 $ 111 $ 26,667 24,024.3 %
Instruments & Other 2,920 1 2,919 291,900.0 % 5,360 17 5,343 31,429.4 %
Consumables 11,387 70 11,317 16,167.1 % 21,418 94 21,324 22,685.1 %
Point of Care imaging 7,029 785 6,244 795.4 % 12,791 2,194 10,597 483.0 %
PVD 850 776 74 9.5 % 2,351 2,097 254 12.1 %
Total International
revenue $ 22,186 $ 1,632 20,554 1,259.4 % $ 41,920 $ 4,402 37,518 852.3 %
International Gross
Profit 6,774 649 6,125 943.8 % 12,822 1,351 11,471 849.1 %
International Gross
Margin 30.5 % 39.8 % 30.6 % 30.7 %
International Operating
Income (Loss) $ 213 $ (169) 382 226.0 % $ (1,699) $ (651) (1,048) (161.0) %
International Operating
Margin 1.0 % (10.4) % (4.1) % (14.8) %
International segment revenue was $22.2 million compared to $1.6 million for the
three months ended September 30, 2020 and 2019, respectively. International
revenue was $41.9 million compared to $4.4 million for the nine months ended
September 30, 2020 and 2019, respectively. The increase in both periods is due
to the acquisitions of CVM and scil, which contributed approximately $20.0
million of revenue in the three months ended September 30, 2020 and $36.9
million of revenue in the nine months ended September 30, 2020 , that were not
included in the comparable periods.
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Gross profit for the International segment was $6.8 million compared to $0.6
million for the three months ended September 30, 2020 and 2019, respectively.
Gross profit was $12.8 million compared to $1.4 million for the nine months
ended September 30, 2020 and 2019, respectively. Gross margin for the
International segment was 30.5% and 30.6% for the three and nine months ended
September 30, 2020 , respectively, compared to 39.8% and 30.7% for the three and
nine months ended September 30, 2019 , respectively. The increase in gross profit
for both periods is primarily driven by increased revenue from acquisitions. The
decrease in gross margin is driven by the increased revenue from acquisitions at
lower margins.
International operating income increased $0.4 million and operating loss
increased $1.0 million for the three and nine months ended September 30, 2020 ,
respectively, compared to the prior year periods. The increase in operating loss
for the three months ended September 30, 2020 is driven by increased
International revenue and gross profit. The increase in operating loss for the
nine months ended September 30, 2020 is driven by one-time transaction related
costs in the current year period; partially offset by increased International
revenue and gross profit discussed above.
Liquidity, Capital Resources and Financial Condition
We believe that adequate liquidity and cash generation is important to the
execution of our strategic initiatives. Our ability to fund our operations,
acquisitions, capital expenditures, and product development efforts may depend
on our ability to access other forms of capital as well as our ability to
generate cash from operating activities, which is subject to future operating
performance, as well as general economic, financial, competitive, legislative,
regulatory, and other conditions, some of which may be beyond our control,
including but not limited to effects of the COVID-19 pandemic. Our primary
source of liquidity is our available cash of $84.5 million , which includes net
proceeds from the issuance of the Notes. Additionally, we financed the
acquisition of scil through a private placement of convertible preferred equity
for which we raised $122 million , while we transferred approximately $111
million in purchase price, netting a remaining $11 million of liquidity. Refer
to Note 12. Capital Stock.
For the nine months ended September 30, 2020 , we had net loss after equity in
losses from unconsolidated affiliates of $17.2 million and net cash used by
operations of $8.1 million . At September 30, 2020 , we had $84.5 million of cash
and cash equivalents and $132.7 million of working capital.
A summary of our cash from operating, investing and financing activities is as
follows (in thousands):
Nine Months Ended
September 30, Change
Dollar %
2020 2019 Change Change
Net cash used in operating activities $ (8,101) $ (3,276) $ (4,825) 147.3 %
Net cash used in investing activities (120,043) (1,344) (118,699) 8,831.8 %
Net cash provided by financing activities 123,499 73,767 49,732 67.4 %
Foreign exchange effect on cash and cash
equivalents 123 (31) 154 (496.8) %
Increase (decrease) in cash and cash equivalents (4,522) 69,116
(73,638) (106.5) %
Cash and cash equivalents, beginning of the 89,030 13,389 75,641 564.9 %
period
Cash and cash equivalents, end of the period
2.4 %
Net cash used in operating activities was approximately $8.1 million for the
nine months ended September 30, 2020 , compared to net cash used in operating
activities of $3.3 million for the nine months ended September 30, 2019 , a
decrease in cash from operating activities of approximately $4.8 million . The
decrease in cash from operating activities is primarily due to the $17.3 million
decrease in net income after equity in losses of
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unconsolidated affiliates for the nine months ended September 30, 2020 compared
to the nine months ended September 30, 2019 . This decrease is partially offset
by non-cash transactions impacting cash used by operating activities, including
a $4.3 million increase related to amortization of the debt discount, a $4.3
million increase in depreciation and amortization driven by the acquisition of
scil, and a $3.3 million increase in stock-based compensation expense.
Net cash used in investing activities was $120.0 million for the nine months
ended September 30, 2020 , compared to net cash used in investing activities of
$1.3 million for the nine months ended September 30, 2019 , an increase of
approximately $118.7 million . The increase in cash used for investing activities
was driven by $105.2 million investment for the scil acquisition, net of cash
acquired, and a $14.4 million payment of consideration for the December 2019
acquisition of CVM.
Net cash provided by financing activities was $123.5 million for the nine months
ended September 30, 2020 , compared to net cash provided financing activities of
$73.8 million for the nine months ended September 30, 2019 , an increase of
approximately $49.7 million . The change was driven primarily by a $122.0 million
increase in proceeds from preferred stock, primarily used for financing the
acquisition of scil.
We believe that our cash, cash equivalents and marketable securities balances,
as well as the cash flows generated by our operations, will be sufficient to
satisfy our anticipated cash needs for working capital and capital expenditures,
including selling and marketing team expansion and product development
initiatives, for at least the next 12 months. Our belief may prove to be
incorrect, however, and we could utilize our available financial resources
sooner than we currently expect. For example, we actively seek opportunities
that are consistent with our strategic direction, which may require additional
capital. Our future capital requirements and the adequacy of available funds
will depend on many factors, including those set forth in Part II, Item 1A,
"Risk Factors", of this Form 10-Q and in Part I, Item 1A, "Risk Factors" in our
Annual Report on Form 10-K for the year ended December 31, 2019 . We may be
required to seek additional equity or debt financing in order to meet these
future capital requirements, even in the absence of any acquisitions. In the
event that additional financing is required from outside sources, we may not be
able to raise it on terms acceptable to us, or at all. If we are unable to raise
additional capital when desired, our business, results of operations and
financial condition would be adversely affected.
Effect of currency translation on cash
Net effect of foreign currency translations on cash was a $123 thousand positive
impact for the nine months ended September 30, 2020 , compared to a $31 thousand
negative impact for the nine months ended September 30, 2019 , an increase of
$154 thousand . These effects are related to changes in exchange rates between
the U.S. Dollar and the Swiss Franc, Euro, Australian Dollar, Canadian Dollar,
and Malaysian Ringgit which are the functional currencies of our subsidiaries.
Off-Balance Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements or variable interest entities.
Purchase Obligations
Purchase obligations represent contractual agreements to purchase goods or
services that are legally binding; specify a fixed, minimum or range of
quantities; specify a fixed, minimum, variable, or indexed price provision; and
specify approximate timing of the transaction. As of September 30, 2020 , the
Company had purchase obligations for inventory of $27.8 million .
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Critical Accounting Policies and Estimates 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 endedDecember 31, 2019 and other than the recently adopted accounting pronouncements described in Note 1. Operations and Summary of Significant Accounting Policies in our Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q, have not changed significantly since such filing.
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