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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Heska Corporation    HSKA

HESKA CORPORATION

(HSKA)
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HESKA : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/05/2020 | 04:54pm EST
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 the SEC 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 on
November 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-
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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 our USDA, FDA
and DEA licensed production facility in Des 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 our U.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 the North 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, of North America revenue for the
three months ended September 30, 2020 and 67.3% and 32.7%, respectively, for the
nine months ended September 30, 2020. Revenue from direct sales and distribution
relationships represented 78.5% and 21.5%, respectively, of International
revenue for the three months ended September 30, 2020 and 75.2% and 24.8%,
respectively, for the nine months ended September 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-
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result, the Company determined it has two operating and reportable segments:
North America and International. North America consists of the United States,
Canada and Mexico. International consists of geographies outside of North
America, primarily our operations in Australia, France, Germany, Italy,
Malaysia, Spain and Switzerland. The Company's core strategic focus on point of
care laboratory and imaging products are included in both segments. The North
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 in
Europe, which were removed during the quarter. Because of social distancing
measures, on-site installations of POC 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. On April 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 ending June 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-
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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) $ (16,864)$ 263


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 to Heska 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 ended September 30,
2020 compared to 7,969 for the three months ended September 30, 2019 and 8,486
for the nine months ended September 30, 2020 compared to 7,960 for the nine
months ended September 30, 2019.
Revenue
Total revenue increased 81.3% to $56.6 million for the three months ended
September 30, 2020, compared to $31.2 million for the three months ended
September 30, 2019. Total revenue increased 49.6% to $133.0 million in the nine
months ended September 30, 2020, compared to $88.9 million in the nine months
ended September 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 ended September 30, 2020, respectively,
that was not included in the prior year periods.
                                      -32-
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Gross Profit
Gross profit increased 71.3% to $23.4 million in the three months ended
September 30, 2020, compared to $13.7 million in the three months ended
September 30, 2019. Gross margin decreased to 41.3% in the three months ended
September 30, 2020, compared to 43.7% in the three months ended September 30,
2019. Gross profit increased 41.7% to $54.7 million in the nine months ended
September 30, 2020, compared to $38.6 million in the nine months ended September
30, 2019. Gross margin decreased to 41.1% in the nine months ended September 30,
2020, compared to 43.4% in the nine months ended September 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 ended September 30, 2020, compared to $6.7 million in the three months
ended September 30, 2019. Selling and marketing expenses increased 35.5% to 27.7
million in the nine months ended September 30, 2020, compared to $20.5 million
in the nine months ended September 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 ended September 30, 2020, compared to $2.5 million in the three months
ended September 30, 2019. Research and development expenses decreased 1.9% to
$6.0 million in the nine months ended September 30, 2020, compared to $6.1
million in the nine months ended September 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 ended September 30, 2020, compared to $4.2 million in the three
months ended September 30, 2019. General and administrative expenses increased
139.3% to 29.9 million in the nine months ended September 30, 2020, compared to
$12.5 million in the nine months ended September 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
ended September 30, 2020, compared to $927 thousand in the three months ended
September 30, 2019. Interest and other expense (income), net, was $6.4 million
in the nine months ended September 30, 2020, compared to $932 thousand in the
nine months ended September 30, 2019. The increase in interest and other expense
was primarily driven by interest expense as a result of the Notes.
                                      -33-
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Income Tax (Benefit) Expense
For the three months ended September 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 ended
September 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 ended September 30, 2020, compared to $0.1 million recognized in the
three months ended September 30, 2019. The Company recognized $0.5 million in
excess tax benefits related to employee share-based compensation in the nine
months ended September 30, 2020, compared to $1.5 million recognized in the nine
months ended September 30, 2019.
Net (Loss) Income Attributable to Heska Corporation
Net loss attributable to Heska was $5.2 million in the three months ended
September 30, 2020, compared to net loss attributable to Heska of $0.3 million
in the three months ended September 30, 2019. Net loss attributable to Heska was
$16.9 million in the nine months ended September 30, 2020, compared to net
income attributable to Heska of $0.3 million in the nine months ended September
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 in February 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 ended September 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 ended September 30, 2019. Adjusted EBITDA was $13.7
million (10.3% adjusted EBITDA margin) in the nine months ended September 30,
2020, compared to $6.0 million (6.8% adjusted EBITDA margin) in the nine months
ended September 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 ended September 30, 2020 compared to loss of $0.04 per diluted share in
the three months ended September 30, 2019. In the nine months ended September
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 ended September 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-
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Non-GAAP Earnings Per Share
Non-GAAP EPS was income of $0.08 per diluted share in the three months ended
September 30, 2020 compared to income of $0.14 per diluted share in the three
months ended September 30, 2019. In the nine months ended September 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 ended September 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 comparable U.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 the U.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 under U.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 ending September 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-
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                                                                   Three Months Ended                       Nine Months Ended
                                                                     September 30,                            September 30,
                                                                 2020                2019                 2020                2019

GAAP 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.
                                      -36-
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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.

                                      -37-
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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.

                                      -38-
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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 $ 84,508$ 82,505$ 2,003

                     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
                                      -39-
--------------------------------------------------------------------------------


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.
                                      -40-

--------------------------------------------------------------------------------



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 ended December 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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