

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

(Mark One)



x☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~June 30, 2020



o☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _______________________

Commission file number: 000-22427

HESKA CORPORATION

(Exact name of registrant as specified in its charter)



Delaware			77-0192527
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
3760 Rocky Mountain Avenue Loveland, Colorado			80538
(Address of principal executive offices)			(Zip Code)
Registrant's telephone number, including area code: (970) 493-7272

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock, $0.01 par value	HSKA	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x☒ No o☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer o☐			Accelerated ~~filer~~ xFiler ☒
Non-accelerated filer o☐			Smaller Reporting Company ¨ ☐
			Emerging growth company o ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐ No x☒

~~9,391,923~~9,443,718 shares of the Registrant's Public Common Stock, $.01 par value, were outstanding at ~~May 7,~~August 6, 2020.

TABLE OF CONTENTS



			Page
PART I - FINANCIAL INFORMATION
	Item 1.	Financial Statements	1
		Condensed Consolidated Balance Sheets	1
		Condensed Consolidated Statements of Income	2
		Condensed Consolidated Statements of Comprehensive Income	3
		Condensed Consolidated Statements of Stockholders' Equity	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6
		Note 1, Operations and Summary of Significant Accounting Policies	6
		Note 2, Revenue	8
		Note 3, Acquisitions and Related Party Items	10
		Note 4, Investments in Unconsolidated Affiliates	1415
		Note 5, Income Taxes	1516
		Note 6, Leases	1517
		Note 7, Earnings Per Share	1619
		Note 8, Goodwill and Other Intangibles	1820
		Note 9, Property and Equipment, Net	1921
		Note 10, Inventories, Net	1921
		Note 11, Accrued Liabilities	2022
		Note 12, Capital Stock	2022
		Note 13, Accumulated Other Comprehensive Income	2423
		Note 14, Commitments and Contingencies	2423
		Note 15, Interest and Other Income, Net	2524
		Note 16, Convertible Notes and Credit Facility	25
		Note 17, Segment Reporting	2826
		~~Note 18, Subsequent Events~~	30
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3228
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4140
	Item 4.	Controls and Procedures	4140
PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings	4240
	Item 1A.	Risk Factors	4240
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4341
	Item 6.	Exhibits	4342
		Signatures	45

HESKA, scil, scil vet, ALLERCEPT, HemaTrue, Solo Step, Element DC, Element HT5, Element POC, Element i, Element COAG, Element DC5X and Element RC are registered trademarks of Heska Corporation. DRI-CHEM is a registered trademark of FUJIFILM Corporation. TRI-HEART is a registered trademark of Intervet Inc., d/b/a Merck Animal Health, formerly known as Schering-Plough Animal Health Corporation ("Merck Animal Health"), which is a unit of Merck & Co., Inc., in the United States and is a registered trademark of Heska Corporation in other countries. This quarterly report on Form 10-Q also refers to trademarks and trade names of other organizations.

~~- i-~~-i-

Our Certificate of Incorporation, as amended (the “Charter”), authorizes three classes of stock: Original Common Stock, Public Common Stock, and Preferred Stock. Pursuant to an NOL Protective Amendment to the Charter adopted in 2010, all shares of Original Common Stock then outstanding were automatically reclassified into shares of Public Common Stock. Our Public Common Stock trades on the Nasdaq Stock Market LLC. In this Quarterly Report on Form 10-Q, references to “Public Common Stock” and “Common Stock” are references to our Public Common Stock, unless the context otherwise requires.

Statement Regarding Forward Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For this purpose, any statements contained herein that are not statements of current or historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ materially from those expressed or forecasted in any such forward-looking statements as a result of certain factors. Such factors are set forth in "Risk Factors," in this Form 10-Q and in our Annual Report on Form 10-K, as well as in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q and include, among others, risks and uncertainties related to:

•the impact of the COVID-19 pandemic on consumer demand, our global supply chain and our financial and operational results;

•the success of third parties in marketing our products;

•outside business interests of our Chief Executive Officer;

•our reliance on third party suppliers and collaborative partners;

•our dependence on key personnel;

•our dependence upon a number of significant customers;

•competitive conditions in our industry;

•our ability to market and sell our products successfully;

•expansion of our international operations;

•the impact of regulation on our business;

•the success of our acquisitions and other strategic development opportunities;

•our ability to develop, commercialize and gain market acceptance of our products;

•cybersecurity incidents and related disruptions and our ability to protect our stakeholders’ privacy;

•product returns or liabilities;

•volatility of our stock price; and

•our ability to service our convertible notes and comply with their terms.

Readers are cautioned not to place undue reliance on these forward-looking statements.

Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect the passage of time, any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based, except as otherwise required by applicable securities laws. These forward-looking statements apply only as of the date of this Form 10-Q.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

March 31, December 31,
2020 2019
(unaudited)
ASSETS
Current assets:

Cash and cash equivalents $ 191,245
$ 89,030
Accounts receivable, net of allowance for doubtful accounts of $232 and $186, respectively 14,838
15,161
Inventories, net 29,056
26,601
Net investment in leases, current, net of allowance for doubtful accounts of $85 and $105, respectively 4,020
3,856
Prepaid expenses 2,711
2,219
Other current assets 3,790
3,000
Total current assets 245,660
139,867

Property and equipment, net 15,076
15,469
Operating lease right-of-use assets 5,404
5,726
Goodwill 36,095
36,204
Other intangible assets, net 11,061
11,472
Deferred tax asset, net 8,027
6,429
Net investment in leases, non-current 14,373
14,307
Investments in unconsolidated affiliates 7,295
7,424
Other non-current assets 7,990
7,526
Total assets $ 350,981
$ 244,424

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY
Current liabilities:

Accounts payable $ 7,137
$ 6,600
Accrued liabilities 10,091
6,345
Accrued purchase consideration payable —
14,579
Current operating lease liabilities 1,755
1,745
Current portion of deferred revenue, and other 2,923
2,930
Total current liabilities 21,906
32,199

Convertible note, long-term, net 46,872
45,348
Deferred revenue, net of current portion 5,521
5,966
Other long-term borrowings 1,110
1,121
Non-current operating lease liabilities 4,092
4,413
Deferred tax liability 678
691
Other liabilities 141
152
Total liabilities 80,320
89,890

Redeemable non-controlling interest and mezzanine equity 23
170

Stockholders' equity:

Preferred stock, $.01 par value, 2,500,000 and 2,500,000 shares authorized, respectively, 122,000 and 0 shares issued and outstanding, respectively 1
—
Common stock, $.01 par value, 10,250,000 and 10,250,000 shares authorized, respectively, none issued or outstanding —
—
Public common stock, $.01 par value, 10,250,000 and 10,250,000 shares authorized, 7,843,079 and 7,881,928 shares issued and outstanding, respectively 78
79
Additional paid-in capital 412,152
290,216
Accumulated other comprehensive income 157
513
Accumulated deficit (141,750 ) (136,444 )
Total stockholders' equity 270,638
154,364
Total liabilities, mezzanine equity and stockholders' equity $ 350,981
$ 244,424
(unaudited)


	June 30,		December 31,
	2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	79,189	$	89,030
Accounts receivable, net of allowance for doubtful accounts of $696 and $186, respectively	26,312		15,161
Inventories	40,772		26,601
Net investment in leases, current, net of allowance for doubtful accounts of $93 and $105, respectively	4,565		3,856
Prepaid expenses	3,077		2,219
Other current assets	4,467		3,000
Total current assets	158,382		139,867

Property and equipment, net	33,873		15,469
Operating lease right-of-use assets	5,988		5,726
Goodwill	84,741		36,204
Other intangible assets, net	54,782		11,472
Deferred tax asset, net	8,205		6,429
Net investment in leases, non-current	15,307		14,307
Investments in unconsolidated affiliates	7,265		7,424
Other non-current assets	8,356		7,526
Total assets	$	376,899	$	244,424

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	11,891	$	6,600
Accrued liabilities	13,211		6,345
Accrued purchase consideration payable	—		14,579
Operating lease liabilities, current	2,108		1,745
Deferred revenue, current, and other	5,644		2,930
Total current liabilities	32,854		32,199

Convertible note, non-current, net	48,396		45,348
Deferred revenue, non-current	5,204		5,966
Other long-term borrowings	507		1,121
Related party loan	1,134		—
Operating lease liabilities, non-current	4,341		4,413
Deferred tax liability	14,071		691
Other liabilities	434		152
Total liabilities	106,941		89,890



Redeemable non-controlling interest and mezzanine equity	(89)		170

Stockholders' equity:
Preferred stock, $.01 par value, 2,500,000 shares authorized, none issued or outstanding	—		—
Common stock, $.01 par value, 13,250,000 and 10,250,000 shares authorized, respectively, none issued or outstanding	—		—
Public common stock, $.01 par value, 13,250,000 and 10,250,000 shares authorized, 9,414,834 and 7,881,928 shares issued and outstanding, respectively	94		79
Additional paid-in capital	415,687		290,216
Accumulated other comprehensive income	2,373		513
Accumulated deficit	(148,107)		(136,444)
Total stockholders' equity	270,047		154,364
Total liabilities, mezzanine equity and stockholders' equity	$	376,899	$	244,424

See accompanying notes to condensed consolidated financial statements.

-1-

HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenue, net	$	45,712	$	28,146	$	76,366	$	57,657
Cost of revenue	27,847		15,734		45,053		32,702
Gross profit	17,865		12,412		31,313		24,955

Operating expenses:
Selling and marketing	9,583		6,715		16,963		13,748
Research and development	1,696		2,239		3,824		3,605
General and administrative	11,040		4,024		19,599		8,243
Total operating expenses	22,319		12,978		40,386		25,596
Operating loss	(4,454)		(566)		(9,073)		(641)
Interest and other expense (income), net	2,145		21		4,343		5
Loss before income taxes and equity in losses of unconsolidated affiliates	(6,599)		(587)		(13,416)		(646)
Income tax expense (benefit):
Current income tax expense	31		28		56		72
Deferred income tax benefit	(243)		(454)		(1,776)		(1,508)
Total income tax benefit	(212)		(426)		(1,720)		(1,436)

Net (loss) income before equity in losses of unconsolidated affiliates	(6,387)		(161)		(11,696)		790
Equity in losses of unconsolidated affiliates	(87)		(127)		(217)		(308)
Net (loss) income after equity in losses of unconsolidated affiliates	(6,474)		(288)		(11,913)		482
Net loss attributable to redeemable non-controlling interest	(117)		(47)		(268)		(91)
Net (loss) income attributable to Heska Corporation	$	(6,357)	$	(241)	$	(11,645)	$	573

Basic (loss) earnings per share attributable to Heska Corporation	$	(0.72)	$	(0.03)	$	(1.43)	$	0.08
Diluted (loss) earnings per share attributable to Heska Corporation	$	(0.72)	$	(0.03)	$	(1.43)	$	0.07

Weighted average outstanding shares used to compute basic (loss) earnings per share attributable to Heska Corporation	8,776		7,486		8,165		7,463
Weighted average outstanding shares used to compute diluted (loss) earnings per share attributable to Heska Corporation	8,776		7,486		8,165		7,956

Three Months Ended March 31,
2020 2019
Revenue:
Core companion animal $ 27,306
$ 24,716
Other vaccines and pharmaceuticals 3,348
4,795
Total revenue, net 30,654
29,511

Cost of revenue 17,206
16,968

Gross profit 13,448
12,543

Operating expenses:
Selling and marketing 7,380
7,033
Research and development 2,128
1,366
General and administrative 8,558
4,219
Total operating expenses 18,066
12,618
Operating loss (4,618 ) (75 )
Interest and other expense (income), net 2,199
(16 )
Loss before income taxes and equity in losses of unconsolidated affiliates (6,817 ) (59 )
Income tax (benefit) expense:
Current income tax expense 25
45
Deferred income tax benefit (1,533 ) (1,055 )
Total income tax benefit (1,508 ) (1,010 )

Net (loss) income before equity in losses of unconsolidated affiliates (5,309 ) 951
Equity in losses of unconsolidated affiliates (130 ) (181 )
Net (loss) income after equity in losses of unconsolidated affiliates (5,439 ) 770
Net loss attributable to redeemable non-controlling interest (151 ) (44 )
Net (loss) income attributable to Heska Corporation $ (5,288 ) $ 814

Basic (loss) earnings per share attributable to Heska Corporation $ (0.70 ) $ 0.11
Diluted (loss) earnings per share attributable to Heska Corporation $ (0.70 ) $ 0.10

Weighted average outstanding shares used to compute basic (loss) earnings per share attributable to Heska Corporation 7,568
7,459
Weighted average outstanding shares used to compute diluted (loss) earnings per share attributable to Heska Corporation 7,568
7,965

See accompanying notes to condensed consolidated financial statements.

-2-

HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net (loss) income after equity in losses of unconsolidated affiliates	$	(6,474)	$	(288)	$	(11,913)	$	482
Other comprehensive (loss) income:
Foreign currency translation	2,216		83		1,860		21
Comprehensive (loss) income	(4,258)		(205)		(10,053)		503

Comprehensive loss attributable to redeemable non-controlling interest	(117)		(47)		(268)		(91)
Comprehensive (loss) income attributable to Heska Corporation	$	(4,141)	$	(158)	$	(9,785)	$	594

Three Months Ended March 31,
2020 2019
Net (loss) income after equity in losses of unconsolidated affiliates $ (5,439 ) $ 770
Other comprehensive (loss) income:
Foreign currency translation (356 ) (62 )
Comprehensive (loss) income (5,795 ) 708

Comprehensive loss attributable to redeemable non-controlling interest (151 ) (44 )
Comprehensive (loss) income attributable to Heska Corporation $ (5,644 ) $ 752

See accompanying notes to condensed consolidated financial statements.

-3-

HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

(unaudited)


																							Preferred Stock				Common Stock						Additional Paid-in Capital		Accumulated Other Comprehensive Income				Accumulated Deficit			Total Stockholders' Equity
Three Months Ended June 30, 2019 and 2020																						Three Months Ended June 30, 2019 and 2020	Shares	Amount		Shares	Amount
Balances, March 31, 2019																						Balances, March 31, 2019	—	$	—	7,747	$	77	$	255,150	$	215					$	(134,165)		$	121,277
Net loss attributable to Heska Corporation																						Net loss attributable to Heska Corporation	—	—		—	—		—		—		(241)		(241)
Issuance of common stock, net of shares withheld for employee taxes																						Issuance of common stock, net of shares withheld for employee taxes	—	—		47	1		607		—		—		608
Stock-based compensation																						Stock-based compensation	—	—		—	—		1,195		—		—		1,195
Other comprehensive income																						Other comprehensive income	—	—		—	—		—		83		—		83
Balances, June 30, 2019																						Balances, June 30, 2019	—	$	—	7,794	$	78	$	256,952	$	298	$	(134,406)	$	122,922
		Preferred Stock			Common Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Total Stockholders' Equity
Three Months Ended March 31, 2019 and 2020		Shares	Amount		Shares		Amount
Balances, March 31, 2020																						Balances, March 31, 2020	122	$	1	7,843	$	78	$	412,152	$	157	$	(141,750)	$	270,638
Net loss attributable to Heska Corporation																						Net loss attributable to Heska Corporation											(6,357)		(6,357)
Issuance of common stock, net of shares withheld for employee taxes																						Issuance of common stock, net of shares withheld for employee taxes				63	1		1,105						1,106
Conversion of preferred stock to common stock																						Conversion of preferred stock to common stock	(122)	(1)		1,509	15		(14)						—
Stock-based compensation																						Stock-based compensation							2,444						2,444
Other comprehensive income																						Other comprehensive income									2,216				2,216
Balances, June 30, 2020																						Balances, June 30, 2020	—	$	—	9,415	$	94	$	415,687	$	2,373	$	(148,107)	$	270,047

Note: Excludes amounts related to redeemable non-controlling interests recorded in mezzanine equity.																						Note: Excludes amounts related to redeemable non-controlling interests recorded in mezzanine equity.

																							Preferred Stock				Common Stock						Additional Paid-in Capital		Accumulated Other Comprehensive Income				Accumulated Deficit			Total Stockholders' Equity
Six Months Ended June 30, 2019 and 2020																						Six Months Ended June 30, 2019 and 2020	Shares	Amount		Shares	Amount
Balances, December 31, 2018		—	$	—	7,676		$	77		$	257,034		$	277		$	(134,979	)	$	122,409		Balances, December 31, 2018	—	$	—	7,676	$	77	$	257,034	$	277					$	(134,979)		$	122,409
Net income attributable to Heska Corporation		—	—		—		—			—			—			814			814			Net income attributable to Heska Corporation	—	—		—	—		—		—		573		573
Issuance of common stock, net of shares withheld for employee taxes		—	—		71		—			(3,070		)	—			—			(3,070		)	Issuance of common stock, net of shares withheld for employee taxes	—	—		118	1		(2,462)		—		—		(2,461)
Stock-based compensation		—	—		—		—			1,186			—			—			1,186			Stock-based compensation	—	—		—	—		2,380		—		—		2,380
Other comprehensive loss		—	—		—		—			—			(62		)	—			(62		)
Balances, March 31, 2019		—	—		7,747		$	77		$	255,150		$	215		$	(134,165	)	$	121,277
Other comprehensive income																						Other comprehensive income	—	—		—	—		—		21		—		21
Balances, June 30, 2019																						Balances, June 30, 2019	—	$	—	7,794	$	78	$	256,952	$	298	$	(134,406)	$	122,922

Balances, December 31, 2019		—	—		7,882		$	79		$	290,216		$	513		$	(136,444	)	$	154,364		Balances, December 31, 2019	—	$	—	7,882	$	79	$	290,216	$	513	$	(136,444)	$	154,364
Adoption of accounting standards		—	—		—		—			—			—			(18		)	(18		)	Adoption of accounting standards	—	—		—	—		—		—		(18)		(18)
Balances, January 1, 2020, as adjusted		—	—		7,882		79			290,216			513			(136,462		)	154,346
Balances, January 1, 2020																						Balances, January 1, 2020	—	—		7,882	79		290,216		513		(136,462)		154,346
Net loss attributable to Heska Corporation		—	—		—		—			—			—			(5,288		)	(5,288		)	Net loss attributable to Heska Corporation	—	—		—	—		—		—		(11,645)		(11,645)
Issuance of common stock, net of shares withheld for employee taxes		—	—		(39	)	(1		)	(201		)	—			-			(202		)	Issuance of common stock, net of shares withheld for employee taxes	—	—		24	—		904		—		—		904
Issuance of preferred stock, net of issuance costs		122	1		—		—			121,784			—			-			121,785			Issuance of preferred stock, net of issuance costs	122	1		—	—		121,784		—		—		121,785
Conversion of preferred stock to common stock																						Conversion of preferred stock to common stock	(122)	(1)		1,509	15		(14)		—		—		—
Stock-based compensation		—	—		—		—			353			—			-			353			Stock-based compensation	—	—		—	—		2,797		—		—		2,797
Other comprehensive loss		—	—		—		—			—			(356		)	-			(356		)
Balances, March 31, 2020		122	$	1	7,843		$	78		$	412,152		$	157		$	(141,750	)	$	270,638
Other comprehensive income																						Other comprehensive income	—	—		—	—		—		1,860		—		1,860
Balances, June 30, 2020																						Balances, June 30, 2020	—	$	—	9,415	$	94	$	415,687	$	2,373	$	(148,107)	$	270,047

Note: Excludes amounts related to redeemable non-controlling interests recorded in mezzanine equity.	Note: Excludes amounts related to redeemable non-controlling interests recorded in mezzanine equity.																					Note: 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


	Six Months Ended June 30,
	2020		2019
Cash flows from operating activities:
Net (loss) income after equity in losses from unconsolidated affiliates	$	(11,913)	$	482
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Depreciation and amortization	4,704		2,522
Non-cash impact of operating leases	840		750
Deferred income tax benefit	(1,776)		(1,508)
Stock-based compensation	2,797		2,380
Equity in losses of unconsolidated affiliates	217		308
Amortization of debt discount and issuance costs	3,049		—
Other losses	65		245
Changes in operating assets and liabilities (net of the effect of acquisitions):
Accounts receivable	(1,268)		3,764
Inventories	(4,094)		(2,978)
Lease receivable, current	(733)		(392)
Other current assets	670		(531)
Accounts payable	(2,732)		(707)
Due to related parties	—		(226)
Accrued liabilities and other	(932)		(7,680)
Lease receivable, non-current	242		(1,090)
Other non-current assets	(235)		28
Deferred revenue and other	(1,996)		(723)
Net cash used in operating activities	(13,095)		(5,356)
Cash flows from investing activities:
Investment in subsidiary, net of cash acquired	—		(622)
Acquisition of CVM	(14,420)		—
Purchases of property and equipment	(316)		(629)
Acquisition of scil, net of cash acquired	(105,190)		—
Net cash used in investing activities	(119,926)		(1,251)
Cash flows from financing activities:
Borrowings on line of credit	—		6,750
Payment of preferred stock issuance costs	(214)		—
Preferred stock proceeds	122,000		—
Proceeds from issuance of common stock	1,514		1,018
Repurchase of common stock	(610)		(3,480)
Repayments of other debt	(109)		(1,083)
Borrowings on other debts	410		—
Net cash provided by financing activities	122,991		3,205
Foreign exchange effect on cash and cash equivalents	189		5
Net increase (decrease) in cash and cash equivalents	(9,841)		(3,397)
Cash and cash equivalents, beginning of period	89,030		13,389
Cash and cash equivalents, end of period	$	79,189	$	9,992

Supplemental disclosure of cash flow information:
Non-cash transfers of equipment between inventory and property and equipment, net	$	1,560	$	878
Non-cash conversion of preferred stock to common stock	$	122,000	$	—
Consideration payable for scil acquisition	$	537	$	—

Three Months Ended
March 31,
2020 2019
Cash flows from operating activities:
Net (loss) income after equity in losses from unconsolidated affiliates $ (5,439 ) $ 770
Adjustments to reconcile net income to cash (used in) provided by operating activities:

Depreciation and amortization 1,374
1,265
Non-cash impact of operating leases 408
375
Deferred income tax benefit (1,533 ) (1,055 )
Stock-based compensation 353
1,186
Equity in losses of unconsolidated affiliates 130
181
Amortization of debt discount and issuance costs 1,524
10
Other losses 42
—
Changes in operating assets and liabilities (net of the effect of acquisitions):

Accounts receivable (1,092 ) 624
Inventories (3,081 ) (1,052 )
Lease receivable, current (196 ) (237 )
Other current assets (23 ) (151 )
Accounts payable 837
(110 )
Due to related parties —
(226 )
Accrued liabilities and other 2,642
39
Lease receivable, non-current (74 ) (668 )
Other non-current assets (136 ) 101
Deferred revenue and other (497 ) (325 )
Net cash (used in) provided by operating activities (4,761 ) 727
Cash flows from investing activities:
Investment in subsidiary, net of cash acquired —
(224 )
Acquisition of CVM (14,420 ) —
Purchases of property and equipment (210 ) (234 )
Net cash used in investing activities (14,630 ) (458 )
Cash flows from financing activities:
Payment of preferred stock issuance costs (158 ) —
Preferred stock proceeds 122,000
—
Proceeds from issuance of common stock 336
410
Repurchase of common stock (538 ) (3,480 )
Repayments of other debt (10 ) (1,486 )
Net cash provided by (used in) financing activities 121,630
(4,556 )
Foreign exchange effect on cash, cash equivalents and restricted cash (24 ) (1 )
Net increase (decrease) in cash, cash equivalents and restricted cash 102,215
(4,288 )
Cash, cash equivalents and restricted cash, beginning of period 89,030
13,389
Cash, cash equivalents and restricted cash, end of period $ 191,245
$ 9,101

Supplemental disclosure of cash flow information:
Non-cash transfers of equipment between inventory and property and equipment, net $ 553
$ 227
Accrued preferred stock issuance costs $ 56
$ —

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; 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

~~In the opinion of management, the~~The accompanying interim Condensed Consolidated Financial Statements are unaudited. The interim unaudited Condensed Consolidated Financial Statements ~~contain~~have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, ~~consisting of~~which include normal, recurring adjustments, necessary to present fairly the financial position of the Company as of ~~March 31,~~June 30, 2020, and ~~December 31, 2019,~~ the results of our operations and statements of stockholders' equity for the three and six months ended ~~March 31,~~June 30, 2020 and 2019, and cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019.

The unaudited Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. Our unaudited Condensed Consolidated Financial Statements include our accounts and the accounts of our wholly-owned subsidiaries since their respective dates of acquisitions. All intercompany accounts and transactions have been eliminated in consolidation. Where our ownership of a subsidiary is less than 100%, the non-controlling interest is reported on our Condensed Consolidated Balance Sheets. The non-controlling interest in our consolidated net income is reported as "Net loss attributable to redeemable non-controlling interest" on our Condensed Consolidated Statements of Income. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and other financial information filed with the SEC.

To maintain consistency and comparability, certain amounts in the financial statements have been reclassified to conform to current year presentation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are required when establishing the allowance for doubtful accounts and the net realizable value of inventory; determining future costs associated with warranties provided; determining the period over which our obligations are fulfilled under agreements to license product rights and/or technology rights; evaluating long-lived and intangible assets and investments for estimated useful lives and impairment; estimating the useful lives of instruments under leasing arrangements; determining the allocation of purchase price under purchase accounting; estimating the expense associated with the granting of stock; determining the need for, and the amount of a valuation allowance on deferred tax assets; determining the value of the non-controlling interest

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

in a business combination; and determining the fair value of the liability component associated with the issuance of convertible debt.

Critical Accounting Policies

Our accounting policies are described in our audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2019, and other than the recently adopted accounting pronouncements described below have not changed materially since such filing.

Adoption of New Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based upon historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. Subsequent to the issuance of ASU 2016-13, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, in November 2018. This ASU clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which further clarifies and improves guidance related to accounting for credit losses. In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326). This ASU provides relief to certain entities adopting ASU 2016-13. The amendment provides entities with an option to irrevocably elect the fair value option for certain financial assets. ~~These amendments are effective for fiscal years beginning after December 15, 2019 and interim periods within those annual periods.~~

The Company adopted ASU 2016-13 with a cumulative-effect adjustment in retained earnings as of January 1, 2020. The impact of the adoption was not material to the Company's consolidated financial ~~statements as~~statements. We continuously monitor our customers' credit worthiness and establish allowances for estimated credit losses related to our accounts receivable, net investment in leases, and promissory notes. Our allowances are ~~not expected to be significant~~established based on factors surrounding the credit risk of specific customers, historical experience including collections and write-off history, and current economic conditions. Account Balances are considered past due if payments have not been received within agreed upon invoice and/or contract terms and the Company may employ collection ~~trends,~~agencies and legal counsel to pursue recovery of defaulted amounts. Account balances are written off against the ~~financial condition of customers,~~allowance after all collection efforts have been exhausted and ~~external market factors.~~it is probable the receivable will not be recovered. The Company also performs a qualitative assessment, on a quarterly basis, to monitor economic factors and other uncertainties that may require additional adjustments for the expected credit loss allowance. The Company will continue to actively monitor the impact of the recent coronavirus ("COVID-19") pandemic on expected credit losses.

Accounting Pronouncements Not Yet Adopted

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

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The amendments in this ASU clarify the interaction between the accounting for investments in equity securities, investment in equity method and certain derivatives instruments. The ASU is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. This guidance will be effective for fiscal years

~~HESKA CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)~~

beginning after December 15, 2021. We are currently evaluating the impact of this update on our consolidated financial statements.

We separate our goods and services among ~~two~~2 reportable segments, ~~Core companion animal ("CCA")~~North America and ~~Other vaccines and pharmaceuticals ("OVP").~~International. The ~~CCA segment consists~~two segments consist of revenue ~~generated from~~originating from:

•North America: including the ~~following:~~United States, Canada and Mexico

•International: all geographies outside North America, including Australia, France, Germany, Italy, Malaysia, Spain and Switzerland

Refer to Note 17 for further detail regarding the change in reportable segments which required recast of ~~Care laboratory products including instruments, consumables and services;~~prior period presentation.

~~Point of Care imaging products including instruments, software and services;~~

~~The OVP segment consists of revenue generated from the following:~~

The following table summarizes our ~~CCA~~segment revenue (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
North America Revenue:
POC Lab Instruments & Other	$	1,942	$	1,404	$	3,314	$	3,307
Sales-type leases	1,020		1,492		2,264		3,234
POC Lab Consumables	13,537		13,182		27,223		25,499
POC Imaging	4,148		4,166		7,644		9,231
PVD	4,880		2,721		9,384		5,392
OVP	3,455		3,431		6,802		8,225
Total North America Revenue	$	28,982	$	26,396	$	56,631	$	54,888
International Revenue:
POC Lab Instruments & Other	$	1,928	$	16	$	2,117	$	16
Sales-type leases	278		—		323		—
POC Lab Consumables	9,470		25		10,032		25
POC Imaging	4,404		1,064		5,762		1,408
PVD	650		645		1,501		1,320
OVP	—		—		—		—
Total International Revenue	$	16,730	$	1,750	$	19,735	$	2,769
Total Revenue	$	45,712	$	28,146	$	76,366	$	57,657

Three Months Ended March 31,
2020
2019
Point of Care laboratory revenue: $ 17,096
$ 15,961
    Consumables 14,248
12,317
    Sales-type leases 1,244
1,742
    Outright instrument sales 1,205
1,528
    Other 399
374

Point of Care imaging revenue: 4,855
5,410
    Outright instrument sales 4,055
4,546
    Other 800
864

Other CCA revenue: 5,355
3,345
    Other pharmaceuticals, vaccines and diagnostic tests 5,329
3,246
    Research and development, license and royalty revenue 26
99

Total CCA revenue $ 27,306
$ 24,716

~~The following table summarizes our OVP revenue (in thousands):~~

Three Months Ended March 31,
2020 2019
Contract manufacturing $ 3,191
$ 4,666
License, research and development 157
129
Total OVP revenue $ 3,348
$ 4,795

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

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 ~~noncancelable~~non-cancelable purchase orders, the non-lease portion of minimum purchase commitments under long-term supply arrangements, extended warranty, service and other long-term contracts. Remaining performance obligations do not include revenue from contracts with customers with an original term of one year or less, revenue from long-term supply arrangements with no minimum purchase requirements, revenue expected from purchases made in excess of the minimum purchase requirements, or revenue from instruments leased to customers. While the remaining performance obligation disclosure is similar in concept to backlog, the definition of remaining performance obligations excludes leases and contracts that provide the customer with the right to cancel or terminate for convenience with no substantial penalty, even if historical experience indicates the likelihood of cancellation or termination is remote. Additionally, the Company has elected to exclude contracts with customers with an original term of one year or less from remaining performance obligations.

As of ~~March 31,~~June 30, 2020, the aggregate amount of the transaction price allocated to remaining minimum performance obligations was approximately ~~$122.1~~$128.2 million. As of ~~March 31,~~June 30, 2020, the Company expects to recognize revenue as follows (in thousands):


Year Ending December 31,	Revenue
2020 (remaining)	$	14,944
2021	27,589
2022	24,426
2023	21,679
2024	17,365
Thereafter	22,242
	$	128,245

Year Ending December 31, Revenue
2020 (remaining) $ 21,055
2021 25,661
2022 22,458
2023 19,697
2024 15,470
Thereafter 17,747
$ 122,088

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets) and deferred revenue, and customer deposits and billings in excess of revenue recognized (contract liabilities) on the Condensed Consolidated Balance Sheets. In addition, the Company defers certain costs incurred to obtain contracts (contract costs).

Contract Receivables

Certain unbilled receivable balances 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. We have no further performance obligations related to these receivable balances and the collection of these balances occurs over the term of the underlying contract. The balances as of ~~March 31,~~June 30, 2020 were ~~$1.1~~$1.2 million and $3.9 million for current and non-current assets, respectively, shown net of related unearned interest. The balances as of December 31, 2019 were $1.1 million and $3.7 million for current and non-current assets, respectively, shown net of related unearned interest.

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

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 ~~March 31,~~June 30, 2020 and December 31, 2019, contract liabilities were ~~$8.2~~$8.6 million and $8.7 million, respectively, and are included within ~~"Current portion of deferred~~"Deferred revenue, current, and other" and "Deferred revenue, ~~net of current portion"~~non-current" in the accompanying Condensed Consolidated Balance Sheets. The decrease in the contract liability balance during the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2020 is approximately ~~$1.1~~$2.0 million of revenue recognized during the period, offset by approximately ~~$0.6~~$1.3 million of additional deferred sales in ~~2020.~~

The Company capitalizes certain direct incremental costs incurred to obtain customer contracts, typically sales-related commissions, where the recognition period for the related revenue is greater than one year. Contract costs are classified as current or non-current and are included in "Other current assets" and "Other non-current assets" in the Condensed Consolidated Balance Sheets based on the timing of when the Company expects to recognize the expense. Contract costs are generally amortized into selling and marketing expense with a certain percentage recognized immediately based upon placement of the instrument with the remainder recognized on a straight-line basis (which is consistent with the transfer of control for the related goods or services) over the average term of the underlying contracts, approximately 6 years. Management assesses these costs for impairment at least quarterly on a portfolio basis and as “triggering” events occur that indicate it is more-likely-than-not that an impairment exists. The balance of contract costs as of March 31, 2020 and ~~December 31, 2019 was $2.7 million and $2.7 million, respectively. Amortization expense for~~ the ~~three-month period ended March 31, 2020 was approximately $0.2 million, offset by approximately $0.2 million~~acquisition of ~~additional~~scil contract ~~costs capitalized.~~

liabilities of $0.6 million. Contract liabilities are reported on the accompanying Condensed Consolidated Balance Sheets on a contract-by-contract ~~basis whereas contract costs are calculated and reported on a portfolio~~ basis.

3. ACQUISITIONS AND RELATED PARTY ITEMS

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 purchase price of approximately $111 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 fair value of the identifiable net assets, resulting in goodwill of $48.1 million, of which $39.2 million is within our International segment and $8.9 million is within our North America segment. All of the goodwill is tax deductible for U.S. federal income tax purposes which may result in a decrease to Heska'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. ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, Fair Value Measurements, as of the acquisition date. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on a preliminary estimate of their fair values as of April 1, 2020. The total purchase consideration is subject to customary working capital adjustments.

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

The information below represents the preliminary purchase price allocation of scil (in thousands):


	April 1, 2020
Total purchase consideration	$	111,564

Cash and cash equivalents	5,837
Accounts receivable	11,087
Inventories	11,373
Prepaid expenses	1,391
Other current assets	281
Property and equipment	19,023
Operating lease right-of-use assets	869
Other intangible assets	44,119
Deferred tax asset	1,013
Investments in unconsolidated affiliates	55
Other non-current assets	1,373
Total assets acquired	96,421
Accounts payable	8,721
Accrued liabilities	6,270
Operating lease liabilities, current	353
Deferred revenue, current, and other	2,669
Deferred revenue, non-current	132
Operating lease liabilities, non-current	524
Deferred tax liability	14,044
Other liabilities	274
Net assets acquired	63,434
Goodwill	48,130
Total fair value of consideration transferred	$	111,564

The Company's preliminary estimates of fair values of the assets acquired and the liabilities assumed are based on the information currently available, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the date of the acquisition. Among items still being evaluated is an existing uncertain tax position of approximately $1.0 million that scil had prior to acquisition. This tax position is still being evaluated during the allowed measurement period. The uncertain tax position may or may not change based on the results of the evaluation. A decrease in the fair value of assets acquired or an increase in the fair value of liabilities assumed in the acquisition from those valuations would result in a corresponding increase in the amount of goodwill from 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 April 1, 2020, was as follows (dollars in thousands):

Useful Life

Amortization
Method

Fair Value

Customer relationships

10 years

Straight-line

35,948

Internally developed software

7 years

Straight-line

350

Backlog

0.2 years

Straight-line

208

Non-compete agreements

2 years

Straight-line

Trade name subject to amortization

0.8 years

Straight-line

Trademarks and trade names not subject to amortization

n/a

Indefinite

7,488

Total intangible assets acquired

44,119

scil generated net revenue of $16.6 million and a net loss of $0.6 million for the period from April 1, 2020 to June 30, 2020.

The Company incurred acquisition related costs of approximately $2.5 million and $5.0 million for the three and six months ended June 30, 2020, respectively, which are included within general and administrative expenses on our Consolidated Statements of Income.

Unaudited Pro Forma Financial Information

The following tables present unaudited supplemental pro forma financial information as if the acquisition had occurred on January 1, 2019 (in thousands, except per share amounts):


	Six Months Ended June 30, 2020
Revenue, net	$	94,917
Net (loss) income before equity in losses of unconsolidated affiliates	$	(12,512)
Net (loss) income attributable to Heska Corporation	$	(12,461)


	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Revenue, net	$	47,276	$	95,026
Net (loss) income before equity in losses of unconsolidated affiliates	$	(400)	$	(955)
Net (loss) income attributable to Heska Corporation	$	(480)	$	(1,172)

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)

On December 5, 2019, Heska entered into a definitive agreement to purchase 100% of the outstanding shares of CVM Diagnostico Veternario S.L. and CVM Ecografia S.L. ~~(“CVM”, collectively)~~(collectively, “CVM”), primarily to expand international operations in Europe. CVM is headquartered in Tudela, outside of Madrid, Spain. CVM mainly operates in Spain. The terms of the agreement transferred ~~administrative~~ control of CVM upon signing, and the transfer of the purchase price of approximately $14.4 million and shares occurred ~~subsequently~~ in January 2020. The purchase price exceeded the fair value of the identifiable net assets and, accordingly, $8.9 million was allocated to goodwill within the ~~CCA~~International segment based on the preliminary purchase price allocation, all of which is tax deductible for U.S. federal income tax purposes.

~~HESKA CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)~~

The preliminary fair values allocated to CVM's assets and liabilities as of the acquisition date, as well as the purchase price, are reflected in the table below (in thousands):

Purchase Price December 5, 2019
Consideration payable to former owners $ 14,420
Total $ 14,420
Net Assets Acquired
Cash and cash equivalents 1,226
Accounts receivable 582
Inventories 1,750
Other current assets 1,186
Property and equipment 260
Other intangible assets 2,608
Other non-current assets 460
Accounts payable (553 )
Current portion of deferred revenue, and other (67 )
Deferred tax liability (683 )
Other long-term borrowings (1,109 )
Other liabilities (157 )
Total fair value of net assets acquired 5,503
Goodwill 8,917
Total fair value of consideration transferred $ 14,420


	December 5, 2019
Consideration paid to former owners	$	14,420

Cash and cash equivalents	1,226
Accounts receivable	583
Inventories	1,621
Other current assets	1,186
Property and equipment	345
Other intangible assets	2,608
Other non-current assets	460
Total assets acquired	8,029
Accounts payable	(94)
Accrued liabilities	(471)
Current portion of deferred revenue, and other	(54)
Deferred tax liability	(683)
Other long-term borrowings	(1,109)
Other liabilities	(157)
Net assets acquired	5,461
Goodwill	8,959
Total fair value of consideration transferred	$	14,420

The Company's preliminary estimates of fair values of the assets acquired and the liabilities assumed are based on the information that was available at the date of the acquisition, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the date of the acquisition. During the ~~three~~six months ended ~~March 31,~~June 30, 2020, the Company made certain valuation adjustments to provisional amounts previously recognized. These adjustments resulted in a net ~~$68~~$110 thousand increase of goodwill, primarily due to fair value adjustments resulting in a decrease in net identifiable assets acquired.

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

Intangible assets acquired, amortization method and estimated useful life as of December 5, 2019, was as follows (dollars in thousands):

Useful Life

Amortization Method

Fair Value

Customer relationships

6 years

Straight-line

2,440

Trade name

4 years

Straight-line

111

Developed technology

n/a

Indefinite

$~~111~~

2,608

The Company incurred acquisition related costs of approximately $0.1 million for the year ended December 31, 2019, which are included within general and administrative expenses on our Consolidated Statements of Income.

CVM generated net revenue of $0.8 million and net income of $0.1 million, for the period from December 6, 2019 to December 31, 2019. CVM generated net revenue of $1.7 million and $3.1 million and net income of $0.1 million and $0.1 million for the three and six months ended June 30, 2020, respectively.

~~HESKA CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)~~

The Company incurred acquisition related costs of approximately $0.1 million and $0.2 million for the three three and six months ended June 30, 2020, respectively, which are included within general and administrative expenses on our Consolidated Statements of Income.

Unaudited Pro Forma Financial Information

The following table presents unaudited supplemental pro forma financial information as if the CVM acquisition had occurred on January 1, 2019 (in thousands):


	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Revenue, net	$	29,931	$	61,552
Net (loss) income before equity in losses of unconsolidated affiliates	$	(198)	$	626
Net (loss) income attributable to Heska Corporation	$	(278)	$	409

Three Months Ended March 31, 2019
Total revenue, net $ 31,621
Net income attributable to Heska Corporation 686

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

~~On February 22,~~CVM management conducts related party activities with Practice Clinicas Veterinarias Moviles, S.L. ("CVM Practice"), which is owned by CVM's management. CVM leases 2 warehouses from CVM Practice and is the debtor of 2 loans with CVM Practice. CVM Practice charged CVM $15 thousand and $0 during the six months ended June 30, 2020 and 2019, ~~Heska acquired 70%~~respectively, all of which is related to lease payments. The right-of-use asset and lease liability amounts related to the ~~equity~~warehouse leases were approximately $169 thousand and $0 as of ~~Optomed, a French-based endoscopy company, in exchange for approximately $0.2 million in cash~~June 30, 2020 and the assumption of approximately $0.4 million in debt. As part of the purchase, Heska entered into put and call options on the remaining 30% minority interest. The written put options can be exercised based on the achievement of certain financial conditions over a specified period of time for a fixed amount. The options are not currently exercisable at the acquisition date or the reporting date. The estimated value of the non-controlling interest is inclusive of the probability weighted outcome of the options described herein. As of December 31, 2019, ~~the purchase price allocation was final. As part~~respectively. All accrued interest is due upon termination of the ~~purchase agreement, Heska also committed to purchase from the minority interest holder real estate in~~loans with CVM Practice and as such, the amount due includes principal and interest. The Company had payables to CVM Practice of ~~$1.2~~approximately $1.0 million ~~which was paid in full~~and $0 as of June 30, 2020 and December 31, ~~2019.~~2019, respectively, which is included in "Related party loan" on the Company's Condensed Consolidated Balance Sheet. The change from December 31, 2019 to June 30, 2020 is due to a reorganization regarding CVM management and the control that they exercise subsequent to the scil acquisition.

~~Cuattro Veterinary Acquisitions~~

-14-

In February 2013, the Company acquired a majority interest in Cuattro Veterinary USA, LLC, which was owned by Kevin S. Wilson, among other members. The subsidiary was subsequently renamed Heska Imaging US, LLC ("US Imaging"). The remaining minority position in US Imaging was subject to purchase by Heska under a performance-based put option which was exercised in March 2017. In May 2017, we purchased the remaining minority interest position in US Imaging.HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

In May 2016, the Company closed a transaction to acquire Cuattro Veterinary, LLC ("International Imaging"), which was owned by Kevin S. Wilson, among other members. International Imaging is a provider to international markets of digital radiography technologies for veterinarians. As a leading provider of advanced veterinary diagnostic and specialty products, we made the acquisition in an effort to combine International Imaging's global reach with our domestic success in the imaging and laboratory markets in the United States.

~~In June 2017, the Company consolidated its assets and liabilities in the US Imaging and International Imaging companies into Heska Imaging, LLC ("Heska Imaging").~~ Other Related Party Activities

Cuattro, LLC ("Cuattro"), which is owned by Kevin S. Wilson, the CEO and President of the Company, in addition to Mrs. Wilson and trusts for the benefit of Mr. and Mrs. Wilson's children and ~~family.~~

~~HESKA CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)~~

~~Purchase Agreement for Certain Assets~~

On December 21, 2018, the Company closed a transaction (the "Asset Acquisition") to acquire certain assets from Cuattro, all related to the CCA segment. Pursuant to the Asset Acquisition, dated November 26, 2018, the Company issued 54,763 shares of the Company's Common Stock to Cuattro on the closing date, at an aggregate value equal to approximately $5.4 million based on the adjusted closing price per share of the Common Stock as reported on the Nasdaq Stock Market on the Asset Acquisition agreement date. These shares were issued to Cuattro in a private placement in reliance upon an exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof and the safe harbor provided by Rule 506 of Regulation D promulgated thereunder. In addition to the Common Stock, the Company paid cash in the amount of $2.8 million to Cuattro as part of the transaction. The total purchase price was determined based on a valuation report from an independent third party. Part of the Asset Acquisition was an agreement to terminate the supply and license agreement that Heska had been operating under since the acquisition of Cuattro Veterinary USA, LLC.

~~The Company evaluated the acquisition of the purchased assets under ASC 805,~~ ~~Business Combinations~~ ~~and ASU 2017-01,~~ ~~Business Combinations (Topic 805)~~ and concluded that as substantially all of the fair value of the gross assets acquired is concentrated in an identifiable group of similar assets, the transaction did not meet the requirements to be accounted for as a business combination and therefore was accounted for as an asset acquisition. Accordingly, the purchase price of the purchased assets was allocated entirely to an identifiable intangible asset. In addition to the software assets acquired, Cuattro is obligated, without further compensation, to assist the Company with the implementation of a third-party image hosting platform and necessary data migration.

~~Other Related Party Activities~~

~~Cuattro~~family, charged Heska Imaging $0 and ~~$6.0~~$6 thousand during the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019, respectively. The 2019 charges primarily related to digital imaging products, pursuant to an underlying supply contract that contains minimum purchase obligations, software and services as well as other operating expenses. Pursuant to the December 18, 2018 transaction in which the Company acquired certain assets from Cuattro, Cuattro was obligated, without further compensation, to assist the Company with the implementation of a third-party image hosting platform and necessary data migration. The implementation and migration were completed, on schedule, as of June 30, 2020 and as such there will be no further related party activities with Cuattro.

The Company had no0 receivables from or payables to Cuattro as of ~~March 31,~~June 30, 2020 or December 31, 2019.

~~HESKA CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)~~

4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The carrying values of investments in unconsolidated affiliates, categorized by type of investment, is as follows (in thousands):

Equity Method Investment

On September 24, 2018, we invested approximately $5.1 million, including costs, in exchange for ~~a 28.7%~~an approximately 25.0% interest of a business as part of our product development strategy. 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 income before equity in losses of unconsolidated affiliates within the Condensed Consolidated Statements of Income.

Non-Marketable Equity Security Investment

On August 8, 2018, the Company invested approximately $3.0 million, including costs, in MBio Diagnostics, Inc. ("MBio"), in exchange for preferred stock, representing ~~a 6.9%~~an approximately 5.0% interest in MBio. The Company’s investment in MBio 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 with MBio, which provides that MBio produce and commercialize products that will enhance the Company's diagnostic portfolio. As part of this agreement, the Company made an upfront payment to MBio of $1.0 million related to a worldwide exclusive license agreement over a 20-year period, recorded in both short and long-term other

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

assets. In addition, the agreement provides for an additional contingent payment from Heska to MBio 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.

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 MBio's research and development work within the ~~CCA~~North America segment research and development operating expenses. Expense is recognized ratably when incurred and in accordance with the development plan.

~~HESKA CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)~~

Our total income tax benefit for our loss before income taxes were as follows (in thousands):

There were cash payments for income taxes of $7$340 thousand and $347 thousand for the three and six months ended ~~March 31,~~June 30, 2020, respectively, and there were cash payments of $28 thousand and cash refunds, net of payments, of $0.1 million, ~~in cash refunds~~respectively, for income taxes ~~net of payments,~~ for the three and six months ended ~~March 31,~~June 30, 2019. The Company’s tax benefit ~~increased to $1.5~~was $0.2 million and $1.7 million for the three and six months ended ~~March 31,~~June 30, 2020, respectively, compared to the tax benefit of ~~$1.0~~$0.4 million and $1.4 million for the three and six months ended ~~March 31, 2019.~~June 30, 2019, respectively. The increase in tax benefits in the six month period is due to the higher financial ~~loss.~~loss offset by transaction costs and a small increase in the partial valuation allowance further discussed below. The Company recognized ~~$0.3~~$0.2 million in excess tax benefits related to employee share-based compensation for the three months ended ~~March 31,~~June 30, 2020, compared to ~~$1.1~~$0.3 million recognized for the three months ended ~~March 31,~~June 30, 2019. The Company recognized $0.5 million in excess tax benefits related to employee share-based compensation for the six months ended June 30, 2020, compared to $1.4 million recognized for the six months ended June 30, 2019.

As of June 30, 2020, the Company assessed whether the reduction of future taxable income due to the lingering effects from COVID-19 would cause a larger portion of our deferred tax assets to likely expire unrealized. The Company recorded an additional $0.3 million to the current partial valuation allowance against the Company's deferred tax assets as of June 30, 2020. The Company will continue to closely monitor the need for an additional valuation allowance against its deferred tax assets in each subsequent reporting period which can be impacted by actual operating results compared to the Company's forecast.

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

The Company leases buildings, office equipment, and vehicles. ~~As of March 31, 2020,~~The following table summarizes the ~~Company’s finance leases were not material to our Condensed Consolidated Financial Statements. ROU assets arising from finance leases are included in Property~~Company's operating and ~~equipment, net in the accompanying Condensed Consolidated Balance Sheets. The current portion of the~~ finance lease liabilities are included in Current portion of deferred revenue, and other and the non-current portion of the finance lease liabilities are included in Other liabilities in the accompanying Condensed Consolidated Balance Sheets.balances (in thousands):


Leases	Balance Sheet Location	June 30, 2020		December 31, 2019
Assets
Operating	Operating lease right-of-use assets	$	5,988	$	5,726
Finance	Property and equipment, net	1,815		81
Total Leased Assets		$	7,803	$	5,807

Liabilities
Operating	Operating lease liabilities, current	$	2,108	$	1,745
	Operating lease liabilities, non-current	4,341		4,413
Finance	Deferred revenue, current, and other	307		47
	Other liabilities	318		37
Total Lease Liabilities		$	7,074	$	6,242

For the three and six months ended ~~March 31,~~June 30, 2020, operating lease expense was approximately $0.7 million and $1.3 million, respectively, including immaterial variable lease costs. For the three and six months ended June 30, 2019, operating lease expense was approximately $0.6 million and ~~$0.6~~$1.1 million, respectively, including immaterial variable lease costs.

For the three and six months ended June 30, 2020, finance lease amortization expense was $165 thousand and $176 thousand, respectively. For the three and six months ended June 30, 2019, finance lease amortization expense was $5 thousand and $14 thousand, respectively. For the three and six months ended June 30, 2020, finance lease interest expense was $3 thousand and $4 thousand, respectively. For the three and six months ended June 30, 2019, finance lease interest expense was $0 and $1 thousand, respectively.

Supplemental cash flow information related to the Company's operating and finance leases for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019, respectively, was as follows (in thousands):


	Six Months Ended June 30,
	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows - operating leases	$	1,011	$	889
Operating cash outflows - finance leases	$	4	$	1
Financing cash outflows - finance leases	$	83	$	10
ROU assets obtained in exchange for new lease obligations:
Operating leases	$	316	$	341
Finance leases	$	110	$	—

Three Months Ended March 31,
2020
2019
Cash paid for amounts included in the measurement of operating lease liabilities $ 460
$ 444
ROU assets obtained in exchange for operating lease obligations 98
293

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

The following table presents the weighted average remaining lease term and weighted average discount rate related to the Company's ~~operating~~ leases:


	June 30, 2020		December 31, 2019
Weighted average remaining lease term:
Operating	3.4 years		3.8 years
Finance	2.8 years		2.0 years
Weighted average discount rate:
Operating	4.3 %		4.4	%
Finance	2.7	%	4.0	%

March 31, 2020 December 31, 2019
Weighted average remaining lease term 3.6 years
3.8 years
Weighted average discount rate 4.44 % 4.44 %

~~HESKA CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)~~

The following table presents the maturity of the Company's ~~operating~~ lease liabilities as of ~~March 31,~~June 30, 2020 (in thousands):


Year Ending December 31,	Operating Leases		Finance Leases
Remainder of 2020	$	1,303	$	162
2021	1,909		252
2022	1,591		115
2023	1,881		44
2024	99		34
Thereafter	179		37
Total lease payments	6,962		644
Less: imputed interest	513		19
Total lease liabilities	$	6,449	$	625

Year Ending December 31,
Remainder of 2020 $ 1,451
2021 1,608
2022 1,411
2023 1,795
2024 30
Thereafter 57
Total operating lease payments 6,352
Less: imputed interest 505
Total operating lease liabilities $ 5,847

~~In our CCA segment, primarily related to our Point of Care laboratory products, the~~The Company enters into sales-type leases as part of our subscription agreements. The following table presents the maturity of the Company's ~~undiscounted~~ lease receivables as of ~~March 31,~~June 30, 2020 (in thousands):


Year Ending December 31,
Remainder of 2020	$	2,288
2021	4,695
2022	4,392
2023	3,678
2024	2,723
Thereafter	2,203
Total undiscounted future maturities	19,979
Less: interest	107
Total lease receivables	$	19,872

Year Ending December 31,
Remainder of 2020 $ 3,101
2021 4,209
2022 3,888
2023 3,182
2024 2,308
Thereafter 1,705
$ 18,393

~~7. EARNINGS PER SHARE~~

Basic earnings per share ("EPS") is computed by dividing net income attributable to the Company by the weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the numerator is increased to exclude charges that would not have been incurred, and the denominator is increased to include the number of additional common shares that would have been outstanding (using the if-converted and treasury stock methods), if securities containing potentially dilutive common shares such as stock options converting to common shares, and if such assumed conversion is dilutive.

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 ~~EPS~~earnings per share ("EPS") for the three and six months ended ~~March 31,~~June 30, 2020 and 2019 (in thousands, except per share data):


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net (loss) income attributable to Heska Corporation	$	(6,357)	$	(241)	$	(11,645)	$	573

Basic weighted-average common shares outstanding	8,776		7,486		8,165		7,463
Assumed exercise of dilutive stock options and restricted shares	—		—		—		493
Diluted weighted-average common shares outstanding	$	8,776	$	7,486	$	8,165	$	7,956

Basic (loss) earnings per share attributable to Heska Corporation	$	(0.72)	$	(0.03)	$	(1.43)	$	0.08
Diluted (loss) earnings per share attributable to Heska Corporation	$	(0.72)	$	(0.03)	$	(1.43)	$	0.07

Three Months Ended March 31,
2020 2019
Net (loss) income attributable to Heska Corporation $ (5,288 ) $ 814

Basic weighted-average common shares outstanding 7,568
7,459
Assumed exercise of dilutive stock options and restricted shares —
506
Diluted weighted-average common shares outstanding $ 7,568
$ 7,965

Basic (loss) earnings per share attributable to Heska Corporation $ (0.70 ) $ 0.11
Diluted (loss) earnings per share attributable to Heska Corporation $ (0.70 ) $ 0.10

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 anti-dilutive (in thousands):


	Three Months Ended June 30,			Six Months Ended June 30,
	2020	2019	2020	2019
Convertible preferred stock	332	—	920	—
Convertible senior notes	—	—	21	—
Stock options and restricted stock	355	714	299	225
	687	714	1,240	225

Three Months Ended March 31,
2020 2019
Convertible preferred stock 1,509

—
Convertible senior notes 43
—
Stock options and restricted stock 135
86
1,687
86

As more fully described in Note 16, our Notes are convertible under certain circumstances, as defined in the indenture, into a combination of cash and shares of our common stock. The Company intends to settle the principal value of the Notes in cash and issue shares of our common stock to settle the intrinsic value of the conversion feature. The Company will use the treasury stock method when calculating the potential dilutive effect of the conversion feature on earnings per share, if any. Potential dilution upon conversion of the Notes occurs when the average market price per share of our common stock is greater than the conversion price of the Notes of $86.63. ~~The average price of our common stock exceeded~~For the ~~conversion price of~~periods presented, all potentially dilutive shares relating to the Notes ~~during the three months ended March 31, 2020; therefore, under the net share settlement method, the potential shares issuable under the Notes would be~~were not included in ~~the calculation of diluted EPS. However, these shares were excluded from~~ the computation of diluted EPS ~~because~~as the effect would have been anti-dilutive.

As discussed in Note 12, the Company issued and sold an aggregate of 122,000 shares of its Preferred Stock to certain investors in a private placement offering. The ~~convertible preferred~~ shares ~~issued are deemed participating securities since these~~were converted into 1,508,964 shares ~~contractually participate alongside common stock~~of Public Common Stock, effective on any dividends declared. During periods of net income, the calculation of EPS for common stock excludes income attributable to the preferred shares from the numerator and excludes the dilutive impact of those shares from the denominator. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.April 21, 2020. The potential dilutive effect of the convertible preferred stock iswas calculated using the if-converted ~~method.~~method for the period the preferred shares were outstanding. For the three and six months ended ~~March 31,~~June 30, 2020, these shares were excluded from the computation of diluted EPS because the effect would have been anti-dilutive.

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 ~~three~~six months ended ~~March 31,~~June 30, 2020 (in thousands):


Carrying amount, December 31, 2019	$	36,204
Goodwill attributable to acquisitions	48,241
Foreign currency adjustments	296
Carrying amount, June 30, 2020	$	84,741

Carrying amount, December 31, 2019 $ 36,204
Goodwill attributable to acquisitions 68
Foreign currency adjustments (177 )
Carrying amount, March 31, 2020 $ 36,095

Other intangibles consisted of the following (in thousands):


	June 30, 2020										December 31, 2019
	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	$	43,401	$	(3,819)	$	39,582	$	6,205	$	(2,226)	$	3,979
Developed technology	$	8,629	$	(1,248)	$	7,381	$	8,200	$	(819)	$	7,381
Trade names	181		(31)		$	150	112		—		$	112
Intangible assets not subject to amortization:
Trade names	$	7,669	$	—	7,669		$	—	$	—	$	—
Total intangible assets	$	59,880	$	(5,098)	$	54,782	$	14,517	$	(3,045)	$	11,472

March 31, 2020 December 31, 2019
Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount
Developed technology $ 8,269
$ (1,026 ) $ 7,243
$ 8,200
$ (819 ) $ 7,381
Customer relationships and other 6,265
(2,447 ) 3,818
6,317
(2,226 ) 4,091
Total intangible assets $ 14,534
$ (3,473 ) $ 11,061
$ 14,517
$ (3,045 ) $ 11,472

Amortization expense relating to other intangibles was as follows (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Amortization expense	$	1,624	$	305	$	2,053	$	607

Three Months Ended March 31,
2020 2019
Amortization expense $ 428
$ 303

The remaining weighted-average amortization period for intangible assets is approximately 9.1 years.

Estimated amortization expense related to intangibles for each of the five years from 2020 (remaining) through 2024 and thereafter is as follows (in thousands):


Year Ending December 31,
2020 (remaining)	$	2,813
2021	5,517
2022	5,482
2023	5,122
2024	5,000
Thereafter	23,179
Total amortization related to finite-lived intangible assets	$	47,113
Indefinite-lived intangible assets	$	7,669
Net intangible assets	$	54,782

Year Ending December 31,
2020 (remaining) $ 1,304
2021 1,733
2022 1,722
2023 1,370
2024 1,250
Thereafter 3,682
$ 11,061

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

As a result of the recent global economic disruption and uncertainty due to the COVID-19 pandemic, the Company concluded a triggering event had occurred as of March 31, 2020, and accordingly, performed interim impairment ~~testing.~~testing during the first quarter. Based on the qualitative assessment performed, we concluded that no indications of impairment existed.

No triggering events were identified in the second quarter to require additional impairment testing.

~~HESKA CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)~~

9. PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consisted of the following (in thousands):

The Company has subscription agreements whereby its instruments in inventory may be placed at a customer's location on a rental basis. 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 ~~March 31,~~June 30, 2020 and December 31, 2019, was ~~$7.8~~$7.9 million and $8.1 million, respectively, before accumulated depreciation of $4.4 million and $4.6 million, respectively.

Depreciation expense was ~~$0.9~~$1.7 million and ~~$1.0~~$0.9 million for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively, and $2.7 million and $1.9 million for the six months ended June 30, 2020 and 2019, respectively.

10. INVENTORIES ~~NET~~

Inventories ~~net,~~ consisted of the following (in thousands):


	June 30, 2020		December 31, 2019
Raw materials	$	14,281	$	14,597
Work in process	4,275		2,730
Finished goods	22,216		9,274
Total inventories	$	40,772	$	26,601

March 31, 2020 December 31, 2019
Raw materials $ 15,868
$ 15,320
Work in process 3,595
2,802
Finished goods 10,961
9,786
Allowance for excess or obsolete inventory (1,368 ) (1,307 )
Total inventory, net $ 29,056
$ 26,601

Inventories are measured on a first-in, first-out basis and stated at lower of cost or net realizable value.

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

11. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

Other accrued liabilities consist of items that are individually less than 5% of total current liabilities.

~~Stock Option Plans~~During the six months ended June 30, 2020, the Company granted the following stock options and restricted stock awards:


	Six Months Ended June 30, 2020
	Options/Awards Granted	Weighted-Average Grant Date Fair Value (per option/award)
Stock options	305,250	$	23.38
Restricted stock awards	30,500	$	66.92


	March 31, 2020			December 31, 2019				June 30, 2020		December 31, 2019
Land	$	694		$	694		Land	$	2,385	$	694
Building	3,845			3,845			Building	11,887		3,845
Machinery and equipment	28,294			28,777			Machinery and equipment	37,293		28,777
Office furniture and equipment	1,348			1,345			Office furniture and equipment	1,995		1,345
Computer hardware and software	3,333			3,408			Computer hardware and software	4,480		3,408
Leasehold and building improvements	10,566			10,558			Leasehold and building improvements	10,660		10,558
Construction in progress	753			671			Construction in progress	86		671
Property and equipment, gross	48,833			49,298			Property and equipment, gross	68,786		49,298
Less accumulated depreciation	(33,757		)	(33,829		)	Less accumulated depreciation	(34,913)		(33,829)
Total property and equipment, net	$	15,076		$	15,469		Total property and equipment, net	$	33,873	$	15,469



	March 31,			December 31,
	2020			2019
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	191,245		$	89,030
Accounts receivable, net of allowance for doubtful accounts of $232 and $186, respectively	14,838			15,161
Inventories, net	29,056			26,601
Net investment in leases, current, net of allowance for doubtful accounts of $85 and $105, respectively	4,020			3,856
Prepaid expenses	2,711			2,219
Other current assets	3,790			3,000
Total current assets	245,660			139,867

Property and equipment, net	15,076			15,469
Operating lease right-of-use assets	5,404			5,726
Goodwill	36,095			36,204
Other intangible assets, net	11,061			11,472
Deferred tax asset, net	8,027			6,429
Net investment in leases, non-current	14,373			14,307
Investments in unconsolidated affiliates	7,295			7,424
Other non-current assets	7,990			7,526
Total assets	$	350,981		$	244,424

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	7,137		$	6,600
Accrued liabilities	10,091			6,345
Accrued purchase consideration payable	—			14,579
Current operating lease liabilities	1,755			1,745
Current portion of deferred revenue, and other	2,923			2,930
Total current liabilities	21,906			32,199

Convertible note, long-term, net	46,872			45,348
Deferred revenue, net of current portion	5,521			5,966
Other long-term borrowings	1,110			1,121
Non-current operating lease liabilities	4,092			4,413
Deferred tax liability	678			691
Other liabilities	141			152
Total liabilities	80,320			89,890

Redeemable non-controlling interest and mezzanine equity	23			170

Stockholders' equity:
Preferred stock, $.01 par value, 2,500,000 and 2,500,000 shares authorized, respectively, 122,000 and 0 shares issued and outstanding, respectively	1			—
Common stock, $.01 par value, 10,250,000 and 10,250,000 shares authorized, respectively, none issued or outstanding	—			—
Public common stock, $.01 par value, 10,250,000 and 10,250,000 shares authorized, 7,843,079 and 7,881,928 shares issued and outstanding, respectively	78			79
Additional paid-in capital	412,152			290,216
Accumulated other comprehensive income	157			513
Accumulated deficit	(141,750		)	(136,444		)
Total stockholders' equity	270,638			154,364
Total liabilities, mezzanine equity and stockholders' equity	$	350,981		$	244,424



	Three Months Ended March 31,
	2020			2019
Revenue:
Core companion animal	$	27,306		$	24,716
Other vaccines and pharmaceuticals	3,348			4,795
Total revenue, net	30,654			29,511

Cost of revenue	17,206			16,968

Gross profit	13,448			12,543

Operating expenses:
Selling and marketing	7,380			7,033
Research and development	2,128			1,366
General and administrative	8,558			4,219
Total operating expenses	18,066			12,618
Operating loss	(4,618		)	(75		)
Interest and other expense (income), net	2,199			(16		)
Loss before income taxes and equity in losses of unconsolidated affiliates	(6,817		)	(59		)
Income tax (benefit) expense:
Current income tax expense	25			45
Deferred income tax benefit	(1,533		)	(1,055		)
Total income tax benefit	(1,508		)	(1,010		)

Net (loss) income before equity in losses of unconsolidated affiliates	(5,309		)	951
Equity in losses of unconsolidated affiliates	(130		)	(181		)
Net (loss) income after equity in losses of unconsolidated affiliates	(5,439		)	770
Net loss attributable to redeemable non-controlling interest	(151		)	(44		)
Net (loss) income attributable to Heska Corporation	$	(5,288	)	$	814

Basic (loss) earnings per share attributable to Heska Corporation	$	(0.70	)	$	0.11
Diluted (loss) earnings per share attributable to Heska Corporation	$	(0.70	)	$	0.10

Weighted average outstanding shares used to compute basic (loss) earnings per share attributable to Heska Corporation	7,568			7,459
Weighted average outstanding shares used to compute diluted (loss) earnings per share attributable to Heska Corporation	7,568			7,965



	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities:
Net (loss) income after equity in losses from unconsolidated affiliates	$	(5,439	)	$	770
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Depreciation and amortization	1,374			1,265
Non-cash impact of operating leases	408			375
Deferred income tax benefit	(1,533		)	(1,055		)
Stock-based compensation	353			1,186
Equity in losses of unconsolidated affiliates	130			181
Amortization of debt discount and issuance costs	1,524			10
Other losses	42			—
Changes in operating assets and liabilities (net of the effect of acquisitions):
Accounts receivable	(1,092		)	624
Inventories	(3,081		)	(1,052		)
Lease receivable, current	(196		)	(237		)
Other current assets	(23		)	(151		)
Accounts payable	837			(110		)
Due to related parties	—			(226		)
Accrued liabilities and other	2,642			39
Lease receivable, non-current	(74		)	(668		)
Other non-current assets	(136		)	101
Deferred revenue and other	(497		)	(325		)
Net cash (used in) provided by operating activities	(4,761		)	727
Cash flows from investing activities:
Investment in subsidiary, net of cash acquired	—			(224		)
Acquisition of CVM	(14,420		)	—
Purchases of property and equipment	(210		)	(234		)
Net cash used in investing activities	(14,630		)	(458		)
Cash flows from financing activities:
Payment of preferred stock issuance costs	(158		)	—
Preferred stock proceeds	122,000			—
Proceeds from issuance of common stock	336			410
Repurchase of common stock	(538		)	(3,480		)
Repayments of other debt	(10		)	(1,486		)
Net cash provided by (used in) financing activities	121,630			(4,556		)
Foreign exchange effect on cash, cash equivalents and restricted cash	(24		)	(1		)
Net increase (decrease) in cash, cash equivalents and restricted cash	102,215			(4,288		)
Cash, cash equivalents and restricted cash, beginning of period	89,030			13,389
Cash, cash equivalents and restricted cash, end of period	$	191,245		$	9,101

Supplemental disclosure of cash flow information:
Non-cash transfers of equipment between inventory and property and equipment, net	$	553		$	227
Accrued preferred stock issuance costs	$	56		$	—



Purchase Price	December 5, 2019
Consideration payable to former owners	$	14,420
Total	$	14,420
Net Assets Acquired
Cash and cash equivalents	1,226
Accounts receivable	582
Inventories	1,750
Other current assets	1,186
Property and equipment	260
Other intangible assets	2,608
Other non-current assets	460
Accounts payable	(553		)
Current portion of deferred revenue, and other	(67		)
Deferred tax liability	(683		)
Other long-term borrowings	(1,109		)
Other liabilities	(157		)
Total fair value of net assets acquired	5,503
Goodwill	8,917
Total fair value of consideration transferred	$	14,420



	Three Months Ended March 31, 2019
Total revenue, net	$	31,621
Net income attributable to Heska Corporation	686



	March 31, 2020		December 31, 2019
Weighted average remaining lease term	3.6 years		3.8 years
Weighted average discount rate	4.44	%	4.44	%



Year Ending December 31,
Remainder of 2020	$	1,451
2021	1,608
2022	1,411
2023	1,795
2024	30
Thereafter	57
Total operating lease payments	6,352
Less: imputed interest	505
Total operating lease liabilities	$	5,847



Year Ending December 31,
Remainder of 2020	$	3,101
2021	4,209
2022	3,888
2023	3,182
2024	2,308
Thereafter	1,705
	$	18,393



Year Ending December 31,
2020 (remaining)	$	1,304
2021	1,733
2022	1,722
2023	1,370
2024	1,250
Thereafter	3,682
	$	11,061



	Three Months Ended March 31,				Year Ended December 31,
	2020				2019
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding at beginning of period	536,315		$	54.855	620,553		$	40.741
Granted at market	250		$	95.660	88,200		$	84.234
Forfeited	(35,641	)	$	70.546	(1,353	)	$	98.660
Expired	(1,051	)	$	98.660	(716	)	$	98.660
Exercised	(10,483	)	$	8.779	(170,369	)	$	18.125
Outstanding at end of period	489,390		$	54.626	536,315		$	54.855
Exercisable at end of period	339,845		$	41.893	315,964		$	37.644



	Options Outstanding				Options Exercisable
Exercise Prices	Number of Options Outstanding at March 31, 2020	Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Price		Number of Options Exercisable at March 31, 2020	Weighted Average Exercise Price
4.96-7.36	78,733	2.72	$	7.022	78,733	$	7.022
7.37-62.50	123,943	3.72	$	26.115	123,838	$	26.088
62.51-69.77	101,668	6.90	$	69.770	71,669	$	69.770
69.78-72.85	84,391	6.67	$	72.237	41,779	$	72.850
72.86-108.25	100,655	8.77	$	96.909	23,826	$	101.137
4.96-108.25	489,390	5.77	$	54.626	339,845	$	41.893



	RSAs		Weighted-Average Grant Date Fair Value Per Award
Non-vested as of December 31, 2019	335,667		$	74.29
Granted	250		86.57
Vested	(16,894	)	48.77
Forfeited	(46,000	)	64.59
Non-vested as of March 31, 2020	273,023		$	77.44


	Minimum Pension Liability		Foreign Currency Translation		Total Accumulated Other Comprehensive Income
Balances at December 31, 2019	$	(346)	$	859	$	513
Current period other comprehensive income	—		1,860		1,860
Balances at June 30, 2020	$	(346)	$	2,719	$	2,373


	Three Months Ended			Three Months Ended June 30,						Six Months Ended June 30,
	March 31, 2020			2020		2019		2020		2019
Interest expense related to contractual coupon interest	$	809	Interest expense related to contractual coupon interest	$	809	$	—	$	1,617	$	—
Interest expense related to amortization of the debt discount	1,524		Interest expense related to amortization of the debt discount	1,524		—		3,049		—
	$	2,333		$	2,333	$	—	$	4,666	$	—


Three Months Ended June 30, 2020	North America			International			Total
Total revenue	$	28,982		$	16,730		$	45,712
Cost of revenue	16,222			11,625			$	27,847
Gross profit	12,760			5,105			$	17,865
Gross margin	44.0		%	30.5		%	39.1		%
Operating loss	(3,067)			(1,387)			$	(4,454)



Three Months Ended March 31, 2020	Core Companion Animal			Other Vaccines and Pharmaceuticals			Total
Total revenue	$	27,306		$	3,348		$	30,654
Operating loss	(4,180		)	(438		)	(4,618		)
Loss before income taxes	(6,379		)	(438		)	(6,817		)
Capital expenditures	128			82			210
Depreciation and amortization	1,042			332			1,374


As of June 30, 2020	North America		International		Total
Total assets	$	119,475	$	257,424	$	376,899



As of March 31, 2020	Core Companion Animal		Other Vaccines and Pharmaceuticals		Total
Investments in unconsolidated affiliates	$	7,295	$	—	$	7,295
Total assets	331,932		19,049		350,981
Net assets	255,237		15,401		270,638


As of December 31, 2019	North America		International		Total
Total assets	$	219,402	$	25,022	$	244,424



	April 1, 2020
Total purchase consideration	$	111,027

Current assets, including cash acquired	18,255
Inventories, net	11,373
Property and equipment, net	19,373
Other intangible assets, net	44,267
Deferred tax asset, net	1,013
Investments in unconsolidated affiliates	55
Other assets	1,365
Total assets	95,701
Current Liabilities	16,189
Current portion of deferred revenue	1,035
Deferred revenue, net of current portion	234
Deferred tax liability	13,023
Other liabilities	798
Net assets acquired	64,422
Goodwill	46,605
Total fair value of consideration transferred	$	111,027



	Year Ended December 31, 2019
Total revenue, net	$	201,865
Net (loss) attributable to Heska Corporation	(2,568		)


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~



	Three Months Ended March 31,						Change
	2020			2019			Dollar Change			% Change
Point of Care laboratory:	$	17,096		$	15,961		$	1,135		7.1	%
Consumables	14,248			12,317			1,931			15.7	%
Instruments	2,449			3,270			(821		)	(25.1	)%
Other	399			374			25			6.7	%
Point of Care imaging	4,855			5,410			(555		)	(10.3	)%
Other CCA revenue	5,355			3,345			2,010			60.1	%
Total CCA revenue	$	27,306		$	24,716		$	2,590		10.5	%
Percent of total revenue	89.1		%	83.8		%
Cost of revenue	13,937			12,622			1,315			10.4	%
Gross profit	13,369			12,094			1,275			10.5	%
Operating loss	$	(4,180	)	$	(51	)	$	(4,129	)	8,096.1	%


	Three Months Ended June 30,									Six Months Ended June 30,
	2020			2019			2020			2019
Net (loss) income⁽¹⁾	$	(6,387)		$	(161)		$	(11,696)		$	790
Income tax benefit	(212)			(426)			(1,720)			(1,436)
Interest expense (income)	2,213			14			4,326			(1)
Depreciation and amortization	3,330			1,257			4,704			2,522
EBITDA	$	(1,056)		$	684		$	(4,386)		$	1,875
Acquisition-related and other one-time costs⁽²⁾	2,728			—			6,603			—
Stock-based compensation	2,444			1,194			2,797			2,380
Equity in earnings (losses) of unconsolidated affiliates	(87)			(127)			(217)			(308)
Net (income) loss attributable to non-controlling interest	117			47			268			91
Adjusted EBITDA	$	4,146		$	1,798		$	5,065		$	4,038
Adjusted EBITDA margin⁽³⁾	9.1		%	6.4		%	6.6		%	7.0		%


~~Item 3.~~	Item 3. Quantitative and Qualitative Disclosures about Market Risk



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs
January 2020	—	$	—	—	$	—
February 2020	—	$	—	—	$	—
March 2020	4,894	$	92.98	—	$	—
	4,894	$	92.98	—	$	—

(1) Shares of Public Common Stock we purchased between January 1, 2020 and March 31, 2020 were solely for the cancellation of shares of stock withheld for related tax obligations



Exhibit Number	Notes	Description of Document
2.1#++	(1)	Agreement regarding the sale and purchase of the sole share in scil animal care company GmbH among Registrant, Heska GmbH, Covetrus Animal Health Holdings Limited and Covetrus, Inc. dated January 14, 2020.
2.2#	(2)	Amendment Agreement dated April 1, 2020 regarding the agreement on the sale and purchase of the sole share in scil animal care company GmbH.
3.1#	(2)	Certificate of Designation of Preferences, Rights and Limitations of Series X Convertible Preferred Stock.
3.2		Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
10.1		2020 Employee Stock Purchase Plan.
10.2		2020 Stock Incentive Plan.
10.3#	(1)	Securities Purchase Agreement, dated as of January 12, 2020, among the Registrant and the purchasers named therein.
10.4	(2)	Amendment to the Securities Purchase Agreement dated March 30, 2020 among the Registrant and the purchaser named therein.
10.5#	(2)	Registration Rights Agreement dated March 30, 2020 among the Registrant and the purchasers named therein.
31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	*	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.



Notes
*			Furnished and not filed herewith.
++			Certain confidential information contained in this exhibit has been omitted because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed.
#			Certain personally identifiable information has been omitted from this exhibit pursuant to Item 601(a)(6) under Regulation S-K.
(1)			Filed with the Registrant's Form 10-K for the year ended December 31, 2019.
(2)			Filed with the Registrant's Form 8-K on April 1, 2020.
(3)			Filed with the Registrant's Form 10-K for the year ended December 31, 2012.
(4)			Filed with the Registrant's Form 10-K for the year ended December 31, 2016.
(5)			Filed with the Registrant's Form 10-Q for the quarter ended March 31, 2017.
(6)			Filed with the Registrant's Form 8-K on May 9, 2018.
(7)			Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2019.
(8)			Filed with the Registrant’s Form 10-Q for the quarter ended March 31, 2020.
(9)			Filed with the Registrant’s Form 8-K on April 1, 2020.
(10)			Filed with the Registrant’s Form S-8 (file No. 333-238008) on May 5, 2020.
(11)			Filed with the Registrant’s Form S-8 (file No. 333-238006) on May 5, 2020.


			HESKA CORPORATION

			~~HESKA CORPORATION~~

	By: /s/ KEVIN S. WILSON Kevin S. Wilson Chief Executive Officer and President (Principal Executive Officer)
			By: /s/ CATHERINE GRASSMAN Catherine Grassman Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)