Heska Corp (HSKA) 2020 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Heska Corporation First Quarter 2020 Earnings Call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to your host Mr. Jon Aagaard. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to Heska Corporation's earnings call for the first quarter of 2020. I am Jon Aagaard, Director of Investor Relations for Heska.

Prior to discussing Heska First Quarter 2020 Results, I would like to remind you that during the course of this call, we may make certain forward-looking statements regarding future events or future financial performance of the company. We need to caution you that any such forward-looking statements are based on our current beliefs and expectations and involve known and unknown risks and uncertainties which may cause actual results and performance to be materially different from that expressed or implied by those forward-looking statements.

Factors that could cause or contribute to such differences are detailed in writing in this morning's earnings release. Heska Corporation's annual and quarterly filings with the SEC and elsewhere. Any forward-looking statements speak only as of the time they are made and Heska does not intend and specifically disclaims any obligation or intention to update any forward-looking statements to reflect events that occur after the time such statement was made.

We have with us this morning Kevin Wilson, Heska's Chief Executive Officer and President; Catherine Grassman, Heska's Chief Financial Officer. Mr. Wilson and Ms. Grassman will provide details surrounding the results reported. And then we will open the call to questions. Before I turn the call over to Kevin, I want to mention one item of housekeeping. Heska had previously announced plans to host an Analyst and Investor Day on September 16, 2020 in New York City to discuss the company's growth strategy, consolidated performance, including its recent major acquisition, Element UF demonstration and multi-year outlook. Heska now plans to host this Analyst and Investor Day on Thursday, November 12, 2020 either in person in New York City or remotely through multimedia from our Loveland, Colorado headquarters pending further evaluation. Details surrounding this event will be forthcoming.

With that being said, it is now my pleasure to turn the call over to Kevin Wilson, Heska's CEO and President. Kevin?

Thanks, Jon, and good morning, everyone. As I indicated in this morning's written release, it is with mixed emotions that I report that the first quarter of 2020. It was a strong quarter for Heska. By grace alone, all of our 500 Heska employees around the world are safe employed and healthy. We are extremely thankful for our unmerited good fortune and we grieve for the millions of people around the world who have been directly and tragically affected by COVID-19

Our business concerns and ambitions pale in comparison to their loss, and it is with this humbling thought in mind that Catherine, Jon and I begin today's call Okay. Let's begin. While Catherine will cover the specifics of the quarter, I wanted to take a few moments to comment on the highlight-reel. We grew revenue, expanded margins, finished up the biggest acquisition in our history, confirm the benefits of the secure subscriptions model in a resilient and the healthcare space., improved our balance sheet, added millions of dollars to our cash position and advanced our research and development projects.

While no period is perfect, in the face of a global COVID-19 crisis, our first quarter accomplishments in nearly all key areas met or exceeded our goals. Our core businesses are doing well. Our key Point of Care Lab Consumables business was up 15.7% over the prior year period. Subscription results were solid. And in a time where our large competitors are scaled for a large ground campaign of hundreds of people visiting customer hospitals in person, our smaller and flexible sales team had become a comparable strength.

In fact, in April we achieved new record performance in total contract subscription value achievement which we celebrated last week on a video conference with over 100 of our Heska teammates. Our morale is high. We've also now completed the acquisition of scil animal care company for $110 million at a time when most global M&A transactions were paused or terminated.

Coming fresh on the heels of our acquisition of CVM companies of Spain in January, we were on time with our scil animal care closing because these are wonderful assets in critical markets that we will want to own for decades, and these are the people with whom we want to build our global business. They're great people. They're experts, and they have thousands of decades-long customer relationships in the anchor markets that we want to be in. If you haven't had a chance to review our releases and presentations around the scil animal care acquisition, I encourage you to do so. We love this deal and nothing of recent events, no matter how dire, has changed our opinion. Our canvas of customers just doubled just before we were scheduled to double our product offerings and potential revenue streams that we sell into them. And we did these things in the midst of a global pandemic crisis. In February and March, Heska adjusted exceptionally well for the COVID-19 prices. We protected our employees and their families.

We provided healthcare security for millions of pets and their families. We serve many thousands of veterinary teams and all the while we paid careful attention to protecting Heska’s commercial capacity, brand reputation and culture to keep our growth capacity fully intact, but business continuity plans are working well and we've been able to maintain full employment and full rates of pay for Heska employees over 85% of whom are working remotely with excellent results. We believe Heska is well prepared and positioned for this current COVID-19 challenge and for the reoccurring surges we anticipate for the next several quarters. Our operating assumption is that we are in for the first round of a brutal match that will continue well into 2021 and we are ready.

Our end markets remain fundamentally healthy, and our supply chain is, with few exceptions, strongly intact. Our balance sheet is in great shape as are our cash on hand projections even in severely down market scenarios. We have the long-term ability to perform financially and to pursue our growth strategies. With these foundations in place, Heska has accomplished a great deal in the first period of 2020 and we continue to expect positive progress throughout the balance of the year. Now I'd like to share a few thoughts on COVID-19 as it relates to veterinary medicine broadly and the Heska specifically.

While I do not know how long COVID-19-related challenges will continue, we have seen and do anticipate certain impacts and we think these observations will interest you. First, it's important to note that our 5-year plan remains intact because the facts on the ground supports this conclusion. After acknowledging maximum pressure on our plans, we continue to believe we are on the right path as we approach the halfway point of our 2018 to 2023 5-year plan. To remind you, we laid out 3 main goals for this period and they remain unchanged. Our first major growth initiatives is to double the addressable customers and geographies we serve. Our second major growth initiative is to double the addressable product revenue lines we serve. These 2 initiatives in combination will have a multiplier effect and our third major growth initiative is to continue to protect our wins to-date and gain in our baseline business.

We've achieved our first goal. In 2020 having launched into new markets organically and through acquisition, as of last month, we have now doubled the customers and geographies we serve. I’m thrilled with this accomplishment and the owners of our fund company now own a much more valuable asset. And we are well on our way to accomplishing our second goal. We expect to double the product revenue streams we offered by the end of the first half of 2021.

While we've experienced sporadic COVID-19-related delays in receiving validation samples and device components as well as inefficiencies in remote collaboration and field testing, our global release of Element RC, Element i+ and Element UF are continuing to progress substantially as planned. And while we anticipate these COVID-19 delays will result in slippage of 90 to 120 days in commercial rollout schedules, we are taking the additional time to improved product features and we're confident in each products updated time line and prospects.

I'm proud of the adjustments our teams have made, and I believe we are on the right track to achieve our major second goal of doubling our product revenue opportunities. And when we accomplish this goal, the owners of our fund company will own a much more valuable asset. Our third major growth initiative is to continue to grow in our baseline business lines and geographies by building upon in the past 6 years of consecutive market share gains in our core diagnostics offerings. We expect to continue to achieve in this third goal throughout the second half of our 5-year plan.

Pet healthcare is essential and it's holding up well. Anecdotally, and across the spectrum from large corporate hospitals to individual hospitals, we consistently hear 3 things. The first relates to patient visits and procedures. Pet visits during the darkest days of March and April dropped from between 10% and 20% but not for all veterinarians and not for all types of visits. Veterinarians are seeing on boarding, travel-related business and less medically necessary procedures are being deferred, but deferrals declined meaningfully as the medical importance of procedures increases. Some segments have been up, specific to Heska for medically important cases involving blood work such as for wellness, chronic disease management, trauma and surgeries, patient visits are holding up strongly and the utilization of Point of Care diagnostics for those visits are similarly solid.

We are encouraged that our top veterinarians are convinced, the Point of Care diagnostics utilization has, is and will continue to be just fine. The second thing that we hear is the capital equipment expenditures especially large ones like digital radiography and facilities remodels will be more often deferred. And for all equipment acquired in 2020 whether Lab or Imaging, it will be more difficult to schedule the onsite in-service. This will reduce Heska's revenue recognition from new equipment installs in 2020.

And third thought we often hear is one of reassurance. Veterinarians are not panicked. As doctors trained in science, they understand the crisis and they're calmly leading and carrying on with their mission. They are making the necessary adjustments to protect themselves and others, and they are proactively managing the healthcare of their patient populations within their communities.

They intuitively understand why pet adoptions have skyrocketed with stay-at-home orders and they are firmly committed to delivering the healthcare required to support the human-animal bond that is so obviously important to families at home. After 30 years in the veterinary space I have to say, I love our customers and I love our employees that serve them. They’re just good people doing good things and this just so happens to also be a very good business. There is no place I'd rather be than at work with our Heska team helping our Heska veterinarians fulfill their mission. In meaningful ways, we are making lives better in good times and bad and that is essential.

With that, I'll turn the call over to Catherine to detail the quarter's performance and provide you with additional information on our revised 2020 outlook. Catherine?

Thanks, Kevin, and good morning, everyone. We are pleased to report a strong performance for the first quarter of 2020. As we begin, I would like to point out that I will be discussing our results as reported on a GAAP and non-GAAP basis. The first quarter for both 2020 and 2019 non-GAAP results include certain adjustments are detailed in the reconciliation of GAAP and non-GAAP schedule included in the Form 8-K furnished with the Securities Exchange Commission as well as in the press release.

Consolidated revenue for the first quarter was $30.7 million, a 3.9% increase over the first quarter of 2019. We report results in 2 segments Core Companion Animal, or CCA, and Other Vaccines and Pharmaceuticals or OVP.

CCA segment revenue increased 10.5% to $27.3 million from $24.7 million in the first quarter of 2019. The $2.6 million increase was driven by a 15.7% increase in Point of Care Lab Consumables and an increase in PVD of $1.9 million related to a manufactured heartworm preventive Tri-Heart, which had reduced customer demand in 2019. These increases were partially offset by a 22.3% decrease in capital lease placements and outright sales of Point of Care Lab instrument and a 10.3% decrease in Point of Care Imaging sales. Our OVP segment revenue decreased 30.2% to $3.3 million in the first quarter of 2020 compared to $4.8 million in the first quarter of 2019. The decrease was driven primarily by reduced customer requirements as compared to the first quarter of 2019. Gross profit increased 7.2% to $13.4 million in the first quarter of 2020 compared to $12.5 million in the first quarter of 2019. Gross margin increased to 43.9% in the first quarter of 2020 compared to 43.5% in the first quarter of 2019.

The increase in gross profit and gross margin was driven primarily by favorable product mix related to increased revenue from consumable sales. Total operating expenses in the first quarter of 2020 were $18.1 million compared to $12.6 million in the prior year. The increase is driven by $3.9 million of onetime acquisition and restructuring costs related to the acquisition of scil. The remaining variance is related to increased investment in research and development associated with our new product initiatives, and an increase in sales and marketing as a result of international expansion, both organic and inorganic.

Net loss attributable to Heska was $5.3 million for the 3 months ended March 31, 2020 compared to net income attributable to Heska of $800,000 in the prior year period. Net loss per share for the first quarter of 2020 was $0.70 compared to net income per diluted share for the first quarter of 2019 of $0.10. In addition to the increased operating expenses as I previously mentioned, net income is lower in the current period due to cash interest and amortization charges relating to the convertible notes issued in the third quarter of 2019.

Adjusted EBITDA for the first quarter of 2020 was $900,000 for an adjusted EBITDA margin of 3% compared to $2.2 million or an adjusted EBITDA margin of 7.6% in the first quarter of 2019. Non-GAAP earnings per share was a loss of $0.14 for the first quarter of 2020 compared to earnings of $0.09 per share in the first quarter of 2019.

The decline in both metrics is due to purposeful investment in research and development and international expansion of sales and marketing. Please refer to the reconciliation of GAAP to non-GAAP included in the release. For the 3 months ended March 31, 2020, we had $191.2 million of cash. The increase in cash is due to $122 million in proceeds from issuance of preferred stock in the anticipation of the acquisition of scil. Approximately $111 million was used subsequent to the end of the first quarter as consideration to close the acquisition.

Net cash used in operating activities was $4.8 million in the 3 months ended March 31, 2020 compared to net cash provided by operating activities of $700,000 for the 3 months ended March 31, 2019. As detailed in this morning's release and defined as 2020 combined outlook, we've introduced 2020 guidance ranges for revenue and adjusted EBITDA margin for Heska Corporation, which updates our previously provided guidance on February 25, 2020, to include the benefit of our recently completed acquisition of scil as well as incorporate for preliminary assumptions related to the expected adverse impact of the current economic environment and COVID-19.

While extremely difficult to assess the impact of the pandemic on our full year results, we are providing our revisions to the legacy business as well as the original combined company revenue guidance of $200 million to incorporate changes to assumptions that would be mostly susceptible to the restrictions in place that relate to the movement of people goods and services.

These revisions are based on the most current available information to us and we plan to provide updates on any material movement in these assumptions over the coming months. With that, Heska Corporation's Full Year 2020 consolidated revenue range is between $175 million to $185 million. Our CCA segment revenue expectation is $160 million to $170 million. Within CCA, our global Point of Care Laboratory range is $105 million to $115 million with our legacy consumable growth guidance provided on February 25, 2020 impact at 12% to 17%.

We anticipate global care -- global Point of Care Imaging revenue to be between $25 million to $35 million. Our OVP segment revenue expectation remain unchanged at $15 million to $16 million. Finally, we have updated our adjusted EBITDA margin for the--for the combined company to 4% to 6%. Additionally, as a result of the current operating environment, we are reducing the legacy Heska net customer acquisition guidance provided on February 25, 2020 by approximately 50% to 60%. That concludes our financial review. With that, we would like to open up the call for your questions, operator?

(Operator Instructions). We will take our first question today from David Westenberg of Guggenheim Securities.

Congrats. I think that the Q1 looked pretty good. So I appreciate all the commentary about what's going on in the market. And capital purchases as you mentioned, it could be delayed in the year. So when we're looking at maybe 2021 that's are going through a little bit of financial distress. So can you talk about the subscription model and the use of maybe that preserve cash flow, but it could also think about a scenario where maybe vets see -- maybe a contract as being something to fear in kind of a post-COVID world. So could you just maybe talk about the strategy that you have underlying on -- in a post-COVID paradigm for veterinarians?

David, it's Kevin. Thanks and you've done great work on the industry during those periods, so I appreciate that as well. In regards to your question about contracts, what we are seeing the opposite. I think in value now matters more than anything. One of our biggest challenges pre-COVID was to get customers to focus on the value Point of Care diagnostics relative to their current provider.

And when things are great, we make a lot of money, staff's happy, businesses rolling in, focusing on those types of things can often seem like a distraction and we found that now it's less of a distraction. People are looking at every line item and not panic, but they want to be prudent and I think we offer the most prudent solution in the market and I think we're now getting more attention.

So we've had a good April. We've also seen our sales force do very well remotely because we have to leverage a smaller sales team that has been able to adjust I think to remote work quite well and then we’ve done some nice things for our customers, we've gone to certain customers are generally smaller customers, 1 and 2 doctor practices. They are having a harder time. Some of the large emergency care facilities were actually up because the small facilities aren't seeing primary care patients or they're just closed. They're just decided to shelter at home and close. And there are -- those smaller practices have struggled a little bit more.

And so we've gone to a few of them, more than a few and an offer to allow them to use Point of Care testing for several months for free. And in exchange for that they've extended their subscription with us for 18 months. So to extending the relationship, especially when people see that we have the best value has really not been an issue and then those conversations that we've got hundreds of them often times have actually led to total renewals, 72-month extensions of their customer contracts. So I think the dynamic probably doesn’t hurt the subscription model in the longer-term contract. People want to lock it in, they want to secure it, and we haven't seen an issue with that.

Got it. And I think that's very helpful particularly around, I think there is a lot of confusion on how flexible you can be with minimum use purchases so that clears up a lot here. So can you talk about also the Tri-Heart, it looks like -- is this officially an item that is back to 2018 levels on a go-forward basis? Can you talk about what we should suspect there?

It was zero last year and before then. It had been running kind of in the $14 million, $15 million range and I think we've tried to guide that it's not going to return to that range. So I think about it closer in the $7-ish million range about half. I suspect that's probably where it will land. There could be some seasonality to it. I don't know if it's race great straight for that number, but that's certainly better than zero last year while they worked down there their stocking issue, but we do think the stocking issue is resolved.

We do have purchase orders and they're doing a good job in the sell-through of the product into the channel, even last year is good. We're just allowing our partner to slide off the excess inventory they've built up while they were acquiring $15 million here as opposed to maybe a normal run rate in that $7 million to $10 million range.

I'm just going to ask one then jump back -- one last one and jump back in the queue. So with the acquisition of scil, I mean I think that -- I believe they're -- Northern Italy and Madrid are 2 important cities for that franchise. It's tough to see through the headlines as somebody was sitting, sheltering at home in the U.S., so can you qualitatively maybe talk about what's going on in those markets and kind of just giving us assurance that supply chains are great, everything's been we expect when shelter at home is ended in those markets that you feel comfortable attacking everything as normal?

Every market has been different. And so I don't think I don't say anything is great Lombardy on Madrid particularly. And I think the human toll is incredible. I think the psychological toll is incredible. Our people are super resilient. They were actually importing masks from Asia through some of our supply channels and donating on to the community. So they were spending their time doing things like that and I kept morale up, but I don't expect we'll be attacking anything in those markets aggressively.

There are times and there are places to let your people's heart shine through. It protects your reputation and protects your brand, and it shows really what your real values are, especially when there's stress around you. And we're allowing our people to do that, they're deeply involved in that communities. And we think rotor sales and dry chemistry sales and those things will come back, but we don't want to push certain markets.

Having said that, Germany is much more like our experience in United States, and it's doing quite well and I think they have less of the psychological blow. The population has less aging, less stay-at-home, less multi-generational within the same apartments, things like that. So we're seeing something in Germany which fortunately is the growth driver of our scil business, little bit more like, what we're seeing in the United States. So it's market by market, and I would say France is probably somewhere in between. But I would be cautious on that. And these are -- these things are all reflected in the numbers right. I give probably 2 to 3 emails per day updating from our Spanish team, and we got pretty good handle on it. But they're going to be a slower path to normalcy.

We take our next question from Andrew Cooper of Raymond James.

I guess first just to kind of jump in on the answer to your question on the subscription model given that's the case I mean, what do you attribute the 50% to 60% reduction in what you're seeing? Is it really just, hey, we can't physically get into a lot of these vets and not taking –- letting sales folks come in and we're having a tough time selling from that perspective? Or is it some amount of -- the amount or capital are being deferred? Or is the corporate account? How do we think about kind of varying the thought of subscription being if anything more attractive right now with your commentary around what new customer wins will look like?

Yes. So nuance in the question, so subscriptions for people who are already in subscription, but I heard David's question more about if people want to commit long term in a scary environment and that's a dynamic that we think is proven to be okay for us. We don’t think that's an issue.

New customer acquisition is going to be difficult. It will be more difficult for everybody. I think the default position, because you can easily go in and pull out old equipment, reinstall and train for new equipment because that's an onsite interaction. And I think that's going to be more difficult for everybody. So I suspect market churn probably reduces a fair amount this year. And the same with corporates, they want to convert to a product, we have a schedule and we also have to be sensitive to be idea that no good company wants to force external interactions on their employees especially in the next say 90 days.

The problem we're not saying hey these 20 hospitals that we wanted to get converted from brand A to Heska, we have to do it next week because that's what our calendar says and we're going to pull out your equipment, we're going to get the team of 6 veterinary technicians together and get them in service on the new equipment. And then similarly, we don't want to be flying our people and pushing them to be in clinics as well. So we based a lot of those assumptions in it could prove to be conservative. But my baseline assumption is we're not really out of the weeds and I think there will be some surges and I think there'll be some reaction it's an emotional reaction to some of those surges, so we kind of baked some of those into that number and just said, let's take a moderate approach to the estimate. That's why we took the number down.

Okay. Fair enough. That's helpful. I just wanted to kind of know how you were thinking about it. I guess next to on -- it was good to see 12% to 17% reiterated for core Heska consumables even despite having I guess fewer months of some of those new installs, but what are you assuming in that in terms of visit volume resumptions and diagnostics utilization kind of relative to what you saw in April. How do you think about that and sort of how that goes through?

Catherine, you want to take that I'll give some detail, but maybe not all of it, but yes just Catherine.

Yes, sure, sure. I mean we certainly think about it in terms of the near shorter-term and longer-term impact that full year 12% to 17%, clearly reflecting on 2018 -- sorry, 2019 performance and then looking at what we're seeing as far end of March into April had certainly reflected that and whereas maybe previously I would have said we would be mid-to high in that 12% to 17% range. I would clearly ratchet that down to the lower end of that range as a result of lower utilization in what we would think would be the short term -- near term.

Okay. That's helpful. I mean I guess maybe just one more on margin and our guidance and I'll hop back in the queue. But if you think about sort of where you reduce the guide, obviously it wasn't consumables at least in terms of the range, but there is the biggest impact when you think about the $20 million reduction from call it $200 million to $180 million at the midpoint, obviously imaging feels like the most obvious place and I know there was an imaging business that was acquired internationally but probably has fallen out with that range, staying the same, but can you give us a little bit more color on what buckets do you view as most impacted, maybe a little bit lesser?

And I think it hangs together with the reduction in the net new customer acquisition as it relates to the Lab business but you're spot on Imaging that's the capital sale product lines for us, but also the placement Lab equipment in new customer locations would be similar in that regard.

Okay. And in terms of what you're assuming on scil. I guess just are you assuming a transition kind around one day 1Q subscription selling or was there some amount of sort of capital installations that you had expected that would have been kind of impacted as well?

The latter, definitely, it's a transition right, not an immediate.

Our next question comes from Ben Haynor, Alliance Global Partners.

It sounds like the business and the team are holding up pretty well. So that's good to hear. Can you kind of characterize the -- what do you expect on the consumable side from scil. I know the 12%, 17% consumable growth that you have in the release and you talked about is really only applies to the Heska standalone and presumably some of the models switching to more of a rental reset program has some impact to what scil will be able to generate year-over-year, but I mean is there a sense you can give us what maybe consumable volume growth might look like for scil or anything on that front that you can share would be helpful?

So broadly speaking, scil mirrors Heska reasonably well. It's not a perfect analog, but people trying to figure out how this integration goes, the biggest difference in scil is the gross margin profile is lower. And I think we can do a very good job. We've already done a very good job in the first month. I think working with them, we will improve the gross margin profile of the business reasonably quickly. They have an Imaging business that is meaningful. And it's going to be effective in the exact same way that our U.S. Imaging business is. And so when we stick those 2 things together, we don't realize as much growth as we hope so. We don't get to $200 million, we get to the range that we guided to because 2 Imaging businesses, capital equipment whether they're in Europe, whether in the United States are going to experience the same with same headwinds and the same will be true for new customer acquisitions for analyzer installs. So again, it really is mostly related to the capital equipment.

The underlying utilization has been good and not every market just like not every market United States is the same. So we might struggle more in New York City and we might be doing great in the Midwest and so it's going to be the same thing we might struggle in Madrid. And we're going to do great in Germany and so I think we're seeing those trends. Consumables will grow this year with scil and the gross margins will grow for all the products that they have, so I hope that answers your question. I mean we're not teaching it out that granularly right now, but I think I think answered the question.

No, that's definitely helpful. And then maybe, Catherine, can you kind of share on what the D&A and the stock based comp expectations that go into the adjusted EBITDA margin outlook?

Yes, I can. I can share that. Let's see. So I would say, and of course, I'm going to do some ranges here around that.

No problem.

Yes, the stock-based comp one's a little more difficult at this point. So I mean I might need to defer that one, but the D&A actually then pre-step-up and intangible value. It's a little bit easier. We just completed our purchase price allocation, right. So we are going to be flowing through quite a bit of amortization as it relates to intangibles acquired. So let's just go with like a $7 million to $10 million range on DNA, and then stock comp expenses like I said it's a bit in progress. Probably not too far off from prior year's Heska standalone, but we'll update that.

Okay. That's helpful. And then just lastly for me, scil has quite a broad line of laboratory diagnostics, it looks like there are some interesting products in there that might be applicable outside of Europe for instance the holographic urine sediment analyzer. Is there any plan to bring some of these things to other geographies?

Yes. So they do have good products, but they also have a great internal R&D team, their technical team that is extraordinary and they have some very nice projects in progress. And so yes, we do see innovation growing in both directions. And we do think the urine SA machine that you're referring to will be a very, very good complement to the Element UF or urine and fecal analyzer. So we haven't really unpacked that yet, we're still doing product line rationalization, but there will be products coming from their direction to ours.

Okay, great. And then just one quick follow-up on that, since you mentioned those R&D team over there. Is there maybe anything that we might be -- maybe we should expect for product line additions beyond what's been disclosed and obviously you're probably not going to get into anything specific but coming November, are we going to see something that seems to come out of left field just because of the -- it's been something that they've been working on for some time?

Yes, I think I probably I'll pass on that one.

Okay.

We've been really forthcoming with our R&D schedule, even at the point where I think, we're kind of making the sausage in public. We're announcing very discrete time lines. And I think the products that we've announced will meet our goal to double our product line, revenue streams. So we'll probably just leave it at that for now.

Our next question today comes from Jim Sidoti of Sidoti & Company.

Couple of questions just on the mechanics of the deal. I believe you converted the preferred shares to common shares couple weeks ago, so when we look at a diluted share count for the back half of 2020 and for 2021 what's a good number for that?

Around $9 million.

$9 million. So will there be any interest going forward or is all the debt paid off?

As it relates to the -- that was not used to pay off any of the convertible debt. We’ll still have be continued interest on the convertible rates in September of last year.

And what was that rate again?

3.75%.

Right and then...

Yes, Kevin, do you want to -- you can clarify, the 3 3/4 is on the $86 million rates.

Okay.

No associated fees, dividends, interest anything on the preferred placements.

Okay. Right. And then I know you don't want to get too granular on contribution from scil going forward, but can you break out what CVM contributed in the first quarter?

Great, it's very light. Remember CVM is focused entirely on the Spain and Spain is basically locked down all of February and all of March, so I think it is extremely light – haven’t broken it out, but it's not a big number.

(Operator Instructions) We now take a follow-up question from David Westenberg of Guggenheim Securities.

So you are going to be almost essentially doubling the company, and you it's impossible to kind of know that the curve balls that can be thrown from doubling of the size of the company, so maybe I'm going to ask in this kind of way Kevin when you're thinking about your time over the next year, I mean how much of a dedication do you need to give to scil? Does it need to be greater than 50%-50% in order to get that thing up to Heska standards or is this something where it's going to be something you feel is already very comfortable and you can kind of split your time fairly evenly or any kind of color in terms --of how much management attention, needs to be on this new portion of the business?

I think it's a great question, and I appreciate the opportunity because maybe a little bit of context will help investors. Scil is actually -- it's not a matter of bringing scil up to our standards. They actually exceed our standards in a number of areas, they run a fantastic business. I think it was just embedded inside much larger companies that had much larger things going on spin-outs and distribution models and direct to consumers and things just didn't fit a diagnostic focus.

And so I think we bring that focus. We certainly bring volume in terms of diagnostics with suppliers and R&D and licensing opportunities, but I'm open to a world where 5, 10 years from now our European business is as big or bigger than our North American business.

So I'm not entirely sure that --we're not going to be in that world, I think the growth that they have ahead of them is substantial. So I think that's one important thing, but we've done basic things. So Canada is a scil business and we worked with them when they were owned by scil, they've obviously rolled into our North America operations quite well.

I think they close like a $1 million multi-site account like last week, and so they're doing great --it's not an integration how do we fix it. So I think that's important.

The second thing is we've got a fantastic General Manager, moving to Viernheim, Germany. [Ellie] Baker, it's her name and she is on schedule to do that. We have a fantastic team in Viernheim, Germany, and they're all in place. They are all staying. The sales leadership is extraordinary. The financial team is fantastic. So it's not a fix-it job. We can help the product innovation. I think we were investing more but again I would go back to the idea that we're diagnostics focused company.

So they have ideas, they have opportunities. And now I think they'll get focus and maybe a little bit more resources than they have in the past to go deep with some of those ideas. David, does that help?

That helps.

Thank you. As we have no further questions, I'd like to turn the call back over to Mr. Kevin Wilson for his final remarks.

Thank you, operator, and thanks to everybody who joined the call. I appreciate the questions as well. I'd like to reiterate something important from this morning's release. Properly prepared companies in structurally sound industries like -- that are in healthcare, that invest in their people and their capabilities during difficult times like these, I believe will be in a position for above-market performance when the uncertainty recedes and we intend to be one of those companies. So our order to place, our capabilities and our markets are intact. And while no business will be left untouched by COVID-19. We are well positioned. Our abilities are intact and we're scalable. Our employees and logistics and supply chain and operations all continue to operate well remotely and perhaps more importantly they're solidly prepared for a staged return and then also prepared to go back to remote if we have additional issues with COVID-19.

So our balance sheet is super strong, our end markets are fundamentally healthy, our geographies and customers have doubled. Our innovation pipeline although delayed by about 90 to 120 days on some of these major product launches is progressing and it's going well, and we'll launch in 2020 and 2021. So we're well positioned to grow healthcare broadly and Heska specifically I think are wonderful places in which to invest for the future and especially in an uncertain times and I'm excited to continually do so. So I look forward to updating you again in a couple of months about our progress. Until then, we thank you for your interest in Heska. Be safe and cautious. Count your blessings. Take your pet to the vet. It's good for your pet. It's good for Heska. And do something nice for somebody. We appreciate it, thanks. Bye-bye.

Thank you, ladies and gentlemen. That will conclude today's conference call. Thank you for your participation, you may now disconnect.