Heska Corp (HSKA) 2011 Q3 法說會逐字稿

Welcome to the Heska third quarter earnings conference call on 14 of November 2011. Throughout today’s recorded presentation, all parties will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions) I will now on the conference over to Brett Maas. Please go ahead sir.

Thank you all for joining us today for our conference call. My name is Brett Maas with Hayden IR, Heska's Investor Relations firm. We would like to welcome everyone to the call. On the call with us today are Heska's Corporation Chairman and Chief Executive Officer, Bob Grieve; and Jason Napolitano, Heska's Chief Financial Officer. We appreciate having the opportunity to read the results of the Company's third quarter of 2011. Prior to discussing our 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 current beliefs and expectations and involve known and unknown risks and uncertainties which may cause actual results and performance to be materially different than what is expressed or implied by these Forward-looking Statements. Factors that could cause or contribute to such differences are detailed on our press releases or in our annual, quarterly or other filings with the SEC. These Forward-looking Statements speak only as of today and except, as otherwise acquired by law, Heska does not intend to update any Forward-looking Statements to reflect events that occur after today's call. I would now like turn the call over to Bob Grieve, Heska's Chairman and CEO, to provide opening remarks.

Thank you, Brett. I'd also like to thank everyone for joining the call today. This was a good quarter for Heska. Our fifth consecutive quarter of profitability and a quarter in which we continued to position the Company for accelerated growth in profitability in the coming quarters. For the third quarter, we increased our gross margin by 1.4 percentage points compared to last year. We increased our operating income and increased our net income, even while revenues remained relatively flat compared to the third quarter last year. This progress demonstrates our ability to control operating expenses and increase our profitability, even while we invest in the development of new products which will help accelerate our growth over the next year. Year-to-date, the progress is even more compelling. We grew revenue 8% for the first nine months of 2011, compared to the first nine months of last year and we shifted from an operating loss to an operating profit. We have produced over $5.6 million in cash, provided by operations since the beginning of this year, helping us to completely pay off our line of credit during the second quarter.

Our balance sheet is in great shape, with $1.44 in cash per basic share and $19.2 million in working capital. On a trailing 12-month basis, we have generated operating income of over $3.5 million and earnings per diluted share of approximately $0.36. As most of you know, in May, Joe Aperfine joined Heska's management team as Executive Vice President, Sales and Marketing. Joe has been hard at work filling vacant sales positions and reorganizing our commercial team. His focus is on increasing the team's technical sales expertise and increasing our specialization. That work is still very much in progress but we've already added impressive new talent, that in addition to our outstanding long-tenured sales people, we expect will make a marked improvement in sales productivity particularly as we introduce new products.

We finished Q3 with 24 out of 30 territory manager positions filled, and we have 26 filled as of today. We expect to have all 30 filled by the end of January. In addition, we expect to expand the number of territory managers by about 10% during 2012 and we're planning to add up to 8 new sales positions, specializing in [placing] instruments. These will be called area diagnostic managers. We filled 2 of these positions as of the end of the third quarter, and as of today, we have 6 of the 8 positions filled. We currently have 17 people in the inside sales and we will grow that number to 25 over the course of 2012. Under our new -- excuse me, under our new sales leadership, we've also changed 3 of the 4 regional manager positions, and also changed leadership over our inside sales department. All told, this represents a pretty significant adjustment in our sales force, much more than just adding feet on the street. We think this will improve our execution, especially as we add innovative products to our portfolio. We expect productivity to ramp as new sales talent gets training and familiarity with their accounts.

It is important for investors realize that the vast majority of our Companion Animal Health revenue occurs through direct sales. One competitor has, in effect, broadened national distributors. As a consequence, for years we used smaller regional distributors but we often found them to be unreliable both in performance and contract compliance. Accordingly, our emphasis has been with the direct sales effort. When we are short-staffed, as I have just described, there's a direct impact on revenue. Of course, we are interested in maximizing revenue. However, investors should understand our revenue results in any given reporting period cannot be materially influenced by selling domestic Core Companion Animal Health products into distributors rather than end users.

Another change we are implementing is a more formal approach to cross-selling with third-party reference labs, by combining our instrument products with third-party reference labs' services and simultaneous transactions. Beyond our sales vacancies, new instrument placements were relatively soft in the third quarter, in part because our 2 primary competitors have become quite aggressive at combining products in this way using their internal offerings. While we have had some success in this area in the past, it has generally been on an informal rep-to-rep basis. We are currently engaged in discussions with different reference laboratory parties and are hoping to enter into formal agreements in the future.

In regards to our increased focus on innovation, in the last 2 calls, I discussed how, in addition to gaining more share with our current products, wherever possible, we also remain committed to creating additional top line growth with new products. Toward that end, we are working on a number of new alliances and other opportunities to bring new products to the market. Our stated goal is to announce the introduction of at least one more product prior to the end of this year, and we remain committed to that goal. In addition, we expect to introduce up to 4 new products next year, including at least 2 new products from our recently announced alliance with Rapid Diagnostek. As we can talk with certainty about new product opportunities, we will keep you informed, but it should be clear that we're focused on revenue growth. And we are investing in new products to drive that growth.

I also think it is important to note the improved profitability we delivered even as we develop and launch new products, this demonstrates our continuing commitment to expense control. I would now like to turn this over to Jason. He will provide detailed information on our financial results and future financial expectations.

Thank you, Bob, and thanks to everyone who joined the call. All revenue in the third quarter was $17.6 million, essentially unchanged from the third quarter last year. In the third quarter of 2011, Core Companion Animal Health revenue grew approximately 1% to $14.3 million, from $14.1 million in the year-ago quarter. Increased revenue from our instrument consumables and domestic sales of our Heartworm Preventive, somewhat offset by lower revenue from our chemistry instruments and our hematology instruments domestically were key factors in the increase. We had a significant level of vacancies in our sales force with only 24 of 30 positions filled at the end of the quarter, which we believe was a contributing factor to our sales performance this quarter. We've already filled several of these positions and our hard at work to hire talented individuals in all open positions. In addition, we continued to see indications of softness in our market, in particular related to the placement of new capital equipment. Bob has discussed some of the efforts we are pursuing to address this softness.

In the three months ended September 30, 2011, our Other Vaccines, Pharmaceuticals and Products segment, or OVP, revenue decreased approximately 4% to $3.3 million from $3.5 million. Lower sales of cattle vaccines under our contract with AgriLabs, somewhat offset by sales of other cattle vaccine products and a bulk bovine biological were factors in the decline. We became aware of issues producing certain cattle vaccine products sold under our contract with AgriLabs to appropriate specifications for purity during the first half of 2010, and did not ship any of these cattle vaccine products in the second quarter of 2010 as a result. We obtained regulatory approval for an improved process and begin to ship these vaccines again, including to fulfill a backlog in the third quarter of 2010. This situation did not recur in the third quarter of 2011, and thus created a difficult revenue comparison for cattle vaccine products shipped under our contract with AgriLabs.

In the third quarter of 2011, our gross profit was $6.8 million compared with gross profit of $6.6 million in the third quarter last year. Gross margin, that is gross profit divided by total revenue was 38.8% in the third quarter of 2011,an increase of 1.4 percentage points from 37.4% in the prior-year period. A shift in product mix to relatively higher margin products was a factor in the increase. Selling and marketing expenses were $3.8 million in the third quarter of 2011,a decline of 4% as compared to $3.9 million in the prior-year period. Sales force vacancies and lower commissions were factors in the decline. Research and development expenses were $311,000 in the third quarter of 2011. A decrease of $144,000 compared to $455,000 in the prior-year period. Lower testing costs were a factor in the decrease. We expect to see increases in research and development expenses as we increase our focus on innovation.

In the third quarter of 2011, general and administrative expenses were $2.4 million, an increase of 27% from $1.9 million in the third quarter of 2010. A greater accrual related to our management incentive plan in the 2011 period as compared to the 2010 period, and greater legal expenses, primarily related to arbitration proceedings with one of our former distributors, were factors in the increase. Total operating expenses were $6.4 million, or 36.5% of sales, in the third quarter of 2011,compared with total operating expenses of $6.2 million, or 35.3% of sales in last year's third quarter. In the third quarter of 2011, we reported operating income of $408,000, up from operating income of $365,000 in last year's third quarter. Interest and other income net was $64,000 in the third quarter of 2011, down from $118,000 in the prior-year period. The largest factor in the decline was a lower foreign currency gain.

In the third quarter of 2011, income before income taxes was $472,000, compared to pre-tax income of $483,000 in the third quarter of 2010. Net income in the three months ended September 30, 2011, was $288,000, or $0.05 per diluted share. This compares with net income of $241,000, or $0.05 per diluted share in the prior-year period. Our third quarter 2011 net income is inclusive of $154,000 deferred income tax expense, or $0.03 per diluted share. It is important to remember that this is a non-cash accounting charge only, and primarily relates to our large domestic net operating loss deferred tax asset position, which provides a tax shield for most favorable income taxes we would otherwise pay. So lower ratio of total tax expense compared to income or loss before income taxes results from the impact of non-tax deductible expenses, such as incentive stock option amortization at relatively low income or loss levels.

For the nine months ended September 30, 2011, which I will refer to as the nine-month period, our revenue was $54.6 million, an 8% increase as compared to $50.4 million in the prior-year period. Core Companion Animal Health revenue in the nine-month period grew 2% to $44.7 million, from $43.7 million in the prior-year period. OVP revenue grew 45% in the nine-month period to $9.8 million from $6.8 million last year. Gross profit for the nine-month period was $22.6 million, or 41.4% gross margin, compared with gross profit of $18.6 million, or 37% gross margin in the prior-year period. Total operating expenses for the nine-month period were $19.8 million, or 36.2% of sales compared with total operating expenses of $19 million, or 37.6% of sales in the corresponding period last year.

Depreciation and amortization was $1.6 million in the nine-month period, down slightly from $1.7 million in the prior-year period. For the nine-month period, we reported operating income of $2.8 million compared to an operating loss of $330,000 last year. Income before income taxes was $2.7 million compared to a loss of $507,000 in the prior-year period. Net income in the nine-month period was $1.7 million, or $0.31 per diluted share. This compares with a net loss of $254,000 or $0.05 per basic and diluted share last year. Our net income in the nine-month period is inclusive of an $884,000 deferred income tax expense, which translates to approximately $0.17 per diluted share. Turning to the balance sheet, we had $7.5 million in cash and working capital of $19.2 million as of September 30, 2011. We continue to have zero debt at the end of the reporting period, after fully repaying our line of credit during the second quarter of 2011. We are currently negotiating with our bank to modify our agreement so that we may pursue strategic acquisitions under the agreement.

Let me turn to the outlook for the fourth quarter. I want to remind investors, our business remains a difficult one to project in particular, in times of economic uncertainty. Our guidance for the fourth quarter of 2011 is for revenue of approximately $16.5 million, including -- approximately $3 million in OVP revenue; gross margin of approximately 40%; operating expenses in line with the third quarter of 2011; operating income around $175,000; approximately $40,000 in interest and other expense; and an income of approximately $80,000. If one were to add this quarterly guidance to our nine-month results, one obtains our full-year guidance for revenue of approximately $71 million, including -- approximately $12.8 million in OVP revenue; gross margin of a little over 41%; operating expenses, a little above $26 million, operating income of approximately $3 million; interest and other expense of approximately $140,000; and approximately $1.75 million in net income.

Based on Friday's closing stock price and currently outstanding shares and stock options, which I will refer to as current diluted shares, this guidance translates into approximately $0.33 in earnings per diluted share. I note that this net income figure is inclusive of approximately $925,000 in deferred income tax expense, which as I mentioned earlier, is a non-cash accounting charge primarily related to our large domestic deferred tax asset. Based on shares and options currently outstanding in Friday's closing stock price, this translates to an impact of approximately $0.17 per diluted share. I would now like to turn the call back over to Bob.

Thank you, Jason. I would like to close our comments by making a few summary points about our financial performance. We reported strong year-to-date growth in revenue, gross profit, gross margin percentage, and on the bottom line. Our balance sheet remains in great shape, no term debt, no balance on our line of credit, with ample cash and available borrowings to fund our operations and be opportunistic with potential M&A activity. We have introduced one new product already in 2011; we intend to announce one more this year and launch up to 4 next year. We expect cash from operations will continue to benefit from our NOL asset. Specifically, our guidance of $0.33 per share in 2011 includes substantial non-cash tax expense. We also like to take this opportunity to provide a high-level outlook on our 2012 financial results.

Investors should note we have not yet completed our budget process, and predicting results for periods more than a year out is even more difficult to accurately predict than our normal guidance. Given that, our current outlook for 2012 is for revenue of approximately $85 million; including approximately $12.5 million in OVP revenue; gross margin of around 44%; operating expense of a little over $31 million; operating income of approximately $6 million; $100,000 in interest and other expense; and net income of approximately $3.5 million. Each of these metrics represents healthy growth over 2011. Based on shares and options currently outstanding, in Friday's closing stock price, this translates to approximately $0.65 per diluted share. As in 2011, we expect the bulk of income tax expense, or around $2 million, to be non-cash deferred tax expense, related to our domestic net operating loss asset. Based on shares and options currently outstanding, in Friday's closing stock price, this translates to approximately $0.37 per diluted share.

During our last 3 calls, we have discussed management's focus on achieving trailing 12-month earnings to $1 a share while we are simultaneously making underlying investments towards sustained long-term growth. We believe it is realistic that we will be able to meet this goal on a GAAP basis by the end of 2013. To do this, we need to grow revenue with both current and new product offerings. I'm encouraged by the fact that we have the most experienced and professional sales force we've ever had and a sales force that continues to improve under Joe's capable leadership. We have a renewed focus on R&D and product development which should produce new products that help drive our growth. We believe our gross margins should continue to improve as we sell higher margin products including a greater relative volume of consumables for our analyzers. We expect more leverage out of our current operating expense base overall, even including somewhat higher investments in R&D and sales and marketing. We firmly believe revenue growth and gross profit growth will significantly exceed expense growth, resulting in accelerated profitability. In aggregate, therefore, we are confident about the $1 per share target.

And of course, remember that I'm describing an after-tax GAAP target and that because of our NOL carry forward, we pay significantly less cash tax than the cash expense reflected in our financial statements. I'd like to reiterate again that we have not yet completed our budgeting process. And this outlook is based on early and as yet unconfirmed timelines for new product launches and other assumptions. I'd also remind listeners that our business remains a difficult one to project, and the current economic climate doesn't make that any easier. Accordingly, this is subject to change. I look forward to updating this outlook on our fourth-quarter call. Thanks for your attention today. We appreciate your continued interest and support of Heska. At this time, I'd like to turn this over to our moderator for the purposes of conducting our question-and-answer session.

(Operator Instructions) Chris [Armbruster].

Thanks for taking my call and congratulations on a solid quarter.

Thank you.

Can you talk a little bit about the competitive environment effects on pricing in your Core Companion Animal Health segment? Are you seeing any pressures there? I know you talked a little bit about the bundling efforts by some of your competitors, and the gains that you are seeing in that segment, are they coming purely from volume?

I would say, first, to address the pricing issue, I would say, yes, that's an astute question and I'd say there is certainly, in the absence of our formal ability to do combinations of lab services and instrument products, there's definitely margin pressure on the instrument placements. Not necessarily the consumable piece but certainly on the analyzers themselves. The rest of the Core Companion Animal business has done well. I would say it held up well to pricing and we feel good about that. I don't remember your other part of your question.

Just the gains that you are seeing there, they're volume related? And the volume related gains are offsetting the pricing pressures?

I think we called out that actual analyzer revenues were softer, on the downside. The upside was associated with some of our other business, and again, the downside is merely associated with some of those gross margin pressures plus unit placements. I think the gains we're seeing are completely disconnected from that.

The increased revenue was for certain consumables and domestic sales of the heartworm preventive and that was somewhat offset by lower revenue from the chemistry instrument hardware and hematology instrument hardware in the US.

Okay. That helps. And then on hiring, you talked a little bit about the need for increased technical expertise from your sales department and the need to fill vacant sales territories. I'm assuming those two goals aren't mutually exclusive and as a potential for hires to fill both of those needs? And then I guess the second question would be, is there any concern about near-term margin pressure from the higher employee count and the cost of hiring more highly trained personnel?

No, I think our guidance reflects the anticipations and increased expenses in both marketing and sales, as well as the incremental increases in R&D spend. So those are baked into what we've talked about our future. And I think that guidance is extremely positive and reflects top- and bottom-line growth as we've just described. And then as far as the hiring is concerned, yes, to reiterate without going into that much granularity again, I've said that we finished the quarter down around 20% to -- our vacancies were about 20% of our existing sales positions. We've narrowed that gap to date, and we'll see that completely filled by the end of January.

I said we would also increase those territory manager positions by around 10% over the course of 2012, so we're going to get growth there, but we're also then adding headcount that specializes in instrument analyzer placements. I've referenced again there, that we would anticipate 8 of those positions in the course of 2012 and 6 of those have been hired to date. So it's a growth overall, and it's specialization within that growth.

Okay. Thank you very much.

John Nelson.

Hi, guys. Thank you. This is John Nelson from the State of Wisconsin Investment Board and I wanted to congratulate you on a good quarter. Thank you for providing a significant amount of good details for myself and other investors to assess the Company prospects.

Certainly, John.

My questions are related to the drop in the cost of revenue. Year-over-year, what contributed to that? Any significant factors?

John, it's Jason Napolitano. Thanks for the comments. It was primarily a mix of issues, John, where on a relative basis, we sold more of relatively higher margin products, like the consumables and less of relatively low margin products, like the hardware placements tend to be among our lowest margin sales.

Okay.

Okay?

Yes. Also, can you say anything about what you think has been happening as far as market share for your products versus competition?

Sure. Again, this really very much depends on the product line that we're talking about. I would say 40% of our business is in the instruments business, which includes analyzers and consumables; roughly 10% analyzers, 30% consumables. We've been told by third parties, a third party that's done a survey, that actually, our margin share has continued to -- I'm sorry, our market share has continued to improve there, particularly in chemistry analyzers. That's the only real market share data we have. I'd say other than that sort of information, John, it's very difficult to get market share data out of animal health, [much more] difficult than, say, human health. We're comfortable that we continue to enjoy the largest share in a growing share of the allergy business and that we've held on very well in our Heartworm Diagnostics. Just anecdotally, I would offer those comments.

Okay. And then on new product introductions, can -- I know you can't say much about this, but can you identify the area or areas targeted for Companion Animal versus OVP?

Yes, everything I've -- John, that's again, good question. You're right. You've learned well. (laughter) We don't do a lot of detail there for competitive reasons. But I will say that the product launches that I've talked about and from now on we're talking about, I guess, and you add them up around 5 new products by the end of 2012. Those are all Core Companion Animal Business products. Those are not in the OVP area. We continue to make our investments in both commercial infrastructure, brand, and pipeline in the Core Companion Animal segment.

Okay. Very good. Thank you very much.

Nicholas Jansen.

Hi guys, it's Nick Jansen from Raymond James. A couple of quick questions. First on the -- going back to the competitive landscape, thinking about bundling internal offerings with a reference lab. Can you perhaps maybe go into little bit more detail what you're seeing there? And select markets where you are trying to formalize some agreements with some labs? What you are bringing to the table for them and the strategy behind that opportunity?

Sure. I think it's -- as you would know very well, Nick, it's a competitive advantage to be able to offer both reference lab services and in-clinic analyzer business all at the same time to the same customer. While we've faced some competition with our 2 largest competitors, their ability to do this with their own internal product offerings. We are in the reference laboratory business to any scale, and don't directly intend to be at any time in the future. However, there are reference laboratory businesses out there that have reference laboratory offerings that don't have instrument offerings, so there's an obvious positive association that would occur between our business and theirs. So those are the sorts of discussions we're undertaking. And we're fairly enthusiastic about the prospects and the ability to compete that way.

And is the expectation for pretty healthy revenue growth next year relative to where you ended up this year in terms of total revenue dollars? Is that a function of three things? A, some of the successful execution on those alliances; B, just better leverage off the sales force infrastructure investment that Joe is doing right now; and then, C, how much are you baking into your new product forecast for your 5 new products into that, let's say, 18% revenue growth forecast that you're modeling for next year?

Right. I would say, certainly, we expect to see the benefit of some new product lines as they are launched and it depends on when they're launched in the year as to how much material impact they have. Again, I qualified in my remarks on our outlook as to say, it's not really -- we haven't finished the budgeting process and we're trying to caveat and explain that those launch dates move a little bit, and it'll be hard to be precise for another while as to when that happens. But certainly, I think you could look to the continuing growth in our instruments business, and the consumables thereby. I think that growth will occur, in part, through to creative alliances but also very much more so due to the fact that we'll have a full and engaged sales force that's up and trained and one that is also expanding. So I think those are the primary drivers in the 2012 period. And depending on when those products are launched in '12, they may, in fact, have much more impact in '13.

Okay. And then just lastly, just going back to the sales force investments, what has Joe done since he has came on board that's differentiated your self relative to the prior two years in terms of your sales force productivity? And where are we on the stage of the game of ramping up those [sales]? Are we still in the first couple innings of the game in terms of getting some productivity out of these new launches or are these new talent?

Well, it's -- you ask a question that could deserve an extremely long answer. But I'll try and summarize at some level. I've laid out some numbers for you. I've talked about situations where we are expanding and we're specializing. And that and, other than the remarks I made earlier in response to questions, I've observed also that we're building out our inside sales as well. We've replaced the lead in inside sales; we've changed leadership in 3 of the 4 regions.

All of this goes to both getting the right people in and in some cases, getting some great people in different roles, where they're even more effective. I think also, you look at everything from selling process to territory and account management. It's really soup to nuts, and Joe's very much elevated the game. And yes, we're very encouraged by the early signs that we see from these efforts. A reason to be even more encouraged as we fill out the sales force.

Great, guys. That's all I had and I look forward to seeing the progress. Thanks.

Jim Martin.

Yes. Security Research Associates. And actually, Jim had to take off. This is Brian Swift. Most of my questions have already been asked and answered. But maybe you could elaborate a little bit on what some of the drivers and headwinds you see over the next year in addition to your business and in addition to adding to your sales organization and some of the new products that you already outlined?

Sure. I don't -- I'll -- the driver, I think you've captured the driver. Trying to introduce new products, and going and specializing our sales force are both very, very important to continuing growth. I think as Jason detailed in his remarks, we are continuing to see increased gross margin percentage as a result of product mix. So that's also going to be helpful. And again, we'd also point out that, while we intend to increase the spend in marketing and sales and to some extent in R&D, we also believe there'll be leverage out of this operating expense on an ongoing basis, and that leverage will continue. So that's the drivers. I think the headwinds, as you describe them, are primarily uncertainty around, to some extent, the macro economy, and then the implicit adjustments that you always make in a competitive environment. That's pretty much it in a capsule.

All right. We look forward to having you at our conference tomorrow.

So thank you. We look forward to it as well.

Steven Crowley.

Good morning, gentlemen. It's Steve Crowley with Craig-Hallum Capital Group.

Hi, how are you doing Steve?

Thanks for taking my questions. Just a follow on in terms of your sales force building efforts. I'm hoping you might be able to give us a little bit of color on the profile and experience out of the new salespeople you're hiring, both the territory managers and then the system placement experts?

Sure. Well, I would say that the territory managers is generally, as we've hired and recruited in the past, these will be people that work the full product line, our full product line in the field and are very capable of doing that. Then those folks will be overlaid at some [regional] level, where the area diagnostic managers as I mentioned, you can imagine 10% build out of territory managers by the end of the year gets you into the low- to mid-30s in headcount. And then around 8 of these area diagnostic managers, those folks have been to date recruited out of capital equipment, professional sales organizations, and those are highly varied organizations that they've come out of, and other than that, other than saying it's capital equipment intensive and professional sales around that, it doesn't warrant going into their specific companies they came from. But that's the gist of it; it's extremely different mentality mindset, highly motivated to sell capital equipment, and highly -- very comfortable with highly variable comp based on performance.

And it looks like, just trying to connect the dots, it looks like you're maybe assuming a six-month views to reasonable productivity of these people once they get into your organization or is that out in left field?

I don't know that I'd have the basis to make that extrapolation. It's going to be depending on the individual, of course, as they get in here and then also we slot them into training classes on our product lines, and then again work with account management, call cycles, things like that. So it's going to vary and I'm really not comfortable saying how many months it will be.

In terms of the difference of this group characteristic-wise, or qualitatively, is it that enhanced historical experience selling capital equipment versus a group previously that wasn't as strong in that area? Or are you just trying to upgrade across-the-board in terms of skill sets and characteristics?

Well, for sure, we're operating across-the-board but I would also say, very enthusiastically say that we have long-tenured sales reps that are phenomenal. It's really a matter of specialization, so you constantly add talent wherever you can at the highest possible level. Sometimes you wait a little longer to get the best possible talent. And I would say as a matter -- think of it as a matter of an outstanding generalist sales force, and then you're adding specialists on top of that.

Okay. That's helpful. Again, appreciate you taking my questions.

(Operator Instructions) David Olson.

Hi, gentlemen. It's David Olson with Security Research Associates. I have a follow-up question to my partner, Brian, asked earlier. In terms of opportunities facing the Company. You mentioned that you're looking at potential M&A opportunities, and I know that's all variable, one never knows when those things are going to come to fruition and what ultimately will come of it, but I imagine you have a process in place and you're working through that right now. Do you have a -- and I'm trying to get a sense of a target areas for products and how the process is going.

Well, there -- I would say there is no process and if there was, we had something formal, we'd be disclosing it in an [empty] environment for sure. I would say -- I think the -- I may just step back and just say the overall flavor of our Company right now, as we described earlier in the call, is we're positioning -- this year has been a great year, we've reported another quarter of profit, very much we're positioning ourselves for growth in revenue and profitability for the future. And this is really the thesis here. We're talking about adding products, and we've done that in detail. We've talked about improving and expanding our sales efforts and getting all that done in this current year. And really, all of this has focused on getting positioned for accelerated future growth.

The other point here is that we have continued to generate cash in our business. We -- Jason called out the fact that we have some $7.5 million in cash on the balance sheet at the end of the quarter and without debt and so forth, the question always is, what do you do with that cash? And opportunistic merger and acquisition activity is certainly on the opportunity list. And I would say, other than I've already said, there's no process, the areas that we would look in would be in product adjacencies to our current products, but I would say also something, more particularly, something that would sell through this sales channel we're building. We're not interested in a product or a product line that doesn't fit with the profile of this, dare I say, higher octane sales force that we're building. This is a real high IQ group, and we need products that fit there.

So it would be in equipment space or are you thinking of something along the therapeutic space?

I would say we have a business that spans the equipment space, as you called it, but we also have businesses in single-use disposable diagnostics, we have vaccines, we have niche pharmaceuticals, we have allergy diagnosis and therapy. We have a number of other businesses under our umbrella that gets us back to why it's important to have generalists and specialists both in the sales force.

I would just add to that, we have seen a fairly steady flow, not a high flow of opportunities over the years. Most of them aren't a great strategic fit. There's a lot of small distribution businesses out there, generics businesses. But some will fit, we expect, in the near future.

All right. Very good, gentlemen. Thank you. Look forward to chatting with you tomorrow.

(Operator Instructions) We have no further questions. I'd like to hand back to Management for closing remarks.

Thank you. And thank you all for your interest in Heska and for taking the time to join us today. Goodbye.

This concludes the Heska third quarter earnings conference call. Thank you for your participation. You may now disconnect.