Heska

2015
a n n u a l
r e p o r t

1
Blood Testing     •     Imaging     •     Software     •     Allergy     •     Vaccines     •     Preventatives

2015 Heska Corporation Annual Report

This  report  was  finalized  on  April  14,  2016  and  speaks  only  as  of  such  date  or,  with  respect  to  historical  information 

(including the financial data included herein), to such earlier date as may be expressly stated. Information contained 

herein has not been updated for the passage of time or otherwise from such dates.

This  report  also  contains  express  or  implied  forward-looking  information  about  the  future  plans,  financial  condition 

and operating performance of Heska Corporation (“Heska”) that are not statements of historical fact. These are forward-

looking  statements  within  the  meaning  of  the “safe  harbor”  provisions  of  the  Private  Securities  Litigation  Reform  Act 

of  1995. These  statements  are  based  on  current  expectations,  and  factors  that  could  cause  our  actual  business  and 

financial results to differ materially from those expressed in Heska’s forward-looking statements include the following: 

risks related to relying on historical results to project future performance; uncertainties related to Heska’s ability to sell 

and market its products in an economically sustainable fashion; uncertainties related to the reputation of Heska and its 

offerings with Heska’s customers, Heska’s ability to maintain or enhance such reputation and Heska’s ability to benefit 

from such reputation; uncertainties related to product development and commercialization, including the risk that a 

planned product will not perform as anticipated or a new product will not gain the market acceptance as anticipated; 

uncertainties related to Heska’s ability to enter new market geographies, including uncertainties related to Heska’s ability 

to obtain relevant sales and marketing rights from third parties; uncertainties related to Heska’s reliance on third-parties 

to develop and supply certain of its products, which are substantial; uncertainties related to the future benefit of any 

investment Heska may choose to make; uncertainties related to Heska’s evaluation of or reliance upon the performance 

of  any  individual  or  group  of  individuals;  and  the  risks  and  uncertainties  set  forth  in  Heska’s  filings  and  future  filings 

with the Securities and Exchange Commission, including those articulated in Heska’s Annual Report on Form 10-K for 

the twelve month period ended December 31, 2015. Heska does not undertake any obligation to update any forward-

looking statement except as may be required by law.

2015

2

Dear Shareholder, 

Thank you for your interest in the new Heska. We set a new course in 2013 and we reconfirmed our new 

direction with a strong performance in 2014. Today, I am pleased to write that Heska Corporation has now 

had a record year in 2015.   

Heska has been delighting customers with personalized attention, better products and programs, and 

greater value than the competition. Customers rewarded Heska in 2015 with a 16% bump in revenues to a 

record of $104.6 million, a 194% operating income increase, and net income that more than doubled. Heska 

common stock responded in kind with a 113% advance for our owners. I am pleased with these results and 

am extremely proud of the 310 dedicated Heska employees who worked hard to deliver them. I hope you 

are as well.  

We enter 2016 focused on optimization and expansion. We will expand our share of existing markets on the 

strength of our product bundles, multi-year subscription programs, and regulatory experience. We will take 

these winning ways and expand into new geographies. We will continue to release new imaging, software, 

and blood analyzer products to gain new customers and refresh current ones. And we will strive to be the 

best operator in the space by investing in our people, systems, cost controls, relationships, and capabilities.  

Heska occupies what many consider to be the prime diagnostics spot within a wonderful veterinary market 

that is historically and currently healthy. Heska’s people are managing strongly and are more committed to 

customers and to each other than at any other time. Heska’s existing products are now refreshed, leading 

the competition, and favored by a growing share of customers. In light of these positive signals and the 

large market opportunity still available to us, we will continue to play prudent offense in 2016. We are ready 

to hit the mark and we are pleased to share our journey with you as we work hard to do so.  

Respectfully, 

Kevin S. Wilson
 

Chief Executive Officer and President 

3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Heska Corporation and Subsidiaries
Loveland, Colorado

We have audited the accompanying consolidated balance sheets of Heska Corporation and Subsidiaries
(the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of
operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2015. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Heska Corporation and Subsidiaries as of December 31, 2015 and
2014, and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2015, in conformity with accounting principles generally accepted in the United
States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over financial reporting as of December 31, 2015,
based on criteria established in Internal Control—Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 15, 2016, expressed an unqualified opinion.

EKS&H LLLP

March 15, 2016
Boulder, Colorado

4

HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

ASSETS

Current assets:

Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of
   $216 and $189, respectively
Due from – related parties
Inventories, net
Other current assets

Total current assets

Property and equipment, net
Note receivable – related party
Goodwill and other intangibles
Deferred tax asset
Other long-term assets

Total assets

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable
Due to – related party
Accrued liabilities
Current portion of deferred revenue
Line of credit

Other short-term borrowings, including current portion of
long-term note payable
Total current liabilities

Long-term note payable, net of current portion
Deferred revenue, net of current portion, and other

Total liabilities

Commitments and contingencies  (Note 10)
Non-Controlling Interest
Stockholders' equity:

Preferred stock, $.01 par value, 2,500,000 shares authorized,
   none issued or outstanding
Common stock, $.01 par value, 7,500,000 shares authorized,
   none issued or outstanding
Public common stock, $.01 par value, 7,500,000 shares authorized,

   6,342,205 and 6,625,287 shares issued and outstanding, respectively

Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit

Total stockholders' equity
Total liability and stockholders' equity

December 31,

2014

2015

$

5,855

$

6,890

11,919
892
12,658
1,587
32,911
13,410
1,466
21,205
27,210
642
96,844

4,897
252
5,130
4,584
48

141
15,052
227
12,754
28,033

$

$

16,136
308
16,101
1,827
41,262
17,020
1,516
20,966
25,883
3,072
109,719

7,624
—
5,416
5,461
143

159
18,803
69
11,572
30,444

15,679

15,747

—

—

—

—

63
222,297
283
(169,511)
53,132
96,844

$

66
227,267
187
(163,992)
63,528
109,719

$

$

$

See accompanying notes to consolidated financial statements.

5

HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

Revenue:

Core companion animal health

Other vaccines, pharmaceuticals and products

Total revenue, net

Cost of revenue

Gross profit

Operating expenses:

Selling and marketing
Research and development

General and administrative

Total operating expenses

Operating income (loss)

Interest and other expense (income), net

Income (loss) before income taxes

Income tax expense (benefit):

Current income tax expense

Deferred income tax expense (benefit)

Total income tax expense (benefit)

Net income (loss)

Net income (loss) attributable to non-controlling interest

Net income (loss) attributable to Heska Corporation

Basic earnings (loss) per share attributable

to Heska Corporation

Diluted earnings (loss) per share attributable

to Heska Corporation

Weighted average outstanding shares used to compute basic earnings (loss)
per share attributable to Heska Corporation

Weighted average outstanding shares used to compute diluted earnings (loss)
per share attributable to Heska Corporation

Year Ended December 31,

2013

2014

2015

$

66,404

$

72,354

$

11,935

78,339

17,483

89,837

84,249

20,348

104,597

47,707

54,122

60,384

30,632

35,715

44,213

19,428
1,500

11,134

32,062
(1,430)
(37)
(1,393)

183
(637)
(454)

19,159
1,414

12,231

32,804

2,911
(39)
2,950

47

1,304

1,351

$

$

$

$

$

$

(939)
257
(1,196) $

1,599
(1,004)
2,603

(0.21) $

0.44

(0.21) $

0.41

5,755

5,755

5,951

6,409

21,339
1,658

12,659

35,656

8,557

130

8,427

1,581

1,327

2,908

5,519

280

5,239

0.80

0.74

6,509

7,074

See accompanying notes to consolidated financial statements.

6

HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands) 

Net income (loss)

Other comprehensive income (expense):

Minimum pension liability

Unrealized gain on available for sale investments

Foreign currency translation

Comprehensive income (loss)

Year Ended December 31,

2013

2014

2015

$

(939) $

1,599

$

5,519

182

30

72
(655)

—

3
(300)
1,302

(129)
44
(11)
5,423

Comprehensive income (loss) attributable to non-controlling interest

Comprehensive income (loss) attributable to Heska Corporation

257
(912) $

(1,004)
2,306

280

$

5,143

$

See accompanying notes to consolidated financial statements.

7

HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

Common Stock

Shares

Amount

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income (Loss)

Accumulated
Deficit

Total
Stockholders'
Equity

$

218,544

$

296

$

(170,032) $

48,862

(939)

(939)

Balances January 1, 2013

5,372

$

Net loss

Issuance of common stock related to
options, ESPP and other

Recognition of stock based compensation

Excess tax benefit from stock-based 
compensation

Stock issued for Heska Imaging

Stock issued for Heska Imaging Mark to
Market

Accretion of non-controlling interest

Accrued distribution for Heska Imaging
minority

Minimum pension liability adjustments

Unrealized gain on available for sale
investments

Foreign currency translation adjustments

—

55

—

—

419

—

—

—

—

—

—

Balances, December 31, 2013

5,846

$

Net income

Issuance of common stock related to
options, ESPP and other

Recognition of stock based compensation

Excess tax benefit from stock-based 
compensation
Stock issued for Heska Imaging

Stock issued for Heska Imaging Mark to
Market

Unrealized gain on available for sale
investments

Foreign currency translation adjustments

—

496

—

—

—

—

—

—

Balances, December 31, 2014

6,342

$

Net income

Issuance of common stock related to
options, ESPP and other

Recognition of stock based compensation

Excess tax benefit from stock-based 
compensation
Accretion of non-controlling interest

Minimum pension liability adjustments

Unrealized gain on available for sale
investments

Foreign currency translation adjustments

—

283

—

—

—

—

—

—

Balances, December 31, 2015

6,625

$

54

—

—

—

—

4

—

—

—

—

—

—

58

—

5

—

—

—

—

—

—

63

—

3

—

—

—

—

—

—

66

—

323

408

15

3,571

(3,405)

(1,868)

—

—

—

—

—

—

—

—

—

—

—

—

182

30

72

—

—

—

—

—

—

(139)

—

—

—

$

217,588

$

580

$

(171,110) $

—

1,443

1,653

228

3,405

(2,020)

—

—

—

—

—

—

—

—

3

(300)

1,599

—

—

—

—

—

—

—

$

222,297

$

283

$

(169,511) $

—

1,255

2,269

1,514

(68)

—

—

—

—

—

—

—

—

(129)

44

(11)

5,519

—

—

—

—

—

—

—

323

408

15

3,575

(3,405)

(1,868)

(139)

182

30

72

47,116

1,599

1,448

1,653

228

3,405

(2,020)

3

(300)

53,132

5,519

1,258

2,269

1,514

(68)

(129)

44

(11)

$

227,267

$

187

$

(163,992) $

63,528

See accompanying notes to consolidated financial statements.

8

HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:

Net income (loss)

$

(939) $

1,599

$

5,519

Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:

Year Ended December 31,

2013

2014

2015

Depreciation and amortization

Deferred tax (benefit) expense

Stock based compensation

Unrealized (gain) loss on foreign currency translation

Changes in operating assets and liabilities:

Accounts receivable

Inventories

Other current assets

Accounts payable

Accrued liabilities and other

Other non-current assets

Deferred revenue and other

Net cash provided by (used in) operating activities

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:

Investment in subsidiary

Purchases of property and equipment

Proceeds from disposition of property and equipment

Net cash provided by (used in) investing activities

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:

Proceeds from issuance of common stock, net of distributions

Proceeds from (repayments of) line of credit borrowings, net

Proceeds from other debt

            Excess tax benefit from stock-based compensation

Net cash provided by (used in) financing activities

EFFECT OF EXCHANGE RATE CHANGES ON CASH

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

2,497
(637)
408

20

(159)
(1,687)
(642)
(2,276)
(130)
(179)
2,312
(1,412)

(3,019)
(1,930)
5,020

71

323

2,246
(1,025)
15

1,559

14
232

5,784

3,712

1,304

1,653
(81)

(510)
(5,592)
(73)
900

814
(263)
2,091

5,554

—
(2,337)
6
(2,331)

1,430
(4,751)
(178)
228
(3,271)
(113)
(161)
6,016

CASH AND CASH EQUIVALENTS, END OF YEAR

$

6,016

$

5,855

$

See accompanying notes to consolidated financial statements.

4,187

1,327

2,269

36

(4,216)
(7,240)
(238)
3,059

43
(2,430)
(191)
2,125

—
(3,773)
—
(3,773)

1,258

95
(141)
1,514

2,726
(43)
1,035

5,855

6,890

9

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.

OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Heska Corporation and its wholly-owned and majority-owned subsidiaries ("Heska", the "Company",
"we" or "our") develops, manufactures, markets, sells and supports veterinary products. Heska's core focus is 
on the canine and feline companion animal health markets.

Basis of Presentation

Our consolidated financial statements include our accounts and the accounts of our wholly-owned 
subsidiaries and majority-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 consolidated balance sheets. The non-controlling 
interest in our consolidated net income is reported as "Net income (loss) attributable to non-controlling 
interest" on our consolidated statements of operations.  Our consolidated financial statements are stated in 
United States dollars and have been prepared in accordance with accounting principles generally accepted in 
the United States ("U.S. GAAP").

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 provision for excess/
obsolete inventory, in 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 for impairment, 
determining the allocation of purchase price under purchase accounting, estimating the expense associated 
with the granting of stock options and in determining the need for, and the amount of, a valuation allowance 
on deferred tax assets.

Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist of cash and 

cash equivalents and accounts receivable. We maintain the majority of our cash and cash equivalents with 
financial institutions that management believes are creditworthy in the form of demand deposits. We have no 
significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options 
contracts or other foreign currency hedging arrangements. Our accounts receivable balances are due largely 
from domestic veterinary clinics and individual veterinarians.

One customer represented approximately 12% of our 2015 revenue and 11% of our 2014 revenue and 
another customer represented approximately 11% of our 2015 revenue, 12% of our 2014 revenue and 13% of 
our 2013 revenue.

One customer represented approximately 20% of our accounts receivable at December 31, 2015 and 

another customer represented 13% of accounts receivable at December 31, 2015 and 11% of our accounts 
receivable at December 31, 2014. No other customers represented 10% or more of revenue for 2013, 2014 or 
2015 nor 10% or more of accounts receivable at December 31, 2014 or December 31, 2015.  We have 
established an allowance for doubtful accounts based upon factors surrounding the credit risk of specific 
customers, historical trends, and other information.

10

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at net realizable value. From time to time, our customers are unable 

to meet their payment obligations. We continuously monitor our customers' credit worthiness and use our 
judgment in establishing a provision for estimated credit losses based upon our historical experience and any 
specific customer collection issues that we have identified. While such credit losses have historically been 
within our expectations and the provisions established, there is no assurance that we will continue to 
experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial 
position of our customers could have a material adverse impact on the collectability of accounts receivable 
and our future operating results.

Changes in allowance for doubtful accounts are summarized as follows (in thousands):

Years Ended December 31,

2013

2014

2015

Balances at beginning of period

Additions - charged to expense

Deductions - write offs, net of recoveries

Balances at end of period

Cash and Cash Equivalents

$

$

155

$

98

(44)

209

$

209

143

(136)

$

216

$

216

83

(110)

189

Cash and cash equivalents are stated at cost, which approximates market value, and include short-
term, highly liquid investments with original maturities of less than three months. We valued our Euro and 
Japanese Yen cash accounts at the spot market foreign exchange rate as of each balance sheet date, with 
changes due to foreign exchange fluctuations recorded in current earnings. We held 652,110 and 
1,779,910 Euros at December 31, 2014 and 2015, respectively. We held 1,252,221 and 1,252,221 Yen at 
December 31, 2014 and 2015, respectively. We held 166,832 and 127,507 Swiss Francs at December 31, 2014 
and 2015, respectively. We held 22,761 and 26,477 Canadian Dollars at December 31, 2014 and 2015, 
respectively. The majority of our cash and cash equivalents are held at U.S.-based or Swiss-based financial 
institutions in accounts not insured by governmental entities.

Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, short-term trade receivables and 

payables and the Company's revolving line of credit. The carrying values of cash and cash equivalents and 
short-term trade receivables and payables approximate fair value. The fair value of our line of credit balance 
is estimated based on current rates available for similar debt with similar maturities and collateral, and at 
December 31, 2014 and 2015, approximates the carrying value due primarily to the floating rate of interest on 
such debt instruments.

Inventories 

Inventories are stated at the lower of cost or market value using the first-in, first-out method. 
Inventory we manufacture includes the cost of material, labor and overhead. If the cost of inventories exceeds 
estimated fair value, provisions are made to reduce the carrying value to estimated fair value.

11

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Inventories, net consist of the following (in thousands):

Raw materials
Work in process
Finished goods
Allowance for excess or obsolete inventory

Property and Equipment

December 31,

2014

2015

6,298
2,966
4,949
(1,555)
12,658

$

$

8,531
2,839
6,122
(1,391)
16,101

$

$

Property and equipment is stated at cost, net of accumulated depreciation.  The costs of additions and 

improvements are capitalized, while maintenance and repairs are charged to expense as incurred.  When an 
item is sold or retired, the cost and related accumulated depreciation is relieved, and the resulting gain or loss, 
if any, is recognized in the consolidated statements of income.  We provide for depreciation primarily using 
the straight-line method by charges to income in amounts that allocate the cost of property and equipment 
over their estimated useful lives as follows:

Asset Classification

Building
Machinery and equipment
Leasehold and building improvements

Estimated
Useful Life
10 to 20 years
3 to 15 years
7 to 15 years

We capitalize certain costs incurred in connection with developing or obtaining software designated 

for internal use based on three distinct stages of development.  Qualifying costs incurred during the 
application development stage, which consist primarily of internal payroll and direct fringe benefits and 
external director project costs, including labor and travel, are capitalized and amortized on a straight-line basis 
over the estimated useful life of the asset.  Costs incurred during the preliminary project and post and post-
implementation and operation phases are expensed as incurred.  These costs are general and administrative in 
nature and related primarily to the determination of performance requirements, data conversion and training. 

Goodwill, Intangible and Other Long-Lived Assets

We assess goodwill for impairment annually, at the reporting unit level, in the fourth quarter and 

whenever events or circumstances indicate impairment may exist.  In evaluating goodwill for impairment, we 
have the option to first assess the qualitative factors to determine whether it is more likely than not that the 
fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is 
necessary to perform the two-step goodwill impairment test.  The more-likely-than-not threshold is defined as 
having a likelihood of more than 50 percent.  If, after assessing the totality of events or circumstances, we 
determine that is more likely than not that the fair value of a reporting is less than its carrying amount, we 
would then perform step one of the two-step impairment test; otherwise, no further impairment test would be 
required.  In contrast, we can opt to bypass the qualitative assessment for any reporting unit in any period and 
proceed directly to step one of the two-step impairment test.  Doing so does not preclude us from performing 
the qualitative assessment in any subsequent period.

In the fourth quarter of 2015, we performed a qualitative assessment of the goodwill residing within 

the assets of our CCA segment and determined that no indications of impairment existed.

12

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Intangible assets are valued based on estimates of future cash flows and amortized over their estimated 

useful lives.  We continually evaluate whether events and circumstances have occurred that indicate the 
remaining estimated useful life of intangible assets as well as other long-lived assets may warrant revision, or 
that the remaining balance of these assets may not be recoverable. When deemed necessary, we complete this 
evaluation by comparing the carrying amount of the assets with the estimated undiscounted future cash flows 
associated with them. If such evaluations indicate that the future undiscounted cash flows of amortizable 
long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their 
estimated fair values.

The estimation of useful lives and expected cash flows requires us to make significant judgments 

regarding future periods that are subject to some factors outside of our control. Changes in these estimates can 
result in significant revisions to our carrying value of these assets and may result in material charges to our 
results of operations.

Revenue Recognition

We generate our revenue through the sale of products, as well as through licensing of technology 

product rights, royalties and sponsored research and development. Our policy is to recognize revenue when 
the applicable revenue recognition criteria have been met, which generally include the following:

•

•

•

•

Persuasive evidence of an arrangement exists;

Delivery has occurred or services rendered;

Price is fixed or determinable; and

Collectability is reasonably assured.

Revenue from the sale of products is recognized after both the goods are shipped to the customer and 
acceptance has been received, if required, with an appropriate provision for estimated returns and allowances. 
We do not permit general returns of products sold. Certain of our products have expiration dates. Our policy is 
to exchange certain outdated, expired product with the same product. We record an accrual for the estimated 
cost of replacing the expired product expected to be returned in the future, based on our historical experience, 
adjusted for any known factors that reasonably could be expected to change historical patterns, such as 
regulatory actions which allow us to extend the shelf lives of our products. Revenue from both direct sales to 
veterinarians and sales to independent third-party distributors are generally recognized when goods are 
shipped. Our products are shipped complete and ready to use by the customer. The terms of the customer 
arrangements generally pass title and risk of ownership to the customer at the time of shipment. Certain 
customer arrangements provide for acceptance provisions. Revenue for these arrangements is not recognized 
until the acceptance has been received or the acceptance period has lapsed. We reduce our revenue by the 
estimated cost of any rebates, allowances or similar programs, which are used as promotional programs.

Recording revenue from the sale of products involves the use of estimates and management judgment. 

We must make a determination at the time of sale whether the customer has the ability to make payments in 
accordance with arrangements. While we do utilize past payment history, and, to the extent available for new 
customers, public credit information in making our assessment, the determination of whether collectability is 
reasonably assured is ultimately a judgment decision that must be made by management. We must also make 
estimates regarding our future obligation relating to returns, rebates, allowances and similar other programs.

13

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

License revenue under arrangements to sell or license product rights or technology rights is 
recognized as obligations under the agreement are satisfied, which generally occurs over a period of time. 
Generally, licensing revenue is deferred and recognized over the estimated life of the related agreements, 
products, patents or technology. Nonrefundable licensing fees, marketing rights and milestone payments 
received under contractual arrangements are deferred and recognized over the remaining contractual term 
using the straight-line method.

Recording revenue from license arrangements involves the use of estimates. The primary estimate 
made by management is determining the useful life of the related agreement, product, patent or technology. 
We evaluate all of our licensing arrangements by estimating the useful life of either the product or the 
technology, the length of the agreement or the legal patent life and defer the revenue for recognition over the 
appropriate period.

We may enter into arrangements that include multiple elements. Such arrangements may include 

agreements allowing for the usage of an instrument and a given level of consumables for one monthly 
payment. In these situations we must determine whether the various elements meet the criteria to be 
accounted for as separate elements. If the elements cannot be separated, revenue is recognized once revenue 
recognition criteria for the entire arrangement have been met or over the period that the Company's 
obligations to the customer are fulfilled, as appropriate. If the elements are determined to be separable, the 
revenue is allocated to the separate elements based on relative fair value and recognized separately for each 
element when the applicable revenue recognition criteria have been met. In accounting for these multiple 
element arrangements, we must make determinations about whether elements can be accounted for separately 
and make estimates regarding their relative fair values.

In addition to our direct sales force, we utilize distributors to sell our products. Distributors purchase 

goods from us, take title to those goods and resell them to their customers in the distributors' territory.

Upfront payments we receive under arrangements for product, patent or technology rights in which 

we retain an interest in the underlying product, patent or technology are initially deferred, and revenue is 
subsequently recognized over the estimated life of the agreement, product, patent or technology. Similarly, 
upfront payments we receive under agreements where we are obligated to maintain a product or technology 
sold to a third party and/or transfer know-how or technology to a third party are initially deferred and revenue 
is subsequently recognized over the estimated life of the agreement. Milestone payments related to an 
improvement in a product in which we retain an interest in the product are initially deferred and recognized 
over the estimated life of the agreement or product. We received upfront and milestone payments totaling $7.0 
million and $3.0 million in 2013 and 2014, respectively. We did not receive any such payments in 2015.  
Revenue from royalties is recognized once we are informed of sales on which we are entitled to royalties.

Stock-Based Compensation

Accounting for stock-based compensation requires the measurement and recognition of compensation 
expense for all share-based payment awards made to employees and directors based on estimated fair values. 
We estimate the fair value of all stock options and awards on the date of grant using the Black-Scholes-
Merton pricing model, which is affected by our stock price, as well as assumptions regarding a number of 
complex and subjective variables. These variables include our expected stock price volatility over the 
estimated term of the awards, the estimated term of the awards, which is dependent in part on employee 
option exercise behaviors, risk free interest rates and expected dividends. Our expected volatility assumption 
is based on the historical closing prices of our stock over a period equivalent to the expected life of the 
options.

14

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Advertising Costs

We expense advertising costs as incurred and are included in sales and marketing expenses.  

Advertising expenses were $0.4 million, $0.1 million and $0.1 million for the years ended December 31, 
2013, 2014 and 2015, respectively.

Income Taxes

The Company records a current provision for income taxes based on estimated amounts payable or 
refundable on tax returns filed or to be filed each year. Deferred tax assets and liabilities are recognized for 
the future tax consequences attributable to differences between the financial statement carrying amounts of 
existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. 
Deferred tax assets and liabilities are measured using enacted tax rates, in each tax jurisdiction, expected to 
apply to taxable income in the years in which those temporary differences are expected to be recovered or 
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in 
the period that includes the enactment date. The overall change in deferred tax assets and liabilities for the 
period measures the deferred tax expense or benefit for the period. Deferred tax assets are reduced by a 
valuation allowance based on a judgmental assessment of available evidence if the Company is unable to 
conclude that it is more likely than not that some or all of the deferred tax assets will be realized.

Foreign Currency Translation

The functional currency of our Swiss subsidiary is the Swiss Franc. Assets and liabilities of our Swiss 

subsidiary are translated using the exchange rate in effect at the balance sheet date. Revenue and expense 
accounts and cash flows are translated using an average of exchange rates in effect during the period. 
Cumulative translation gains and losses are shown in the consolidated balance sheets as a separate component 
of stockholders' equity. Exchange gains and losses arising from transactions denominated in foreign 
currencies (i.e., transaction gains and losses) are recognized as a component of other income (expense) in 
current operations, as are exchange gains and losses on intercompany transactions expected to be settled in the 
near term.

Taxes Collected from Customers

In the course of doing business we collect various taxes from customers including, but not limited to, 
sales taxes.  It is our policy to record revenue net of taxes collected from customers in our consolidated statements 
of operations.

Shipping and Handling Costs

Amounts billed to customers for shipping and handling are recorded in sales.  Shipping and handling 

costs incurred by us for the delivery of products to customers are included in cost of sales.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02 "Leases," which supersedes ASC 840 "Leases" and 
creates a new topic, ASC 842 "Leases." This update requires lessees to recognize a lease liability and a lease 
asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The 
update also expands the required quantitative and qualitative disclosures surrounding leases. This update is 
effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, 
with earlier application permitted. This update will be applied using a modified retrospective transition 
approach for leases existing at, or entered into after, the beginning of the earliest comparative period 

15

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

presented in the financial statements. We are currently evaluating the effect of this update on our consolidated 
financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet 
Classification of Deferred Taxes. The amendments in this update simplify the presentation of deferred income 
taxes and require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of 
financial position. This update applies to all entities that present a classified statement of financial position. 
These amendments may be applied either prospectively to all deferred tax liabilities and assets or 
retrospectively to all periods presented. If the guidance is applied prospectively, disclosure is made in the first 
interim and first annual period of change, the nature of and reason for the change in accounting principle and 
a statement that prior periods were not retrospectively adjusted. If the guidance is applied retrospectively, 
disclosure is made in the first interim and first annual period of change, the nature of and reason for the 
change in accounting principle and quantitative information about the effects of the accounting change on 
prior periods. The amendments are effective for financial statements issued for annual periods beginning after 
December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all 
entities as of the beginning of an interim or annual reporting period. We have decided to early-adopt ASU 
2015-17, which resulted in a retrospective adjustment of amounts disclosed in our consolidated balance sheet 
for the year ended December 31, 2014.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 
606). Upon the effective date, the ASU replaces almost all existing revenue recognition guidance, including 
industry specific guidance, in generally accepted accounting principles. In August 2015, the FASB issued 
ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.  The 
amendments in this update deferred the effective date for implementation of ASU 2014-09 by one year and 
are now effective for annual reporting periods beginning after December 15, 2017. Early application is 
permitted only as of annual reporting periods beginning after December 15, 2016 including interim reporting 
periods within that period.  We are currently assessing the impact that the adoption of this standard will have 
on our consolidated financial statements and related disclosures upon implementation.

2.

ACQUISITION AND RELATED PARTY ITEMS

On February 24, 2013, the Company acquired a 54.6% interest in Cuattro Veterinary USA, LLC  ("Cuattro
Vet  USA")  for  approximately  $7.6  million  in  cash  and  stock,  including  more  than  $4  million  in  cash  (the 
"Acquisition"). Included in the cash consideration was $1 million the Company paid to Cuattro Vet USA in 2012 
which  was  reported  as  part  of  "net  cash  used  in  operating  activities"  on  the  Company's  2012  consolidated 
statements of cash flows.  Immediately following and as a result of the transaction, former Cuattro Vet USA unit 
holders owned approximately 7.2% of the Company's Public Common Stock. The remaining minority position 
(45.4)% in Cuattro Vet USA is subject to purchase by Heska under performance-based puts and calls following 
calendar year 2015, 2016 and 2017. Should Heska undergo a change in control, as defined, prior to the end of 
2017, Cuattro Vet USA minority unit holders will be entitled to sell their Cuattro Vet USA units to Heska.

The Company recorded assets acquired, liabilities assumed and non-controlling interests at their 
estimated fair values. The intangible assets and non-controlling interest were valued based on a report from an 
independent third party. 

16

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following summarizes the aggregate consideration paid by the Company and the allocation of the 

purchase price (in thousands):

Consideration

Cash
Stock

Total

Inventories
Notes from Cuattro Veterinary, LLC, due March 15, 2016
Other tangible assets
Intangible assets
Goodwill
Notes payable and other borrowings
Accounts payable
Other assumed liabilities

Total net assets acquired

Non-controlling interest

Total

$

$

$

$

$

4,073
3,571
7,644

1,466
1,360
1,278
688
19,994
(1,527)
(1,424)
(2,399)
19,436
(11,792)
7,644

Intangible assets acquired, amortization method and estimated useful lives as of February 24, 2013 was 

as follows (in thousands, except useful life):

Trade name

2.75

Straight-line

$

688

Useful Life

Amortization Method

Fair Value

The Company believes goodwill is a function of several factors. Cuattro Vet USA had assembled a 

workforce highly knowledgeable in the veterinary imaging area. These individuals had acquired the training 
necessary to identify opportunities for the Cuattro Vet USA to sell products, including training related to 
which components from existing systems could be utilized within the Cuattro Vet USA's solution to minimize 
the out-of-pocket cost to the customer. Cuattro Vet USA had demonstrated an ability to combine disparate 
assets including but not limited to digital radiography detectors, positioning aides such as tunnels and tables, 
viewing computers and other accessories along with embedded software and support, data hosting and other 
services to provide customers with a simple, efficient and convenient experience in utilizing advanced data 
imaging technology far in excess of what a typical customer could have created individually with similar but 
separately purchased assets and services. The Company anticipated bundling and cross promotion programs, 
including potentially in one customer contract, could enhance the revenue of both the Company and Cuattro 
Vet USA following the Acquisition. The ability of Cuattro Vet USA to generate estimated future cash flows 
due to these factors supports the goodwill calculated at the closing of the Acquisition and the current carrying 
value of the goodwill on the Company's consolidated balance sheets. The Company estimates it had 
approximately $6.9 million in tax deductible goodwill from the Acquisition at the closing of the Acquisition.

Cuattro Vet USA was subsequently renamed Heska Imaging US, LLC ("Heska Imaging") and 

markets, sells and supports digital radiography and ultrasound products along with embedded software and 
support, data hosting and other services.

17

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Shawna M. Wilson, Clint Roth, DVM, Steven M. Asakowicz, Rodney A. Lippincott, Kevin S. Wilson 

and Cuattro, LLC own approximately 29.75%, 8.39%, 4.09%, 3.07%, 0.05% and 0.05% of Heska Imaging, 
respectively. Kevin S. Wilson is the Chief Executive Officer and President of the Company and the spouse of 
Shawna M. Wilson. Steven M. Asakowicz serves as Executive Vice President, Companion Animal Health 
Sales for the Company. Rodney A. Lippincott serves as Executive Vice President, Companion Animal Health 
Sales for the Company. Mr. Wilson, Mrs. Wilson and trusts for their children and family own a 100% interest 
in Cuattro, LLC. Cuattro, LLC owns a 100% interest in Cuattro Software, LLC. Mr. Wilson, Mrs. Wilson and 
trusts for their children and family own a majority interest in Cuattro Veterinary, LLC and Cuattro Medical, 
LLC.

In 2013, following the Acquisition closing, Cuattro, LLC charged Heska Imaging $6.8 million, 
primarily related to digital imaging products, for which there is an underlying supply contract with minimum 
purchase obligations, software and services as well as other operating expenses; Heska Corporation charged 
Heska Imaging $2.2 million, primarily related to sales expenses; Heska Corporation net charged Cuattro, LLC 
$140 thousand, primarily related to facility usage and other services. In 2014, Cuattro, LLC charged Heska 
Imaging $10.5 million, primarily related to digital imaging products, for which there is an underlying supply 
contract with minimum purchase obligations, software and services as well as other operating expenses;  
Heska Corporation charged Heska Imaging $3.9 million, primarily related to sales expenses; Heska 
Corporation net charged Cuattro, LLC $0.2 million, primarily related to facility usage and other services. In 
2015, Cuattro, LLC charged Heska Imaging $9.0 million, primarily related to digital imaging products, for 
which there is an underlying supply contract with minimum purchase obligations, software and services as 
well as other operating expenses; Heska Corporation charged Heska Imaging $4.9 million, primarily related 
to sales expenses; Heska Corporation charged Cuattro, LLC $0.2 million, primarily related to facility usage 
and other services.

At December 31, 2015, Heska Imaging had a $1.5 million note receivable, including accrued interest, 

from Cuattro Veterinary, LLC, which was due on March 15, 2016 and which is listed as "Note receivable - 
related party" on the Company's consolidated balance sheets.  We currently do not anticipate collecting this 
note in 2016 due to our pending acquisition of Cuattro Veterinary, LLC. Heska Corporation had net accounts 
receivable from Cuattro, LLC of $40 thousand which is included in "Due from - related parties" on the 
Company's consolidated balance sheets; Heska Imaging had net prepaid receivables from Cuattro, LLC of 
$0.3 million which is included in "Due to - related party" on the Company's consolidated balance sheets; 
Heska Corporation had accounts receivable from Heska Imaging of $6.3 million, including accrued interest, 
which eliminated in consolidation of the Company's financial statements; all monies owed accrue interest at 
the same interest rate Heska Corporation pays under its credit and security agreement with Wells Fargo Bank, 
National Association ("Wells Fargo") once past due with the exception of the note receivable, which accrues 
at this rate to its maturity date.

The aggregate position in Heska Imaging of the unit holders who hold the 45.4% of Heska Imaging 
that Heska Corporation does not own (the "Put Value") is being accreted to its estimated redemption value in 
accordance with Heska Imaging's Operating Agreement. Since the Operating Agreement contains certain put 
rights that are out of the control of the Company, authoritative guidance requires the non-controlling interest, 
which includes the estimated value of such put rights, to be displayed outside of the equity section of the 
consolidated balance sheets. The adjustment to increase or decrease the Put Value to its expected redemption 
value and to estimate any distributions required under Heska Imaging's Operating Agreement to the unit 
holders who hold the 45.4% of Heska Imaging that Heska Corporation does not own (the "Imaging Minority") 
each reporting period is recorded to stockholders' equity in accordance with United States Generally Accepted 
Accounting Principles.

18

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following is a reconciliation of the non-controlling interest balance (in thousands):

Beginning December 31, 2014
Accretion of Put Value
Balance December 31, 2015

$

$

15,679
68
15,747

In addition, Heska Imaging made a distribution of approximately $2 thousand during the twelve 

months ended December 31, 2014, approximately $1 thousand of which was to the Imaging Minority and 
which has been recorded on the "Proceeds from issuance of common stock, net of distributions" line item of 
the Company's consolidated statements of cash flows.

The following unaudited pro forma financial information presents the combined results of the 

Company and Heska Imaging for the full year ended December 31, 2013 as if the acquisition had closed on 
January 1, 2013 (in thousands, except per share data):

Revenue, net

Net loss attributable to Heska Corporation

Basic loss per share attributable to Heska Corporation

Diluted loss per share attributable to Heska Corporation

3.

INCOME TAXES

Year Ended
December 31,

2013

$

79,239
(1,948)
(0.34)
(0.34)

As of December 31, 2015, the Company had a domestic net operating loss carryforward ("NOL"), of

approximately $104.8 million, a domestic alternative minimum tax credit of approximately $0.4 million and a 
domestic research and development tax credit carryforward of approximately $0.4 million for federal tax 
purposes. The Company's federal NOL is expected to expire as follows if unused: $98.8 million in 2018 
through 2022, $5.5 million in 2024 and 2025 and $0.5 million in 2027 and later. The NOL and tax credit 
carryforwards are subject to alternative minimum tax limitations and to examination by the tax authorities. In 
addition, the Company had a "change of ownership" as defined under the provisions of Section 382 of the 
Internal Revenue Code of 1986, as amended (an "Ownership Change").

The Company does not believe this Ownership Change will place a significant restriction on its 
ability to utilize its NOL in the future. The Company has established a valuation allowance against those 
NOL's for which it is estimated to be more likely than not that they will expire unutilized.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various foreign, state and 

local jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax 
laws and regulations and require significant judgment to apply.  Cash paid for income taxes for the twelve 
months ended December 31, 2013, 2014 and 2015 was $84 thousand, $272 thousand and $55 thousand, 
respectively.

19

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The components of income (loss) before income taxes were as follows (in thousands):

Year Ended December 31,
2014

2015

2013

Domestic
Foreign

$

$

(1,508) $
115
(1,393) $

2,837
113
2,950

$

$

8,325
102
8,427

Temporary differences that give rise to the components of net deferred tax assets are as follows (in 

thousands):

Inventory
Accrued compensation

Stock Options

Research and development

Alternative minimum tax credit

Deferred revenue

Property and equipment

Net operating loss carryforwards – domestic

Capital Lease

Other

Valuation allowance

Total net deferred tax assets

December 31,

2014

2015

$

$

643
124

57

472

308

4,396

1,777

40,277

—
(131)
47,923
(20,713)
27,210

$

$

954
267

344

440

367

3,638

1,967

37,845
(384)
(8)
45,430
(19,547)
25,883

The components of the income tax expense (benefit) are as follows (in thousands):

Year Ended December 31,
2014

2013

2015

Current income tax expense:

Federal
State
Foreign

Total current expense
Deferred income tax expense (benefit):

Federal
State
Foreign

Total deferred expense (benefit)

Total income tax expense (benefit)

$

$

$

95
62
26
183

(583)
(54)
—
(637)
(454) $

11
7
29
47

1,181
123
—
1,304
1,351

$

$

1,492
65
24
1,581

1,043
284
—
1,327
2,908

20

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company's income tax expense (benefit) relating to income (loss) for the periods presented 

differs from the amounts that would result from applying the federal statutory rate to that income (loss) as 
follows:

Statutory federal tax rate

State income taxes, net of federal benefit

Non-controlling interest in Heska Imaging US, LLC

Other permanent differences

Change in tax rate

Foreign rate difference

Change in valuation allowance

Other

Effective income tax rate

Year Ended December 31,

2013

2014

2015

34 %

3 %

6 %

(10)%

— %

(1)%

(13)%

13 %

32 %

34 %

5 %

12 %

(3)%

2 %

— %

78 %

(82)%

46 %

34 %

3 %

(1)%

(1)%

(1)%

— %

(14)%

15 %

35 %

ASC 740 provides detailed guidance for the financial statement recognition, measurement and 
disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a "more-
likely-than-not" recognition threshold before a benefit is recognized in the financial statements. As of 
December 31, 2015, the Company has not recorded a liability for uncertain tax positions. The Company 
would recognize interest and penalties related to uncertain tax positions in income tax expense (benefit). No 
interest and penalties related to uncertain tax positions were accrued at December 31, 2015.

4.

EARNINGS PER SHARE

Basic earnings per share ("EPS") is computed by dividing net income attributable to Heska
Corporation 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 (stock options and restricted stock units 
but excluding options to purchase fractional shares resulting from the Company's December 2010 1-for-10 
reverse stock split) had been converted to common shares, and if such assumed conversion is dilutive.

The following is a reconciliation of the weighted-average shares outstanding used in the calculation 

of basic and diluted earnings per share for the years ended December 31, 2013, 2014, and 2015 (in thousands, 
except per share data):

Years ended December 31,

2013

2014

2015

Net income (loss) attributable to Heska Corporation

$

(1,196) $

2,603

$

5,239

Basic weighted-average common shares outstanding

Assumed exercise of dilutive stock options and restricted stock units

Diluted weighted-average common shares outstanding

5,755

—

5,755

5,951

458

6,409

Basic earnings (loss) per share

Diluted earnings (loss) per share

$

$

(0.21) $
(0.21) $

0.44

0.41

$

$

6,509

565

7,074

0.80

0.74

21

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following stock options and restricted units were excluded from the computation of diluted 

earnings per share because they would have been anti-dilutive (in thousands):

Stock options

5.

GOODWILL AND OTHER INTANGIBLES

Years ended December 31,

2013

2014

2015

1,103

367

144

The Company's recorded goodwill relates to the February 2013 acquisition of a majority interest in

Cuattro Veterinary USA, LLC, which was subsequently renamed Heska Imaging US, LLC and the 1997 
acquisition of Heska AG, the Company's Swiss subsidiary. 

The following summarizes the changes in goodwill during the years ended December 31, 2014 and 

2015 (in thousands):

Carrying amount, beginning of period

Adjustments due to foreign currency fluctuations

Carrying amount, end of period

Year Ended December 31,

2014

2015

$

$

21,009
(106)
20,903

$

$

20,903

7

20,910

Other intangibles consisted of the following as of December 31, 2014 and 2015 (in thousands):

Gross carrying amount

Accumulated amortization

Net carrying amount

Year Ended December 31,

2014

2015

$

$

788
(486)
302

$

$

788
(732)
56

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

Amortization expense

Years Ended December 31,

2013

2014

2015

$

226

$

260

$

246

Estimated amortization expense related to intangibles for each of the five years from 2016 through 

2020 and thereafter is as follows (in thousands):

Year Ending December 31,

2016

2017

2018

2019

2020

Thereafter

$

$

10

10

10

10

10

6

56

22

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

6.

PROPERTY AND EQUIPMENT

Detail of property and equipment is as follows (in thousands):

Land
Building
Machinery and equipment
Leasehold and building improvements
Construction in progress

Less accumulated depreciation and amortization

Total property and equipment, net

December 31,

2014

2015

377
2,868
30,655
5,871
185
39,956
(26,546)
13,410

$

$

377
2,868
35,284
6,673
1,496
46,698
(29,678)
17,020

$

$

The Company has utilized marketing programs whereby its instruments in inventory may be placed in 

a customer's location on a rental basis. The cost of these instruments is transferred to machinery and 
equipment or other long-term assets and depreciated, typically over a five to seven year period depending on 
the circumstance under which the instrument is placed with the customer. During 2013, 2014 and 2015, total 
costs transferred from inventory were approximately $4.0 million, $4.6 million and $4.1 million respectively.

The Company has sold certain customer rental contracts and underlying assets to a third party under 
the agreement that once the customer has met the customer obligations under the contract, ownership of the 
assets underlying the contract would be returned to the Company. The Company enters a debit to cash and a 
corresponding credit to deferred revenue at the time of these sales. These sales provided $1.8 million and $0.1 
million of cash which was reported in the "deferred revenue and other" line item of the Company's 
consolidated statements of cash flows in 2014 and 2015, respectively, all related to the Company's 54.6%-
owned subsidiary, Heska Imaging US, LLC. As the Company anticipates it will regain ownership of the assets 
underlying these sales, it reports these assets as part of property and equipment and depreciates these assets 
per its depreciation policies. The Company had $3.0 million and $2.2 million of net property and equipment 
related to these transactions as of December 31, 2014 and December 31, 2015, respectively, all related to the 
Company's 54.6%-owned subsidiary, Heska Imaging US, LLC.

Depreciation and amortization expense for property and equipment was $2.3 million, $3.4 million and 

$4.0 million for the years ended December 31, 2013, 2014 and 2015, respectively.

The Company capitalizes third-party software costs, where appropriate, and reports such costs, net of 

accumulated amortization, on the "property and equipment, net" line of its consolidated balance sheets. We 
had $0.6 million and $0.4 million of such capitalized costs, net of accumulated amortization, on the "property 
and equipment, net" line of our consolidated balance sheets as of December 31, 2014 and December 31, 2015, 
respectively. Capitalized software costs in a given year are reported on the "purchases of property and 
equipment" line item of the Company's consolidated statements of cash flows. We had $809 thousand, $31 
thousand and $51 thousand of capitalized software costs reported on the "purchases of property and 
equipment" line item of our consolidated statements of cash flows for the years ended December 31, 2013, 
2014 and 2015, respectively.

23

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

7.

ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of December 31, 2014 and 2015 (in thousands):

Accrued payroll and employee benefits
Accrued property taxes
Other
Total accrued liabilities

2014

2015

$

$

1,322
593
3,215
5,130

$

$

1,626
594
3,196
5,416

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

8.

CAPITAL STOCK

Stock Option Plans

We have two stock option plans which authorize granting of stock options and stock purchase rights 
to our employees, officers, directors and consultants to purchase shares of common stock. In 1997, the board 
of directors adopted the 1997 Stock Incentive Plan (the "1997 Plan") and terminated two prior option plans. 
All shares that remained available for grant under the terminated plans were incorporated into the 1997 Plan, 
including shares subsequently canceled under prior plans. In May 2012, the stockholders approved an 
amendment to the 1997 Plan allowing for an increase of 250,000 shares and an annual increase through 2016 
based on the number of non-employee directors serving as of our Annual Meeting of Stockholders, subject to 
a maximum of 45,000 shares per year. In May 2003, the stockholders approved a new plan, the 2003 Equity 
Incentive Plan, which allows for the granting of options for up to 239,050 shares of the Company's common 
stock. The number of shares reserved for issuance under both plans as of December 31, 2015 was 41,440.  

The stock options granted by the board of directors may be either incentive stock options ("ISOs") or 
non-qualified stock options ("NQs"). The exercise price for options under all of the plans may be no less than 
100% of the fair value of the underlying common stock for ISOs or 85% of fair value for NQs. Options 
granted will expire no later than the tenth anniversary subsequent to the date of grant or three months 
following termination of employment, except in cases of death or disability, in which case the options will 
remain exercisable for up to twelve months. Under the terms of the 1997 Plan, in the event we are sold or 
merged, outstanding options will either be assumed by the surviving corporation or vest immediately.

There are four key inputs to the Black-Scholes model which we use to estimate the fair value for 

options which it issues: expected term, expected volatility, risk-free interest rate and expected dividends, all of 
which require us to make estimates. Our estimates for these inputs may not be indicative of actual future 
performance and changes to any of these inputs can have a material impact on the resulting estimated fair 
value calculated for the option. Our expected term input was estimated based on our historical experience for 
time from option grant to option exercise for all employees in 2013, 2014 and 2015; We treated all employees 
in one grouping in all three years. Our expected volatility input was estimated based on our historical stock 
price volatility in 2013, 2014 and 2015. Our risk-free interest rate input was determined based on the U.S. 
Treasury yield curve at the time of option issuance in 2013, 2014 and 2015. Our expected dividends input 
were zero in all periods as we did not anticipate paying dividends in the foreseeable future. 

24

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 Weighted average assumptions used in 2013, 2014 and 2015 for each of these four key inputs are 

listed in the following table:

Risk-free interest rate
Expected lives
Expected volatility
Expected dividend yield

2013
0.75%
3.4 years
46%
0%

2014
1.21%
3.4 years
43%
0%

2015
1.41%
3.4 years
41%
0%

A summary of our stock option plans, excluding options to purchase fractional shares resulting from 

our December 2010 1-for-10 reverse stock split, is as follows

Year Ended December 31,

2013

2014

2015

Weighted 
Average 
Exercise 
Price

Options

Weighted 
Average 
Exercise 
Price

Options

Weighted 
Average 
Exercise 
Price

Options

Outstanding at beginning of period

1,245,161

$ 11.054

1,321,232

$ 10.386

1,074,251

$ 10.110

Granted at Market

Canceled

Exercised

275,654

$

7.532

(166,286) $ 11.437

(33,297) $

6.488

Outstanding at end of period

1,321,232

$ 10.386

$ 16.398
134,800
(218,926) $ 17.786
(162,855) $
7.234
1,074,251

$ 10.110

$ 36.904
146,446
(28,440) $ 10.080
(251,647) $ 10.559
$ 14.163
940,610

Exercisable at end of period

939,458

$ 11.556

729,175

$

9.800

621,559

$ 10.269

The total estimated fair value of stock options granted during the years ended December 31, 2013, 

2014 and 2015 were computed to be approximately $0.7 million, $0.7 million and $1.6 million, respectively. 
The amounts are amortized ratably over the vesting periods of the options. The weighted average estimated 
fair value of options granted during the years ended December 31, 2013, 2014 and 2015 was computed to be 
approximately $2.54, $5.28 and $11.35, respectively. The total intrinsic value of options exercised during the 
years ended December 31, 2013, 2014 and 2015 was $42 thousand, $0.7 million and $4.7 million, 
respectively. The cash proceeds from options exercised during the years ended December 31, 2013, 2014 and 
2015 was $0.2 million, $1.2 million and $1.8 million.

The following table summarizes information about stock options outstanding and exercisable at 

December 31, 2015, excluding outstanding options to purchase an aggregate of 6.0 fractional shares resulting 
from our December 2010 1-for-10 reverse stock split with a weighted average remaining contractual life of 
0.85 years, a weighted average exercise price of $16.77 and exercise prices ranging from $11.00 to $22.50. 
We intend to issue whole shares only from option exercises. The following table includes 109,500 shares 
underlying options issued in December 2015 with a strike price of $39.76 and expiration date of December 
28, 2025 which will only vest and become exercisable if our stockholders approve an increase in the total 
number of authorized shares of our Public Common Stock to at least 8.5 million shares on or before 
December 31, 2022.

25

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Options Outstanding

Options Exercisable

Number of
Options
Outstanding
at
December 31,
2015

Weighted
Average
Remaining
Contractual
Life in Years

Weighted
Average
Exercise
Price

Number of
Options
Exercisable
at
December 31,
2015

Weighted
Average
Exercise
Price

225,302

188,524

168,496

205,826

152,462

940,610

4.90

7.87

6.76

5.42

9.51

6.69

$

$

$

$

$

$

5.600

7.384

9.079

17.483

36.336

14.163

222,671

96,689

136,800

132,229

33,170

621,559

$

$

$

$

$

$

5.593

7.383

9.178

17.206

26.916

10.269

Exercise Prices

$  4.40 - $  6.90

$  6.91 - $  8.26

$  8.27 - $11.65

$11.66 - $18.30

$18.31 - $39.76

$  4.40 - $39.76

As of December 31, 2015, there was $2.2 million of total unrecognized compensation expense related 

to outstanding stock options. That cost is expected to be recognized over a weighted-average period of 1.9 
years with all cost to be recognized by the end of December 2018, assuming all options vest according to the 
vesting schedules in place at December 31, 2015. As of December 31, 2015, the aggregate intrinsic value of 
outstanding options was $23.2 million and the aggregate intrinsic value of exercisable options was $17.7 
million.

Employee Stock Purchase Plan (the "ESPP")

Under the 1997 Employee Stock Purchase Plan, we are authorized to issue up to 450,000 shares of 
common stock to our employees, of which 389,563 had been issued as of December 31, 2015.  On May 5, 
2015, our shareholders approved the amendment and restatement of the ESPP, including a 75,000 share 
increase to 450,000 total shares authorized under the ESPP as well as changes discussed below as compared 
to the ESPP prior to the amendment and restatement.  Employees who are expected to work at least 20 hours 
per week and five months per year are eligible to participate and can choose to have up to 10% of their 
compensation withheld to purchase our stock under the ESPP when they choose to withhold a whole 
percentage of their compensation. 

During the period from January 1, 2013 to June 30, 2013, our ESPP had a five-year offering period 
and six-month accumulation periods ending on each June 30 and December 31. The purchase price of stock 
on June 30 and December 31 was 85% of the fair market value at purchase.

Beginning on July 1, 2013, our ESPP had a 27-month offering period and three-month accumulation 
periods ending on each March 31, June 30, September 30 and December 31. The purchase price of stock on 
March 31, June 30, September 30 and December 31 was the lesser of (1) 85% of the fair market value at the 
time of purchase and (2) the greater of (i) 95% of the fair market value at the beginning of the applicable 
offering period or (ii) 65% of the fair market value at the time of purchase. In addition, participating 
employees may purchase shares under the ESPP at the beginning of an applicable offering period for a 
purchase price of stock equal to 95% of the fair market value at such time or at 5 pm on a day other than 
March 31, June 30, September 30 and December 31 during the applicable offering period for a purchase price 
of stock equal to 95% of the fair market value at purchase.

Beginning April 1, 2015, employees may elect to withhold a positive fixed amount from each 

compensation payment in addition to the previous approach of withholding a whole percentage of such 
compensation payment, with all withholding for a given employee subject to a maximum monthly amount of 
$2,500 following the amendment and restatement as opposed to a $25,000 maximum annual amount prior to 

26

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

the amendment and restatement.  For offering periods beginning on or after April 1, 2015, the purchase price 
of stock on March 31, June 30, September 30 and December 31 is to be the lesser of (1) 85% of the fair 
market value at the time of purchase and (2) the greater of (i) 85% of the fair market value at the beginning of 
the applicable offering period, (ii) the fair market value at the beginning of the applicable offering period less 
1 cent and (iii) 65% of the fair market value at the time of purchase.  In addition, participating employees may 
elect to purchase shares under the ESPP at the beginning of an applicable offering period for a purchase price 
of stock equal to the greater of (1) 85% of the fair market value at the beginning of the applicable offering 
period and (2) the fair market value at the beginning of the applicable offering period less 1 cent or at 5 pm on 
a day other than March 31, June 30, September 30 and December 31 during the applicable offering period for 
a purchase price of stock equal to the greater of (1) 85% of the fair market value at the time of purchase and 
(2) the fair market value at the time of purchase less 1 cent.

For the years ended December 31, 2013, 2014 and 2015, we issued 27,714, 29,847, and 16,673 shares 

under the ESPP, respectively.

Since July 1, 2013, we estimated the fair values of stock purchase rights granted under the ESPP 

using the Black-Scholes pricing model and the following weighted average assumptions:

Risk-free interest rate
Expected lives
Expected volatility
Expected dividend yield

2013
0.21%
1.3 years
34%
0%

2014
0.23%
1.3 years
34%
0%

2015
0.27%
1.2 years
36%
0%

For the years ended December 31, 2013, 2014 and 2015, the weighted-average fair value of the 

purchase rights granted was $1.28, $2.61 and $6.25 per share, respectively.

Restricted Stock Issuance

On March 26, 2014, we issued 63,572 shares to Robert B. Grieve, Ph.D., who was our Executive 

Chair, pursuant to an employment agreement between Dr. Grieve and the Company effective as of March 26, 
2014 (the "Grieve Employment Agreement"). The shares were issued in five tranches and are subject to time-
based vesting and other provisions outlined in the Grieve Employment Agreement. All shares were to vest in 
full as of April 30, 2017. Effective on October 1, 2015, the Grieve Employment Agreement was terminated 
and, in connection therewith, the Company entered into a Separation and Release Agreement dated as of 
October 1, 2015 (the "Release Agreement") with Dr. Grieve.  Pursuant to the Release Agreement, the 
Company agreed to treat the termination of the Grieve Employment Agreement as a termination without 
cause, entitling Dr. Grieve to the immediate vesting of 55,715 shares, 14,373 of which were withheld for tax 
purposes.  As a result of the termination of the Grieve Employment Agreement, and as acknowledged in the 
Release Agreement, effective October 1, 2015, Dr. Grieve began serving as a consultant to the Company 
pursuant to the Consulting Agreement (Founder Emeritus) dated as of March 26, 2014 (the "Consulting 
Agreement").  The remaining 7,857 shares issued to Dr. Grieve on March 26, 2014 are scheduled to vest on 
April 30, 2016 if the Consulting Agreement remains in effect through April 30, 2016.

On March 26, 2014, we issued 110,000 shares to Mr. Wilson pursuant to an employment agreement 

between Mr. Wilson and the Company effective as of March 26, 2014 (the "Wilson Employment 
Agreement"). The shares were issued in four equal tranches and are subject to time-based vesting and other 
provisions outlined in the Wilson Employment Agreement. The first tranche vested on September 26, 2014, 
and each of the three remaining tranches is to vest on the succeeding March 26 until all shares are vested in 
full as of March 26, 2017. On May 6, 2014, we issued an additional 130,000 shares to Mr. Wilson following a 

27

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

vote of approval on the issuance by our stockholders. The shares were issued in ten equal tranches, five of 
which were subject to vesting based on the achievement of certain stock price targets as defined and further 
described in the Wilson Employment Agreement and five of which were subject to vesting based on certain 
"Adjusted EBITDA" targets as defined and further described in the Wilson Employment Agreement. All 
shares subject to vesting based on "Adjusted EBITDA" vested based on our 2014 performance. Of the five 
tranches based on the achievement of certain stock price targets, one vested in 2014 and the remaining four 
vested in 2015.

On March 17, 2015, the Company issued unvested shares to certain Executive Officers related to 

performance-based restricted stock grants (the "Performance Grants") and performance-based restricted stock 
grants related to the Company's 2015 Management Incentive Plan (the "MIP Grants").  The Performance 
Grants are to cliff vest three years following issuance, subject to the Company's achieving $7 million in 
Operating Cash Flow, as defined in the underlying restricted stock grant agreement, in at least one of 2015, 
2016 or 2017, and other vesting provisions in the underlying restricted stock grant agreement.  The MIP 
Grants are to vest on the date MIP Payouts are to be made under the 2015 Management Incentive Plan and are 
subject to the Company's achievement of certain financial goals and other vesting provisions in the underlying 
restricted stock grant agreement.  The Company issued 52,956 shares under Performance Grants and 24,649 
shares under MIP Grants on March 17, 2015.

Restrictions on the transfer of Company stock

The Company's Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), 

places restrictions (the "Transfer Restrictions") on the transfer of the Company's stock that could adversely 
affect the Company's ability to utilize its domestic Federal Net Operating Loss Position. In particular, the 
Transfer Restrictions prevent the transfer of shares without the approval of the Company's Board of Directors 
if, as a consequence of such transfer, an individual, entity or groups of individuals or entities would become a 
5-percent holder under Section 382 of the Internal Revenue Code of 1986, as amended, and the related
Treasury regulations, and also prevents any existing 5-percent holder from increasing his or her ownership
position in the Company without the approval of the Company's Board of Directors. Any transfer of shares in
violation of the Transfer Restrictions (a "Transfer Violation") shall be void ab initio under the Certificate of
Incorporation, and the Company's Board of Directors has procedures under the Certificate of Incorporation to
remedy a Transfer Violation including requiring the shares causing such Transfer Violation to be sold and any
profit resulting from such sale to be transferred to a charitable entity chosen by the Company's Board of
Directors in specified circumstances.

9.

ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income consisted of the following (in thousands):

Balances at December 31, 2014

Current period other comprehensive income (loss)

Balances at December 31, 2015

Minimum
pension
liability

Foreign
currency
translation

$

$

(447) $
(129)
(576) $

684
(11)
673

Unrealized
gains (losses)
on available
for sale
investments
46
$

44

90

$

Total
accumulated
other
comprehensive
income

$

$

283
(96)
187

28

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

10.

COMMITMENTS AND CONTINGENCIES

The Company holds certain rights to market and manufacture all products developed or created under

certain research, development and licensing agreements with various entities. In connection with such 
agreements, the Company has agreed to pay the entities royalties on net product sales. In each of the years 
ended December 31, 2013, 2014 and 2015, royalties of $0.4 million became payable under these agreements.

The Company has contracts with suppliers for unconditional annual minimum inventory purchases 
and milestone obligations to third parties the Company believes are likely to be triggered currently totaling 
approximately $0.4 million for fiscal 2016.

The Company has entered into operating leases for its office and research facilities and certain 

equipment with future minimum payments as of December 31, 2015 as follows (in thousands):

Year Ending December 31,

2016
2017
2018
2019
2020
Thereafter

$

$

1,956
1,893
1,640
1,546
1,541
4,581
13,157

The Company had rent expense of $1.8 million, $1.9 million and $2.0 million in 2013, 2014 and 2015 

respectively.

From time to time, the Company may be involved in litigation relating to claims arising out of its 

operations. On March 12, 2015, a complaint was filed against us by Shaun Fauley in the United States District 
Court Northern District of Illinois alleging our transmittal of unauthorized faxes in violation of the federal 
Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005, as a class 
action seeking stated damages of the greater of actual monetary loss or five hundred dollars per violation. We 
intend to defend ourselves vigorously in this matter. At December 31, 2015, the Company was not a party to 
any other legal proceedings that were expected, individually or in the aggregate, to have a material adverse 
effect on our business, financial condition or operating results.

The Company's current terms and conditions of sale include a limited warranty that its products and 

services will conform to published specifications at the time of shipment and a more extensive warranty 
related to certain of its products. The Company also sells a renewal warranty for certain of its products. The 
typical remedy for breach of warranty is to correct or replace any defective product, and if not possible or 
practical, the Company will accept the return of the defective product and refund the amount paid. 
Historically, the Company has incurred minimal warranty costs. The Company's warranty reserve on 
December 31, 2015 was $0.4 million.

29

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

11.

INTEREST AND OTHER EXPENSE (INCOME)

Interest and other expense (income) consisted of the following (in thousands):

Interest income

Interest expense

Other, net

Year Ended December 31,

2013

2014

2015

$

$

(127) $
74

16
(37) $

(190) $
206
(55)
(39) $

(172)
200

102

130

Cash paid for interest for the twelve months ended December 31, 2013, 2014 and 2015 was $78 

thousand, $92 thousand $90 thousand, respectively.

12.

CREDIT FACILITY AND LONG-TERM DEBT

At December 31, 2015, we had a $15.0 million asset-based revolving line of credit with Wells Fargo

which has a maturity date of December 31, 2017 as part of our credit and security agreement with Wells 
Fargo. At December 31, 2015, we had $143 thousand of borrowings outstanding on this line of credit. Our 
ability to borrow under this line of credit varies based upon available cash, eligible accounts receivable and 
eligible inventory. On December 31, 2015, any interest on borrowings due was to be charged at a stated rate 
of three month LIBOR plus 2.25% and payable monthly.  There is an annual minimum interest charge of $75 
thousand under the agreement. We are required to comply with various financial and non-financial covenants, 
and we have made various representations and warranties under our agreement with Wells Fargo. A key 
financial covenant is based on a fixed charge coverage ratio, as defined in our agreement with Wells Fargo. 
We were in compliance with all financial covenants as of December 31, 2015 and our available borrowing 
capacity based upon eligible accounts receivable and eligible inventory under our revolving line of credit was 
approximately $11.2 million.

Long-term debt consists of the following (in thousands):  

December 31,

2014

2015

Term loan with a financial entity due in monthly installments beginning July
2012 with the balance paid in full in June 2017 and a stated interest rate of
6.0%.
Less current portion of long-term debt
Long-term debt, net of current portion

$

$

368

$

141
227 $

Maturities of long-term debt as of December 31, 2015 were as follows (in thousands):

Year Ending December 31,
2016
2017
2018

$

$

228

159
69

159
69
—
228

30

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

13.

SEGMENT REPORTING

The Company is comprised of two reportable segments, Core Companion Animal Health ("CCA")
and Other Vaccines, Pharmaceuticals and Products ("OVP"). The Core Companion Animal Health segment 
includes diagnostic instruments and supplies, as well as single use diagnostic and other tests, pharmaceuticals 
and vaccines, primarily for canine and feline use. The CCA segment also includes digital radiography and 
ultrasound products along with embedded software and support, data hosting and other services from Heska 
Imaging after February 24, 2013. These products are sold directly by the Company as well as through 
independent third-party distributors and through other distribution relationships. CCA segment products 
manufactured at the Des Moines, Iowa production facility included in the OVP segment's assets are 
transferred at cost and are not recorded as revenue for the OVP segment. The Other Vaccines, 
Pharmaceuticals and Products segment includes private label vaccine and pharmaceutical production, 
primarily for cattle, but also for other animals including small mammals. All OVP products are sold by third 
parties under third-party labels.

31

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Summarized financial information concerning the Company's reportable segments is shown in the 

following table (in thousands):

Year Ended December 31, 2013

Total revenue

Operating Income (loss)

Income (loss) before income taxes

Total assets

Net assets

Capital expenditures

Depreciation and amortization

Year Ended December 31, 2014

Total revenue

Operating Income

Income before income taxes

Total assets

Net assets

Capital expenditures

Depreciation and amortization

Year Ended December 31, 2015

Total revenue

Operating Income

Income before income taxes

Total assets

Net assets

Capital expenditures

Depreciation and amortization

Core
Companion
Animal Health

Other Vaccines,
Pharmaceuticals
and Products

Total

$

66,404
(2,295)
(2,229)
81,041

36,933

512

1,691

$

11,935

$

865

836

12,512

10,183

1,418

806

78,339
(1,430)
(1,393)
93,553

47,116

1,930

2,497

Core
Companion
Animal Health

Other Vaccines, 
Pharmaceuticals 
and Products

Total

$

72,354

$

17,483

$

89,837

1,198

1,290

85,361

41,286

1,864

2,954

1,713

1,660

11,483

11,846

473

758

2,911

2,950

96,844

53,132

2,337

3,712

Core
Companion
Animal Health

Other Vaccines, 
Pharmaceuticals 
and Products

Total

$

84,249

$

20,348

$

104,597

4,911

4,836

92,567

48,175

1,177

3,478

3,646

3,591

17,152

15,353

2,596

709

8,557

8,427

109,719

63,528

3,773

4,187

32

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Revenue is attributed to individual countries based on customer location.  Total revenue by principal 

geographic area was as follows (in thousands):

United States
Europe
Other International
Total

For the Years Ended December 31,
2014

2015

2013

$

$

71,713
2,738
3,888
78,339

$

$

83,584
2,264
3,989
89,837

$

$

97,164
2,086
5,347
104,597

Total assets by principal geographic areas were as follows (in thousands):

United States
Europe
Other International
Total

For the Years Ended December 31,
2014

2015

2013

$

$

90,572
2,981
—
93,553

$

$

93,977
2,867
—
96,844

$

$

106,780
2,939
—
109,719

14.

QUARTERLY FINANCIAL INFORMATION (unaudited)

The following summarizes selected quarterly financial information for each of the two years in the

periods ended December 31, 2014 and 2015 (amounts in thousands, except per share data).

Q1

Q2

Q3

Q4

Total

Total revenue
Gross profit
Operating income (loss)
Net income (loss)
Net income attributable to Heska
Corporation
Basic earnings per share attributable to Heska 
Corporation

Diluted earnings per share attributable to Heska 
Corporation

$ 20,793
8,279
(101)
(273)

$ 22,916
9,077
917
778

$ 21,805
8,317
341
15

$ 24,323
10,042
1,754
1,079

$

192

1,069

0.03

0.03

0.18

0.17

513

0.09

0.08

829

0.14

0.13

89,837
35,715
2,911
1,599

2,603

0.44

0.41

2014

2015

Total revenue
Gross profit
Operating income
Net income
Net income attributable to Heska Corporation
Basic earnings per share attributable to Heska 
Corporation
Diluted earnings per share attributable to Heska 
Corporation

$ 22,894
10,084
1,021
583
598

$ 23,910
10,297
1,829
1,178
1,197

$ 28,034
11,597
2,142
1,383
1,415

$ 29,759
12,235
3,565
2,375
2,029

$ 104,597
44,213
8,557
5,519
5,239

0.10

0.09

0.19

0.17

0.22

0.20

0.29

0.28

0.80

0.74

33

HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

15.

SUBSEQUENT EVENTS

On November 11, 2015, the Company entered into a Unit Purchase Agreement (the "International

Agreement") with Cuattro Veterinary, LLC ("Cuattro International"), Kevin S. Wilson and all of the Cuattro 
International members (the "Members").  Cuattro International sells the same digital radiography solutions 
outside the United States that Heska Imaging sells in the United States.  Under the terms of the International 
Agreement, the Company agreed to deliver $6.0 million in stock, subject to a minimum of 175,000 shares and 
a maximum of 200,000 shares, in exchange for 100% ownership of Cuattro International.  In addition, the 
Company also agreed to issue additional shares of common stock to the Members (the "Contingent Shares") 
in the event that any of the liabilities or obligations of Cuattro International that have been fully reserved as 
uncollectible (the "Reserved Assets") from affiliates of Cuattro International, Mr. Wilson and the Members are 
recovered by the Company or Cuattro International.  Additionally, the Company will assume approximately 
$2.1 million in debt as part of the International Agreement.  The acquisition was expected to close on or about 
January 1, 2016 subject to certain closing conditions, including the affirmative vote of the Company's 
stockholders to increase by 1,000,000 shares each the authorized shares of both classes of the Company's 
Common Stock Securities, as defined in the Company's Restated Certificate of Incorporation, as amended.  
On December 16, 2015, the Company entered into a First Amendment to Unit Purchase Agreement, dated 
effective as of December 1, 2015 (the "First International Amendment"), with Cuattro International, Kevin S. 
Wilson and all of the Members. The First International Amendment extended to February 29, 2016 from 
December 31, 2015 the earliest date upon which the parties may terminate the International Agreement for the 
failure of a closing condition under the International Agreement to be satisfied. The Amendment also capped 
Contingent Shares at 100,000.

On March 14, 2016, the Company, Cuattro International, Kevin S. Wilson and the Members 
terminated the International Agreement and superseded the International Agreement with an agreement and 
plan of merger by and among the Company, the Company’s wholly-owned subsidiary, Cuattro International 
Merger Subsidiary Inc., a Delaware corporation ("Merger Sub"), Cuattro International and the Members (the 
"New Agreement") and Heska Imaging extended the due date on the $1.5 million note receivable, including 
accrued interest, from Cuattro Veterinary, LLC which is listed as "Note receivable - related party" on the 
Company's consolidated balance sheets from March 15, 2016 to June 15, 2016.  All parties involved intend 
that the transactions contemplated by the New Agreement be treated as a transaction that qualifies as a 
"reorganization" within the meaning of Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as 
amended (the "Code"), and the New Agreement is intended to be, and is adopted as, a plan of reorganization 
for purposes of Sections 354 and 361 of the Code and within the meaning of Treasury regulation section 

 The New Agreement eliminated the use of Contingent Shares in the event any of the Reserved 

Assets are recovered by the Company or Cuattro International; in such a circumstance, the Members would be 
paid in cash under the New Agreement.  The earliest date upon which the parties may terminate the New 
Agreement for failure of a closing condition under the New Agreement to be satisfied is May 31, 2016.

34

35

OFFICERS

Kevin S. Wilson, Chief Executive Officer and President

Jason A. Napolitano, Chief Operating Officer, Chief Financial Officer, Executive Vice President and Secretary

Michael J. McGinley, Ph.D., President, Biologicals and Pharmaceuticals

Nancy Wisnewski, Ph.D., Executive Vice President, Product Development and Customer Support

Steven M. Eyl, Executive Vice President, Commercial Operations

Steven M. Asakowicz, Executive Vice President, Companion Animal Health Sales

Rodney A. Lippincott, Executive Vice President, Companion Animal Health Sales

John McMahon, Vice President, Financial Operations and Controller

Laurie E. Peterson, Vice President, Heska Des Moines*

Daniel J. Pollack, Treasurer and Assistant Secretary*

Sharon L. Riley, Chair of the Board; Principal and CEO of Larson Riley Associates

G. Irwin Gordon, Executive Vice President and Chief Customer Officer of Invitation Homes, a Blackstone Company

BOARD OF DIRECTORS

David E. Sveen, Ph.D., President, Cedarstone Partners, Inc.

Bonnie J. Trowbridge, Retired Partner, PricewaterhouseCoopers LLP

Kevin S. Wilson, Chief Executive Officer and President, Heska Corporation

Carol A. Wrenn, Founder and former President, Sky River Helicopters, LLC 

CONTACTS

Investor Relations • investorrelations@heska.com

Marketing • marketing@heska.com

Product Orders • 800.464.3752

Corporate Office • 3760 Rocky Mountain Ave • Loveland CO  80538 • 970.493.7272

LOCATIONS

Des Moines IA • 515.263.8600

Fribourg, Switzerland • + 41 26 347 21 40

www.heska.com

970.493.7272

*All Officers of Heska Corporation identified without an asterisk are “officers” under Section 16 of the Securities Exchange Act of 1934, as amended, and “executive officers” as defined in Rule 3b-7 
under the Exchange Act. Those Officers identified with an asterisk are neither Section 16 “officers” nor “executive officers” of Heska Corporation, but they are board-appointed officers of Heska 
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