P O I N T O F C A R E L A B A N D I M A G I N G D I A G N O S T I C S • A L L E R G Y • V A C C I N E S • P R E V E N T A T I V E S
2017
A N N U A L
R E P O R T
2017 Heska Corporation Annual Report
This report was finalized on March 23, 2018 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 spending in the veterinary marketplace, including
during times of economic difficulty; 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 and the reputation of third parties which sell
Heska’s products, including Heska’s ability to to benefit from
such reputations; uncertainties related to the future technical
performance of Heska’s products; 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
anticipated; uncertainties related to Heska’s reliance on third-
parties to develop and supply certain of its products, which is
substantial; uncertainties related to projects for which Heska
is working with third-parties, which may or may not come to
fruition; and the risks and uncertainties set forth in Heska’s
filings and future filings with the Securities and Exchange
Commission (the “SEC”), including those articulated in Heska’s
Annual Report on Form 10-K/A for the twelve month period
ended December 31, 2017. Heska does not undertake any
obligation to update any forward-looking statement except as
may be required by law.
March 23, 2018
Dear Shareholder,
The “humanization” of pets is in full swing and Heska is leading by example. We sleep with our pets, we cuddle with our
pets, we read, we joke, we hike, we ride, we run, we drive, and we even ski and surf… with our pets. Certain days, we may
begin to look more like our pets! Pets are among our best friends, and we, along with millions around the world, deeply
care and take responsibility for the wellbeing of our best friends. As pet owners and animators of the global pet healthcare
industry, we at Heska are honored to help veterinarians improve pet healthcare outcomes. Because pet patients cannot
“speak” about their symptoms, discomfort, or the challenges of aging, Heska is dedicated to providing veterinarians with
the advanced point of care diagnostics they need to answer millions of these unspoken questions rapidly, accurately, non-
invasively, and cost effectively. This is our mission and each time a Heska point of care laboratory, imaging, allergy, or
infectious disease diagnostic is performed, the lives of pets, families, and veterinarians improve.
Heska helped millions of pets in 2017 and was rewarded with very strong financial results for the year. We continued to
increase our market share and the number of Heska Reset Subscribers, while achieving full year $1.30 of earnings per share
and record full year gross margins (45%), operating margins (14.1%) and adjusted non-GAAP earnings per share ($2.07)(1).
Importantly, we achieved these results while also providing veterinarians and pet families with the highest-level
combination of diagnostics, value, and savings available, leaving them confident and with more money for other important
things. I am proud of these results and the savings we provided and am thankful for each Heska employee who worked
hard to deliver them; I hope you are as well.
The substantial value-creating work Heska accomplished from 2013 through 2017 improved our base business and has us
well positioned for the next strategic cycle. We enter our “second act” of 2018 through 2022 with the strongest pipeline of
product upgrades, new product lines, geographic expansion, and strategic partnerships in our history. Fully aware of the
strength and size of our competitors, my confidence in Heska to win in this upcoming cycle is firm and I am encouraged by
well-informed industry partners and long-term investors who join me in this view. I am optimistic that we can do our work
well into this large and healthy market, and I am extraordinarily excited about our prospects. This is the most exciting time
to be a Heska stakeholder; we are honored to have you join us in our mission.
Respectfully,
Kevin S. Wilson
Chief Executive Officer and President
(1) See “Use of Non-GAAP Financial Measure” and related appendix included in Heska’s earnings release dated February 28, 2018 and furnished with the
SEC under cover of Form 8-K on February 28, 2018 for a definition and reconciliation to its most directly comparable GAAP financial measure of this non-
GAAP financial measure.
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Heska Corporation and Subsidiaries
Loveland, Colorado
OPINIONS ON THE CONSOLIDATED FINANCIAL STATEMENTS AND INTERNAL
CONTROL OVER FINANCIAL REPORTING
We have audited the accompanying consolidated balance sheets of Heska Corporation and Subsidiaries
(the "Company") as of December 31, 2017 and 2016, and the related consolidated statements of income,
comprehensive income, stockholders' equity, and cash flows, for each year in the three-year period ended
December 31, 2017, and the related notes (collectively referred to as the "financial statements"). We
have also audited the Company's internal control over financial reporting as of December 31, 2017, based
on the criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO").
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and 2016, and the results of its operations
and its cash flows for each year in the three-year period ended December 31, 2017, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework: (2013)
issued by COSO.
BASIS FOR OPINIONS
The Company's management is responsible for these financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on the Company's
financial statements and an opinion on the Company's internal control over financial reporting based on
our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent with respect to
the Company in accordance with the US federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud, and whether effective internal control
over financial reporting was maintained in all material respects.
3
To the Board of Directors and Stockholders
Heska Corporation and Subsidiaries
Page Two
Our audits of the financial statements included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
DEFINITION AND LIMITATIONS OF INTERNAL CONTROL OVER FINANCIAL
REPORTING
A company's internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
March 19, 2018
Denver, Colorado
We have served as the Company’s auditor since 2006.
EKS&H LLLP
4
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Current assets:
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of
$215 and $237, respectively
Due from – related parties
Inventories, net
Lease receivable, current
Other current assets
Total current assets
Property and equipment, net
Goodwill
Other intangible assets, net
Deferred tax asset, net
Lease receivable, non-current
Other non-current assets
Total assets
Current liabilities:
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable
Due to – related party
Accrued liabilities
Current portion of deferred revenue
Obligation to purchase minority interest
Line of credit and other short-term borrowings
Total current liabilities
Deferred revenue, net of current portion, and other
Total liabilities
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $.01 par value, 2,500,000 shares authorized,
none issued or outstanding
Common stock, $.01 par value, 10,000,000 shares authorized,
none issued or outstanding
Public common stock, $.01 par value, 10,000,000 shares authorized,
7,302,954 and 7,026,051 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,
2017
2016
$
9,659
$
10,794
15,710
1
32,596
2,069
2,877
62,912
17,331
26,687
1,958
11,877
9,615
5,407
135,787
9,489
1,828
4,417
3,992
—
6,000
25,726
9,621
35,347
$
$
20,857
100
20,395
825
2,302
55,273
16,581
26,647
2,346
21,122
4,833
4,042
130,844
6,343
1,578
5,581
3,560
14,602
750
32,414
11,455
43,869
—
—
—
—
73
243,598
232
(143,463)
100,440
135,787
$
70
238,635
97
(151,827)
86,975
130,844
$
$
$
See accompanying notes to consolidated financial statements.
5
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
Interest and other (income) expense, net
Income before income taxes
Income tax expense:
Current income tax expense
Deferred income tax expense
Total income tax expense
Basic earnings per share attributable
to Heska Corporation
Diluted earnings per share attributable
to Heska Corporation
Net income
Net (loss) income attributable to non-controlling interest
Net income attributable to Heska Corporation
9,953
$
10,508
$
Weighted average outstanding shares used to compute basic earnings per
share attributable to Heska Corporation
Weighted average outstanding shares used to compute diluted earnings per
share attributable to Heska Corporation
7,026
7,642
6,783
7,361
See accompanying notes to consolidated financial statements.
Year Ended December 31,
2017
2016
2015
$ 105,191
$ 107,398
$
24,150
129,341
22,685
130,083
84,249
20,348
104,597
71,080
76,191
60,384
58,261
53,892
44,213
23,225
2,004
14,813
40,042
18,219
(150)
18,369
49
8,864
8,913
9,456
(497)
22,092
2,147
13,120
37,359
16,533
29
16,504
407
3,932
4,339
12,165
1,657
$
$
$
1.42
1.30
$
$
1.55
1.43
$
$
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
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(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
Interest and other (income) expense, net
Income before income taxes
Income tax expense:
Current income tax expense
Deferred income tax expense
Total income tax expense
Net income
Net (loss) income attributable to non-controlling interest
Net income attributable to Heska Corporation
Basic earnings per share attributable
to Heska Corporation
Diluted earnings per share attributable
to Heska Corporation
Weighted average outstanding shares used to compute basic earnings per
share attributable to Heska Corporation
Weighted average outstanding shares used to compute diluted earnings per
share attributable to Heska Corporation
Year Ended December 31,
2017
2016
2015
$ 105,191
$ 107,398
$
24,150
129,341
22,685
130,083
84,249
20,348
104,597
71,080
76,191
60,384
58,261
53,892
44,213
23,225
2,004
14,813
40,042
18,219
(150)
18,369
49
8,864
8,913
9,456
(497)
9,953
1.42
1.30
7,026
7,642
$
$
$
22,092
2,147
13,120
37,359
16,533
29
16,504
407
3,932
4,339
12,165
1,657
10,508
$
1.55
1.43
$
$
$
$
$
6,783
7,361
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
(in thousands)
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Comprehensive
Accumulated
Stockholders'
Income
Deficit
Total
Equity
Accumulated
Other
6,342
$
$
222,297
$
283
$
(169,511) $
Balances, December 31, 2015
6,625
$
$
227,267
$
187
$
(163,992) $
Balances January 1, 2015
Net income
Issuance of common stock, net of shares
withheld for employee taxes
Stock-based compensation
Excess tax benefit from stock-based
compensation
Accretion of non-controlling interest
Other comprehensive income (loss)
Net income
Issuance of common stock related to the
acquisition of Cuattro Veterinary
International, LLC
Issuance of common stock, net of shares
withheld for employee taxes
Stock-based compensation
Accretion of non-controlling interest
Other comprehensive income (loss)
Net income
Issuance of common stock, net of shares
withheld for employee taxes
Stock-based compensation
Accretion of non-controlling interest
Distribution for Heska Imaging minority
Other comprehensive income (loss)
—
283
—
—
—
—
—
175
226
—
—
—
—
—
—
—
—
277
63
—
3
—
—
—
—
66
—
2
2
—
—
—
70
—
3
—
—
—
—
73
—
1,255
2,269
1,514
(68)
—
—
6,347
1,616
2,260
1,145
—
—
1,373
2,745
845
—
—
5,519
12,165
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,456
(1,092)
53,132
5,519
1,258
2,269
1,514
(68)
(96)
63,528
12,165
6,349
1,618
2,260
1,145
(90)
86,975
9,456
1,376
2,745
845
(1,092)
135
(96)
—
—
—
—
—
—
—
—
—
—
97
—
—
—
—
—
135
232
(90)
Balances, December 31, 2017
7,303
$
$
243,598
$
$
(143,463) $
100,440
See accompanying notes to consolidated financial statements.
Balances, December 31, 2016
7,026
$
$
238,635
$
$
(151,827) $
Year Ended December 31,
2017
2016
2015
$
9,456
$ 12,165
$
5,519
12
—
123
9,591
75
(90)
(75)
12,075
(129)
44
(11)
5,423
280
5,143
Net income
Other comprehensive income (loss):
Minimum pension liability
Sale of equity investment
Foreign currency translation
Comprehensive income
Comprehensive (loss) income attributable to non-controlling interest
Comprehensive income attributable to Heska Corporation
(497)
$ 10,088
1,657
$ 10,418
$
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
Accumulated
Deficit
Total
Stockholders'
Equity
Balances January 1, 2015
Net income
Issuance of common stock, net of shares
withheld for employee taxes
Stock-based compensation
Excess tax benefit from stock-based
compensation
Accretion of non-controlling interest
Other comprehensive income (loss)
6,342
$
—
283
—
—
—
—
Balances, December 31, 2015
6,625
$
Net income
Issuance of common stock related to the
acquisition of Cuattro Veterinary
International, LLC
Issuance of common stock, net of shares
withheld for employee taxes
Stock-based compensation
Accretion of non-controlling interest
Other comprehensive income (loss)
—
175
226
—
—
—
Balances, December 31, 2016
7,026
$
Net income
Issuance of common stock, net of shares
withheld for employee taxes
Stock-based compensation
Accretion of non-controlling interest
Distribution for Heska Imaging minority
Other comprehensive income (loss)
—
277
—
—
—
—
Balances, December 31, 2017
7,303
$
63
—
3
—
—
—
—
66
—
2
2
—
—
—
70
—
3
—
—
—
—
73
$
222,297
$
283
$
(169,511) $
—
1,255
2,269
1,514
(68)
—
—
—
—
—
—
(96)
5,519
—
—
—
—
—
$
227,267
$
187
$
(163,992) $
—
6,347
1,616
2,260
1,145
—
$
238,635
$
—
1,373
2,745
845
—
—
$
243,598
$
—
—
—
—
—
(90)
97
—
—
—
—
—
135
232
12,165
—
—
—
—
—
$
(151,827) $
9,456
—
—
—
(1,092)
—
53,132
5,519
1,258
2,269
1,514
(68)
(96)
63,528
12,165
6,349
1,618
2,260
1,145
(90)
86,975
9,456
1,376
2,745
845
(1,092)
135
$
(143,463) $
100,440
See accompanying notes to consolidated financial statements.
8
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to cash provided by operating activities:
$
9,456
$
12,165
$
5,519
Year Ended December 31,
2016
2015
2017
Depreciation and amortization
Deferred income tax expense
Stock-based compensation
Other (gain) loss
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Due from related parties
Lease receivable, current
Other current assets
Accounts payable
Due to related parties
Accrued liabilities and other
Lease receivable, non-current
Other non-current assets
Deferred revenue and other
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equity investment
Purchase of minority interest
Purchases of property and equipment
Proceeds from disposition of property and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
Repurchase of common stock
Distributions to non-controlling interest members
Proceeds from line of credit borrowings
Repayments of line of credit borrowings
Repayments of other debt
Payment of debt issuance costs
Excess tax benefit from stock-based compensation
Net cash provided by financing activities
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
4,754
8,864
2,745
(46)
5,156
(13,834)
99
(1,244)
(469)
3,143
250
(1,293)
(4,782)
(989)
(1,401)
10,409
—
(13,757)
(3,469)
57
4,645
3,932
2,260
(3)
(4,700)
(4,731)
(59)
(736)
883
(688)
1,356
(351)
(3,867)
(1,951)
(2,300)
5,855
115
—
4,187
1,327
2,269
36
(4,216)
(7,240)
851
(89)
(1,000)
3,059
(30)
73
(967)
(1,463)
(191)
2,125
—
—
(3,417)
(3,773)
—
—
(17,169)
(3,302)
(3,773)
2,452
(1,076)
(965)
40,307
2,382
(762)
—
2,143
(885)
—
34,792
26,809
(34,979)
(34,262)
(26,714)
(68)
(120)
—
5,551
74
(1,135)
10,794
(747)
—
—
1,403
(52)
3,904
6,890
(141)
—
1,514
2,726
(43)
1,035
5,855
6,890
—
$
$
CASH AND CASH EQUIVALENTS, END OF YEAR
$
9,659
$
10,794
NON-CASH TRANSACTIONS:
Common stock issued as partial consideration of acquisition of Cuattro Veterinary International, LLC $
— $
6,349
See accompanying notes to consolidated financial statements.
9
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Heska Corporation and its wholly-owned subsidiaries ("Heska", the "Company", "we" or "our") sell
veterinary and animal health diagnostic and specialty products. Our offerings include point of care diagnostics
laboratory instruments and supplies, digital imaging diagnostics products, software and services, vaccines,
local and cloud-based data services, allergy testing and immunotherapy, and single-use offerings such as in-
clinic diagnostic tests and heartworm preventive products. Our core focus is on supporting veterinarians in the
canine and feline healthcare space.
Basis of Presentation and Consolidation
Our consolidated financial statements include our accounts and the accounts of our wholly-owned
subsidiaries since their respective dates of acquisitions. All intercompany accounts and transactions have been
eliminated in consolidation. Where our ownership of a subsidiary was 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 income. 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 ("US GAAP").
To maintain consistency and comparability, certain amounts in the financial statements have been
reclassified to conform to current year presentation.
Reclassification
Use of Estimates
The preparation of financial statements in conformity with US 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 or
obsolete inventory, in determining future costs associated with warranties provided, 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, estimating the useful lives of equipment under
leasing arrangements, 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 distribution partners, domestic veterinary clinics and individual veterinarians and other animal health
companies.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Heska Corporation and its wholly-owned subsidiaries ("Heska", the "Company", "we" or "our") sell
veterinary and animal health diagnostic and specialty products. Our offerings include point of care diagnostics
laboratory instruments and supplies, digital imaging diagnostics products, software and services, vaccines,
local and cloud-based data services, allergy testing and immunotherapy, and single-use offerings such as in-
clinic diagnostic tests and heartworm preventive products. Our core focus is on supporting veterinarians in the
canine and feline healthcare space.
Basis of Presentation and Consolidation
Our consolidated financial statements include our accounts and the accounts of our wholly-owned
subsidiaries since their respective dates of acquisitions. All intercompany accounts and transactions have been
eliminated in consolidation. Where our ownership of a subsidiary was 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 income. 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 ("US GAAP").
Reclassification
To maintain consistency and comparability, certain amounts in the financial statements have been
reclassified to conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with US 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 or
obsolete inventory, in determining future costs associated with warranties provided, 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, estimating the useful lives of equipment under
leasing arrangements, 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 distribution partners, domestic veterinary clinics and individual veterinarians and other animal health
companies.
10
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Henry Schein represented 16% of our consolidated accounts receivable at December 31, 2017 and
2016. Merck entities represented approximately 15% and 11% of our consolidated accounts receivable at
December 31, 2017 and 2016, respectively. DLL represented 11% and 18% of our consolidated accounts
receivable at December 31, 2017 and 2016, respectively. Eli Lilly entities, including Elanco, represented
approximately 3% and 15% of our consolidated accounts receivable at December 31, 2017 and 2016,
respectively. No other customer accounted for more than 10% of our consolidated accounts receivable at
December 31, 2017 or 2016.
We have established an allowance for doubtful accounts based upon factors surrounding the credit
value.
risk of specific customers, historical trends, and other information.
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):
Balances at beginning of period
Additions - charged to expense
Deductions - write offs, net of recoveries
Balances at end of period
Cash and Cash Equivalents
Years Ended December 31,
2015
2016
2017
$
$
237 $
168
(190)
215 $
189 $
163
(115)
237 $
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 1,077,787 and 2,778,614
Euros at December 31, 2017 and 2016, respectively. We held 0 and 1,252,221 Yen at December 31, 2017 and
2016, respectively. We held 80,459 and 172,743 Swiss Francs at December 31, 2017 and 2016, respectively.
We held 0 and 26,477 Canadian Dollars at December 31, 2017 and 2016, respectively. The majority of our
cash and cash equivalents are held at US-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 because of the short-term nature of the
instruments. The fair value of our line of credit balance is estimated based on current rates available for
11
similar debt with similar maturities and collateral, and at December 31, 2017 and 2016, 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 net realizable 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 net realizable value, provisions are made to reduce the carrying value to estimated net realizable
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,
2017
2016
18,465 $
4,296
11,465
(1,630)
32,596 $
10,807
3,820
7,087
(1,319)
20,395
$
$
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 direct project costs, including labor and travel, are capitalized and amortized on a straight-line basis
over the estimated useful life of the asset, which range from three to five years. Costs incurred during the
preliminary project 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
estimated fair value of the reporting unit is less than its carrying amount as a basis for determining whether it
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
similar debt with similar maturities and collateral, and at December 31, 2017 and 2016, 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 net realizable 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 net realizable value, provisions are made to reduce the carrying value to estimated net realizable
value.
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,
2017
2016
18,465 $
4,296
11,465
(1,630)
32,596 $
10,807
3,820
7,087
(1,319)
20,395
$
$
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 direct project costs, including labor and travel, are capitalized and amortized on a straight-line basis
over the estimated useful life of the asset, which range from three to five years. Costs incurred during the
preliminary project 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
estimated fair value of the reporting unit is less than its carrying amount as a basis for determining whether it
12
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
is necessary to perform the comparison of the estimated fair value of the reporting unit to the carrying value.
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 it more likely than not that the
estimated fair value of a reporting is less than its carrying amount, we would then estimate the fair value of
the reporting unit and compare it to the carrying value. If the carrying value exceeds the estimated fair value
we would recognize an impairment for the difference; 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 quantitative analysis. Doing so does not preclude us from performing the qualitative
assessment in any subsequent period.
In the fourth quarter of 2017, we performed a qualitative assessment of the goodwill residing within
the assets of our CCA segment, also determined to be a reporting unit, and determined that no indications of
impairment existed.
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, either by outright purchase by our customers or
through a subscription agreement whereby our customers receive equipment and pay us a monthly fee for the
usage of the equipment as well as, when applicable, the consumables needed to conduct testing. Outright
sales to customers is the majority of imaging diagnostics transactions, while subscription placement is the
majority of point of care diagnostics laboratory transactions. We also may recognize revenue 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 outright sale of products to customers 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. Distributor rebates are
recorded as a reduction to revenue.
13
Revenue from our subscription agreements is recognized based on the length of the agreements that
are signed by our customers. Among other factors, the length of the agreement determines whether a
subscription is considered an operating lease or capital lease. Our capital leases qualify for sales-type lease
treatment. For subscription agreements that are considered operating leases, we recognize revenue of our
subscriptions ratably over the term of the agreement. The equipment is transferred from inventory to
property, plant and equipment and depreciated into cost of revenue over the term of the agreement, based on
the assets’ useful life. Revenue from subscription agreements that are sales-type (capital) leases is
recognized, along with the associated cost of the equipment, at the time of placement in our customer’s
location. The amount of revenue recognized at the time of lease inception is based on, along with other
factors, observable prior sales prices of similar equipment sold by us over the prior twelve months, relative to
total contract value. We record a short and long-term capital lease receivable related to sales-type leases.
Revenue from our rentals of digital imaging equipment is recognized ratably over the term of the
rental agreement, which is typically over a 26-month period. The equipment is transferred from inventory to
property, plant and equipment and depreciated over the assets' useful life.
Recording revenue from the sale of products involves the use of estimates and management's
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 obligations relating to returns, rebates,
allowances and similar other programs.
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 enter into arrangements that include multiple elements. 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.
Stock-based Compensation
Stock-based compensation expense is measured at the grant date based upon the estimated fair value
of the portion of the award that is ultimately expected to vest and is recognized as expense over the applicable
vesting period of the award generally using the straight-line method.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue from our subscription agreements is recognized based on the length of the agreements that
are signed by our customers. Among other factors, the length of the agreement determines whether a
subscription is considered an operating lease or capital lease. Our capital leases qualify for sales-type lease
treatment. For subscription agreements that are considered operating leases, we recognize revenue of our
subscriptions ratably over the term of the agreement. The equipment is transferred from inventory to
property, plant and equipment and depreciated into cost of revenue over the term of the agreement, based on
the assets’ useful life. Revenue from subscription agreements that are sales-type (capital) leases is
recognized, along with the associated cost of the equipment, at the time of placement in our customer’s
location. The amount of revenue recognized at the time of lease inception is based on, along with other
factors, observable prior sales prices of similar equipment sold by us over the prior twelve months, relative to
total contract value. We record a short and long-term capital lease receivable related to sales-type leases.
Revenue from our rentals of digital imaging equipment is recognized ratably over the term of the
rental agreement, which is typically over a 26-month period. The equipment is transferred from inventory to
property, plant and equipment and depreciated over the assets' useful life.
Recording revenue from the sale of products involves the use of estimates and management's
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 obligations relating to returns, rebates,
allowances and similar other programs.
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 enter into arrangements that include multiple elements. 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.
Stock-based Compensation
Stock-based compensation expense is measured at the grant date based upon the estimated fair value
of the portion of the award that is ultimately expected to vest and is recognized as expense over the applicable
vesting period of the award generally using the straight-line method.
14
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Advertising Costs
Warranty Costs
Advertising costs are expensed as incurred and are included in sales and marketing expenses.
Advertising expenses were $0.2 million for each of the years ended December 31, 2017 and 2016, and $0.1
million for the year ended December 31, 2015.
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, including the current year
impact of the enacted 21% US corporate income tax rate under the Tax Cuts and Jobs Act, 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.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the
weighted-average number of shares of common stock outstanding during the period. Diluted earnings per
share is computed by dividing income available to common shareholders by the weighted-average number of
shares of common stock outstanding during the period increased to include the number of additional shares of
common stock that would have been outstanding if the potentially dilutive securities had been issued.
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 income.
Shipping and Handling Costs
Amounts billed to customers related to shipping and handling are classified as revenue. Shipping and
handling costs incurred by us for the delivery of products to customers are classified as cost of revenue.
15
The Company generally provides for the estimated cost of hardware and software warranties in the period
the related revenue is recognized. The Company assesses the adequacy of its accrued warranty liabilities and
adjusts the amounts as necessary based on actual experience and changes in future estimates. Should product
failure rates differ from our estimates, actual costs could vary significantly from our expectations.
Adoption of New Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-09,
“Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU 2017-09 was
issued to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying
the guidance in Topic 718 to a change in the terms or conditions of a share-based payment award. ASU
2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting under Topic 718. The amendments in ASU 2017-09 are
effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early
adoption is permitted, including adoption in any interim period. The amendments in ASU 2017-09 should be
applied prospectively to an award modified on or after the adoption date. Heska adopted the new guidance in
its second quarter of fiscal year 2017.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic
350): Simplifying the Accounting for Goodwill Impairment,” to simplify financial reporting by eliminating
the need to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill
impairment. Under ASU 2017-04, an entity should perform its goodwill impairment test by comparing the
fair value of the reporting unit with its carrying amount and recognize an impairment charge for the amount
by which the carrying amount exceeds the reporting unit’s fair value, up to the amount of goodwill allocated
to that reporting unit. The new guidance effectively eliminates “Step 2” from the previous goodwill
impairment test. ASU 2017-04 is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed on testing
dates after January 1, 2017. Heska adopted the new guidance in its fourth quarter of fiscal year 2017 when it
performed its annual goodwill impairment test as of December 15, 2017.
Accounting Pronouncements Not Yet Adopted
In February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income”. The ASU permits companies to elect a reclassification of disproportionate tax effects in
accumulated other comprehensive income (AOCI) caused by the Tax Cuts and Jobs Act of 2017 to retained
earnings. The ASU also requires additional disclosures. This update is effective for fiscal years beginning
after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. We are
currently evaluating the effect of this ASU on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326)",
which require that financial assets measured at amortized cost be presented at the net amount expected to be
collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis
of the financial asset to present the net carrying value at the amount expected to be collected. The income
statement reflects the measurement of credit losses for newly recognized financial assets, as well as the
increases or decreases of expected credit losses that have taken place during the period. The measurement of
expected credit losses is based upon historical experience, current conditions, and reasonable and supportable
forecasts that affect the collectability of the reported amount. The amendments in this update are effective for
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Warranty Costs
The Company generally provides for the estimated cost of hardware and software warranties in the period
the related revenue is recognized. The Company assesses the adequacy of its accrued warranty liabilities and
adjusts the amounts as necessary based on actual experience and changes in future estimates. Should product
failure rates differ from our estimates, actual costs could vary significantly from our expectations.
Adoption of New Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-09,
“Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU 2017-09 was
issued to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying
the guidance in Topic 718 to a change in the terms or conditions of a share-based payment award. ASU
2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting under Topic 718. The amendments in ASU 2017-09 are
effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early
adoption is permitted, including adoption in any interim period. The amendments in ASU 2017-09 should be
applied prospectively to an award modified on or after the adoption date. Heska adopted the new guidance in
its second quarter of fiscal year 2017.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic
350): Simplifying the Accounting for Goodwill Impairment,” to simplify financial reporting by eliminating
the need to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill
impairment. Under ASU 2017-04, an entity should perform its goodwill impairment test by comparing the
fair value of the reporting unit with its carrying amount and recognize an impairment charge for the amount
by which the carrying amount exceeds the reporting unit’s fair value, up to the amount of goodwill allocated
to that reporting unit. The new guidance effectively eliminates “Step 2” from the previous goodwill
impairment test. ASU 2017-04 is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed on testing
dates after January 1, 2017. Heska adopted the new guidance in its fourth quarter of fiscal year 2017 when it
performed its annual goodwill impairment test as of December 15, 2017.
Accounting Pronouncements Not Yet Adopted
In February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income”. The ASU permits companies to elect a reclassification of disproportionate tax effects in
accumulated other comprehensive income (AOCI) caused by the Tax Cuts and Jobs Act of 2017 to retained
earnings. The ASU also requires additional disclosures. This update is effective for fiscal years beginning
after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. We are
currently evaluating the effect of this ASU on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326)",
which require that financial assets measured at amortized cost be presented at the net amount expected to be
collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis
of the financial asset to present the net carrying value at the amount expected to be collected. The income
statement reflects the measurement of credit losses for newly recognized financial assets, as well as the
increases or decreases of expected credit losses that have taken place during the period. The measurement of
expected credit losses is based upon historical experience, current conditions, and reasonable and supportable
forecasts that affect the collectability of the reported amount. The amendments in this update are effective for
16
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
fiscal years beginning after December 15, 2019 and interim periods within those annual periods. Early
adoption for fiscal year beginning after December 15, 2018 is permitted.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", 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. The
accounting for lessors does not fundamentally change except for changes to conform and align guidance to
the lessee guidance as well as to the new revenue recognition guidance in ASU 2014-09. This update is
effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.
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 presented in the financial statements. We are
currently evaluating the effect of this update on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” and has
subsequently issued several supplemental and/or clarifying ASUs (collectively “ASC 606”). ASC 606
prescribes a single common revenue standard that replaces most existing US GAAP revenue recognition
guidance. ASC 606 outlines a five-step model, under which Heska will recognize revenue as performance
obligations within a customer contract are satisfied. ASC 606 is intended to provide more consistent
interpretation and application of the principles outlined in the standard across filers in multiple industries and
within the same industries compared to current practices, which should improve comparability. Along with
the issuance of ASC 606, additional cost guidance was issued and codified under ASC 340-40 that outlines
the requirement for capitalizing incremental costs of obtaining a contract and costs to fulfill a contract that
meet certain capitalization criteria.
Adoption of ASC 606 is required for annual reporting periods beginning after December 15, 2017,
including interim periods within the reporting period. Upon adoption, Heska must elect to adopt either
retrospectively to each prior reporting period presented (full retrospective method) or using the cumulative
effect transition method with the cumulative effect of initial adoption recognized at the date of initial
application (modified retrospective method). Heska has elected to adopt the modified retrospective method
and apply this method to contracts not yet completed as of January 1, 2018. The cumulative effect of initially
applying the new revenue standard is recognized as an adjustment to the opening balance of our fiscal year
2018 retained earnings. The comparative information will not be recast and will continue to be reported
under the accounting standards in effect for those periods.
Heska assessed the impact that the adoption of ASC 606 is expected to have on its Consolidated
Financial Statements by analyzing its current portfolio of customer contracts and various revenue streams,
including a review of historical accounting policies and practices to identify potential differences in applying
the guidance of ASC 606. Heska also performed a comprehensive review of its current processes and systems
to determine and implement changes required to support the adoption of ASC 606 on January 1, 2018.
Based on review of customer contracts within our Core Companion Animal ("CCA") segment, Heska
has determined the timing of revenue recognition of our product sales, which includes upfront equipment
sales and sales of consumables, will continue to be recognized as it is currently, generally upon shipment of
products. Also included within CCA are our subscription agreements, which contain a lease of equipment, for
which rental income will continue to be recognized under ASC 840, Leases, unless the equipment is
considered a sales-type lease, which revenue will be recognized under ASC 606 at the point of sale.
Based on review of customer contracts within our Other Vaccines, Pharmaceuticals, and Products
segment, Heska has determined that the timing of revenue recognition of our customer contracts will continue
17
to be recognized as it is currently - generally upon shipment or acceptance by our customer. Heska assessed
the over-time criteria within ASC 606 and concluded that because products within this segment have no
alternative use to Heska as Heska is contractually prohibited to redirect the product to other customers, Heska
does not have right to payment for performance to date and therefore, point in time recognition is appropriate.
Often our contracts contain multiple performance obligations to which the transaction price must be
allocated. The objective when allocating the transaction price is to allocate the transaction price to each
performance obligation (or distinct good or service) in an amount that depicts the consideration to which the
entity expects to be entitled in exchange for transferring the promised goods or services to the customer. To
accomplish this objective, Heska will allocate transaction price on a relative standalone selling price basis
(SSP) and where SSP is not readily observable, Heska will generally utilize expected cost-plus-a-margin
approach. All of the individual performance obligations, including equipment, consumables, and services are
sold separately, and therefore, observable prices are available.
Because a significant number of Heska’s customers are under noncancelable contracts for periods
extending beyond one year with the delivery of goods and services occurring throughout the duration, Heska
anticipates recording an asset related to the prepayment of such contract acquisition costs. In addition, ASC
606 states that "an asset recognized in accordance with the incremental costs of obtaining a contract shall be
amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to
which the asset relates." Because a significant number of Heska’s customers are under noncancelable
contracts for periods extending beyond one year with the delivery of goods and services occurring throughout
the duration, Heska anticipates recording an asset related to the prepayment of such contract acquisition costs.
We expect the impact of the adoption of the new standard will result in an adjustment to the
recognition of software support revenue, which historically has been a separate element however this has been
deemed to be an immaterial promise and therefore, previously deferred revenue relating to software support
will be recognized at point of sale along with the equipment and embedded software. The adoption of the new
standard will also impact the recognition of sales commissions. Previously, sales commissions were expensed
when the underlying contract was executed, which will now be recognized as a cost to acquire a contract and
amortized over its useful life. Finally, the new standard will impact the recognition of revenue associated
with certain bill and hold arrangements. Previously, we deferred revenue recognition until shipment, which
will now be recognized upon customer acceptance. We are finalizing the quantitative impact of these
changes.
2.
ACQUISITION AND RELATED PARTY ITEMS
Cuattro Veterinary, LLC
On May 31, 2016, the Company closed a transaction (the "Merger") to acquire Cuattro Veterinary,
LLC ("Cuattro International") from Kevin S. Wilson, and all of the members of Cuattro International (the
"Members"). Pursuant to the Merger, the Company issued 175,000 shares of the Company’s common stock,
$0.01 par value per share (the "Common Stock"), to the Members on the Closing Date, at an aggregate value
equal to approximately $6.3 million based on the adjusted closing price per share of the Common Stock as
reported on the Nasdaq Stock Market on the Merger closing date. These shares were issued to the Members in
a private placement in reliance upon an exemption from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(a)(2) thereof and the safe harbor provided by Rule 506 of Regulation
D promulgated thereunder. Effective on the Merger closing date, each of the Members executed lock-up
agreements with the Company that restricted their ability to sell any of the shares of Common Stock received
in the Merger until 180 days after the Merger closing date. In addition, the Company assumed approximately
$1.5 million in debt as part of the transaction.
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
to be recognized as it is currently - generally upon shipment or acceptance by our customer. Heska assessed
the over-time criteria within ASC 606 and concluded that because products within this segment have no
alternative use to Heska as Heska is contractually prohibited to redirect the product to other customers, Heska
does not have right to payment for performance to date and therefore, point in time recognition is appropriate.
Often our contracts contain multiple performance obligations to which the transaction price must be
allocated. The objective when allocating the transaction price is to allocate the transaction price to each
performance obligation (or distinct good or service) in an amount that depicts the consideration to which the
entity expects to be entitled in exchange for transferring the promised goods or services to the customer. To
accomplish this objective, Heska will allocate transaction price on a relative standalone selling price basis
(SSP) and where SSP is not readily observable, Heska will generally utilize expected cost-plus-a-margin
approach. All of the individual performance obligations, including equipment, consumables, and services are
sold separately, and therefore, observable prices are available.
Because a significant number of Heska’s customers are under noncancelable contracts for periods
extending beyond one year with the delivery of goods and services occurring throughout the duration, Heska
anticipates recording an asset related to the prepayment of such contract acquisition costs. In addition, ASC
606 states that "an asset recognized in accordance with the incremental costs of obtaining a contract shall be
amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to
which the asset relates." Because a significant number of Heska’s customers are under noncancelable
contracts for periods extending beyond one year with the delivery of goods and services occurring throughout
the duration, Heska anticipates recording an asset related to the prepayment of such contract acquisition costs.
We expect the impact of the adoption of the new standard will result in an adjustment to the
recognition of software support revenue, which historically has been a separate element however this has been
deemed to be an immaterial promise and therefore, previously deferred revenue relating to software support
will be recognized at point of sale along with the equipment and embedded software. The adoption of the new
standard will also impact the recognition of sales commissions. Previously, sales commissions were expensed
when the underlying contract was executed, which will now be recognized as a cost to acquire a contract and
amortized over its useful life. Finally, the new standard will impact the recognition of revenue associated
with certain bill and hold arrangements. Previously, we deferred revenue recognition until shipment, which
will now be recognized upon customer acceptance. We are finalizing the quantitative impact of these
changes.
2.
ACQUISITION AND RELATED PARTY ITEMS
Cuattro Veterinary, LLC
On May 31, 2016, the Company closed a transaction (the "Merger") to acquire Cuattro Veterinary,
LLC ("Cuattro International") from Kevin S. Wilson, and all of the members of Cuattro International (the
"Members"). Pursuant to the Merger, the Company issued 175,000 shares of the Company’s common stock,
$0.01 par value per share (the "Common Stock"), to the Members on the Closing Date, at an aggregate value
equal to approximately $6.3 million based on the adjusted closing price per share of the Common Stock as
reported on the Nasdaq Stock Market on the Merger closing date. These shares were issued to the Members in
a private placement in reliance upon an exemption from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(a)(2) thereof and the safe harbor provided by Rule 506 of Regulation
D promulgated thereunder. Effective on the Merger closing date, each of the Members executed lock-up
agreements with the Company that restricted their ability to sell any of the shares of Common Stock received
in the Merger until 180 days after the Merger closing date. In addition, the Company assumed approximately
$1.5 million in debt as part of the transaction.
18
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Mr. Wilson is a founder of Cuattro International, Cuattro, LLC, Cuattro Software, LLC and Cuattro
Heska Imaging US, LLC ("US Imaging") was transferred to the Company's wholly-owned subsidiary, Heska
Medical, LLC. Mr. Wilson, Mrs. Wilson and trusts for the benefit of Mr. and Mrs. Wilson’s children and
family own a 100% interest in Cuattro, LLC and a majority interest in Cuattro Medical, LLC. Cuattro, LLC
owns a 100% interest in Cuattro Software, LLC and, prior to the Merger, owned a majority interest in Cuattro
International.
The Company recorded assets acquired and liabilities assumed at their estimated fair values.
Intangible assets were valued based on a report from an independent third party. The goodwill associated with
the acquisition is the result of expected synergies and expansion of the technology into additional markets.
The following summarizes the aggregate consideration paid by the Company and the allocation of the
31, 2017, we delivered $13.8 million in cash to obtain the remaining minority position in US Imaging.
purchase price (in thousands):
Common stock issued - 175,000 shares
Debt assumed
Total fair value of consideration transferred
Accounts receivable
Inventories
Due from Cuattro, LLC
Property and equipment
Other tangible assets
Deferred tax asset
Intangible assets
Goodwill
Accounts payable
Deferred tax liability
Other assumed liabilities
Total fair value of consideration transferred
$
$
$
$
6,347
1,535
7,882
222
39
963
80
164
56
2,521
5,783
(112)
(905)
(929)
7,882
Intangible assets acquired, amortization method and estimated useful lives as of May 31, 2016 was as
follows (dollars in thousands):
Customer relationships
Useful Life
6.67
Amortization
Method
Straight-line
Fair Value
$2,521
Cuattro International is a provider to international markets of digital radiography technologies for
veterinarians. As a leading provider of advanced veterinary diagnostic and specialty products, we made the
acquisition in an effort to combine Cuattro International's international reach with our domestic success in the
imaging and point of care laboratory markets in the United States. International markets represent a
significant portion of worldwide veterinary revenues for which we intend to compete.
As of the closing date of the Merger, Cuattro International was renamed Heska Imaging International,
LLC, and the Company's interest in both Heska Imaging International, LLC ("International Imaging") and
19
Imaging Global, LLC ("Global Imaging").
Cuattro Veterinary USA, LLC
On February 24, 2013, the Company acquired a 54.6% interest in Cuattro Veterinary USA, LLC (the
"Acquisition"), which was subsequently renamed Heska Imaging US, LLC ("US Imaging"). The remaining
minority position (45.4)% in US Imaging was subject to purchase by Heska under performance-based puts and
calls following the audit of our financial statements for 2016 and 2017. The required performance criteria were
met in 2016, we considered notice given on March 3, 2017 that the put option was being exercised and on May
Prior to the purchase of the minority position (the "Imaging Minority"), Shawna M. Wilson, Clint
Roth, DVM, Steven M. Asakowicz, Rodney A. Lippincott, Kevin S. Wilson and Cuattro, LLC owned
approximately 29.75%, 8.39%, 4.09%, 3.07%, 0.05% and 0.05% of US 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.
On April 3, 2017, and in accordance with the terms of its Operating Agreement, US Imaging distributed $2.1
million based on past operating performance, including $1.0 million to its minority interest members. As of
December 31, 2017, US Imaging accrued an additional $0.3 million distribution, including $0.1 million to its
minority interest members.
On June 1, 2017, the Company consolidated its assets and liabilities in the US Imaging and
International Imaging companies into Global Imaging, which was re-named Heska Imaging, LLC ("Heska
Imaging").
Related Party Activities
Cuattro, LLC charged Heska Imaging $17.7 million, $14.5 million, and $9.0 million during 2017,
2016, and 2015, respectively, 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 Cuattro, LLC $0.1 million, $0.2 million, and $0.2 million in the years
ended December 31, 2017, 2016, and 2015, respectively, primarily related to facility usage and other services.
Heska Corporation had a receivable from Cuattro, LLC of $1 thousand and $22 thousand as of
December 31, 2017 and 2016, respectively which is included in "Due from - related parties" on the
Company's consolidated balance sheet. Heska Imaging had a receivable from Cuattro, LLC of $0 thousand
and $78 thousand as of December 31, 2017 and 2016, respectively. Heska Imaging owed Cuattro $1.7 million
as of December 31, 2017, and Global Imaging owed Cuattro $1.6 million as of December 31, 2016, which is
included in "Due to- related parties" on the Company's consolidated balance sheets.
Heska Corporation charged US Imaging $2.9 million from January 1, 2017 to May 31, 2017, prior to
the acquisition of the minority interest, and $5.3 million and $4.9 million for the years ended December 31,
2016, and 2015, respectively, for sales and other administrative related expenses. At December 31, 2016, US
Imaging had a $1.6 million note receivable, including accrued interest, from International Imaging, which was
due on June 15, 2019 and which eliminated in consolidation of the Company's financial statements. As of
June 1, 2017, the $0.3 million remaining balance of the note was eliminated in the consolidation of the
imaging companies into Heska Imaging. At December 31, 2016, Heska Corporation had accounts receivable
from US Imaging of $5.6 million, including accrued interest, and Global Imaging had net prepaid receivables
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Heska Imaging US, LLC ("US Imaging") was transferred to the Company's wholly-owned subsidiary, Heska
Imaging Global, LLC ("Global Imaging").
Cuattro Veterinary USA, LLC
On February 24, 2013, the Company acquired a 54.6% interest in Cuattro Veterinary USA, LLC (the
"Acquisition"), which was subsequently renamed Heska Imaging US, LLC ("US Imaging"). The remaining
minority position (45.4)% in US Imaging was subject to purchase by Heska under performance-based puts and
calls following the audit of our financial statements for 2016 and 2017. The required performance criteria were
met in 2016, we considered notice given on March 3, 2017 that the put option was being exercised and on May
31, 2017, we delivered $13.8 million in cash to obtain the remaining minority position in US Imaging.
Prior to the purchase of the minority position (the "Imaging Minority"), Shawna M. Wilson, Clint
Roth, DVM, Steven M. Asakowicz, Rodney A. Lippincott, Kevin S. Wilson and Cuattro, LLC owned
approximately 29.75%, 8.39%, 4.09%, 3.07%, 0.05% and 0.05% of US 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.
On April 3, 2017, and in accordance with the terms of its Operating Agreement, US Imaging distributed $2.1
million based on past operating performance, including $1.0 million to its minority interest members. As of
December 31, 2017, US Imaging accrued an additional $0.3 million distribution, including $0.1 million to its
minority interest members.
On June 1, 2017, the Company consolidated its assets and liabilities in the US Imaging and
International Imaging companies into Global Imaging, which was re-named Heska Imaging, LLC ("Heska
Imaging").
Related Party Activities
Cuattro, LLC charged Heska Imaging $17.7 million, $14.5 million, and $9.0 million during 2017,
2016, and 2015, respectively, 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 Cuattro, LLC $0.1 million, $0.2 million, and $0.2 million in the years
ended December 31, 2017, 2016, and 2015, respectively, primarily related to facility usage and other services.
Heska Corporation had a receivable from Cuattro, LLC of $1 thousand and $22 thousand as of
December 31, 2017 and 2016, respectively which is included in "Due from - related parties" on the
Company's consolidated balance sheet. Heska Imaging had a receivable from Cuattro, LLC of $0 thousand
and $78 thousand as of December 31, 2017 and 2016, respectively. Heska Imaging owed Cuattro $1.7 million
as of December 31, 2017, and Global Imaging owed Cuattro $1.6 million as of December 31, 2016, which is
included in "Due to- related parties" on the Company's consolidated balance sheets.
Heska Corporation charged US Imaging $2.9 million from January 1, 2017 to May 31, 2017, prior to
the acquisition of the minority interest, and $5.3 million and $4.9 million for the years ended December 31,
2016, and 2015, respectively, for sales and other administrative related expenses. At December 31, 2016, US
Imaging had a $1.6 million note receivable, including accrued interest, from International Imaging, which was
due on June 15, 2019 and which eliminated in consolidation of the Company's financial statements. As of
June 1, 2017, the $0.3 million remaining balance of the note was eliminated in the consolidation of the
imaging companies into Heska Imaging. At December 31, 2016, Heska Corporation had accounts receivable
from US Imaging of $5.6 million, including accrued interest, and Global Imaging had net prepaid receivables
20
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
from US Imaging of $1.2 million, all of which eliminated in consolidation of the Company's financial
statements.
thousands):
Temporary differences that give rise to the components of net deferred tax assets are as follows (in
3.
INCOME TAXES
Income Taxes
As of December 31, 2017, the Company had a domestic federal net operating loss carryforward
("NOL"), of approximately $94.0 million and a domestic research and development tax credit carryforward of
approximately $0.4 million. Our federal NOL is expected to expire as follows if unused: $88.0 million in
2018 through 2022, $5.5 million in 2024 and 2025 and $0.5 million in 2027 and later. The Tax Cuts and Jobs
Act repealed the corporate alternative minimum tax credit and made refundable all carryforward amounts in
years 2018-2021. As a result, the alternative minimum tax credit of $0.5 million has been reclassified from a
deferred tax asset to a non-current federal income tax asset.
The Company is subject to income taxes in the US 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. In the United States, the tax years 2014 -
2016 remain open to examination by the Internal Revenue Service and the tax years 2013 - 2016 remain open
for various state taxing authorities.
Cash paid for income taxes for the years ended December 31, 2017, 2016, and 2015 was $213
thousand, $357 thousand and $55 thousand, respectively.
The components of income before income taxes were as follows (in thousands):
Year Ended December 31,
2016
16,375 $
129
16,504 $
2017
18,188 $
181
18,369 $
2015
8,325
102
8,427
Domestic
Foreign
$
$
21
Inventory
Accrued compensation
Stock options
Research and development
Alternative minimum tax credit
Deferred revenue
Property and equipment
Net operating loss carryforwards – domestic
Foreign tax credit carryforward
Capital leases
Unremitted earnings for controlled foreign corporations
Other
Valuation allowance
Total net deferred tax assets
$
11,877 $
The components of the income tax expense are as follows (in thousands):
December 31,
2017
2016
$
1,321 $
1,172
103
914
442
—
2,002
2,531
22,627
54
(3,757)
(50)
194
26,381
(14,504)
114
811
438
543
2,934
2,750
34,706
(2,833)
—
—
34
40,669
(19,547)
21,122
$
$
$
Year Ended December 31,
2017
2016
2015
— $
197 $
1,492
6
43
179
31
65
24
49 $
407 $
1,581
9,736 $
3,545 $
1,043
(872)
—
8,864
387
—
3,932
$
8,913 $
4,339 $
284
—
1,327
2,908
Current income tax expense:
Total current expense
Deferred income tax expense (benefit):
Federal
State
Foreign
Federal
State
Foreign
Total deferred expense
Total income tax expense
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
Foreign tax credit carryforward
Capital leases
Unremitted earnings for controlled foreign corporations
Other
Valuation allowance
Total net deferred tax assets
December 31,
2017
2016
1,321 $
103
914
442
—
2,002
2,531
22,627
54
(3,757)
(50)
194
26,381
(14,504)
11,877 $
1,172
114
811
438
543
2,934
2,750
34,706
—
(2,833)
—
34
40,669
(19,547)
21,122
$
$
The components of the income tax expense are as follows (in thousands):
Year Ended December 31,
2016
2017
2015
Current income tax expense:
Federal
State
Foreign
Total current expense
Deferred income tax expense (benefit):
Federal
State
Foreign
Total deferred expense
Total income tax expense
$
$
$
$
— $
6
43
49 $
9,736 $
(872)
—
8,864
8,913 $
197 $
179
31
407 $
3,545 $
387
—
3,932
4,339 $
1,492
65
24
1,581
1,043
284
—
1,327
2,908
22
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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:
Year Ended December 31,
2016
2017
2015
Statutory federal tax rate
State income taxes, net of federal benefit
Non-controlling interest in Heska Imaging US, LLC
Non-temporary stock option benefit
Other permanent differences
Change in tax rate
Change in valuation allowance
Other
Effective income tax rate
34 %
(5)%
1 %
(30)%
1 %
32 %
16 %
— %
49 %
34 %
2 %
(3)%
(7)%
(1)%
— %
— %
1 %
26 %
34 %
3 %
(1)%
(1)%
— %
(1)%
(14)%
15 %
35 %
In 2017, we had total income tax expense of $8.91 million, including $8.86 million in domestic
deferred income tax expense, a non-cash expense, and $0.05 million in current income tax expense. In 2016,
we had total income tax expense of $4.3 million, including $3.9 million in domestic deferred income tax
expense, a non-cash expense, and $0.4 million in current income tax expense. In 2015, we had total income
tax expense of $2.9 million, including $1.3 million in domestic deferred income tax expense, a non-cash
expense, and $1.6 million in current income tax expense. The overall increase in tax expense in 2017 from
2016 was due to the re-measurement of our deferred tax assets (including the valuation allowance) due to the
US Tax Cuts and Jobs Act, offset by the reduction of tax expense from stock based compensation deductions.
Income tax expense increased in 2016 from 2015 as a result of higher income before taxes in 2016.
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, 2017, 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 (benefit)/expense. No
interest and penalties related to uncertain tax positions were accrued at December 31, 2017.
US Tax Reform
On December 22, 2017, the tax legislation commonly known as the US Tax Cuts and Jobs Act was
signed into law (the “Act”). This enactment resulted in a number of significant changes to US federal income
tax law for US corporations. Most notably, the statutory US federal corporate income tax rate was changed
from 35% to 21% for corporations. In addition to the change in the corporate income tax rate, the Act further
introduced a number of other changes including a one-time transition tax via a mandatory deemed repatriation
of post-1986 undistributed foreign earnings and profits; the introduction of a tax on global intangible low-
taxed income (“GILTI”) for tax years beginning after December 31, 2017; the further limitation of the
deductibility of share-based compensation of certain highly compensated employees; and the repeal of the
corporate alternative minimum tax; amongst other things.
Shortly after enactment, the Security and Exchange Commission ("SEC") issued SAB 118, which
provides guidance on accounting for the new legislation. Under SAB 118, an entity should recognize
amounts for which accounting can be completed. Where accounting under ASC 740 is incomplete relative to
23
certain income tax effects of tax reform, the entity should recognize provisional amounts and adjust such
amounts as more information becomes available and disclose this information in its financial statements. The
measurement period under SAB 118 is one year from date of enactment (with the approach being similar to
business combinations).
Heska has determined the estimated tax impact of the Act by using the most reliable data available in
accordance with SAB 118. Specifically, at the time the estimated tax reform impact was performed, only the
Final Bill itself and Notice 2018-07 had been released to provide guidance. Therefore, reasonable approaches
and considerations were performed in estimating the overall tax reform impact. Further refinement will be
made to this estimation as the IRS provides further guidance prior to the filing of the Company’s 2017 income
tax returns. The ultimate impact of the Act may differ from this year-end estimate due to changes in
interpretations and assumptions, guidance that may be issued by various US authorities and standard setting
bodies, and actions the Company may take as a result of the new provisions. The Company will refine these
estimates during the one year measurement period in accordance with SAB 118.
The items below outline the 2017 financial statement considerations associated with the most material
provisions of the Act impacting the Company. This list is not intended to be inclusive of all provisions
included in the Act nor all impacts to the Company as a result of the Act.
• The Act reduces the US corporate income tax rate to 21% for tax years beginning after December 31,
2017. The Company’s deferred tax balances were re-measured at 21% as of December 31, 2017. The
total impact of the US tax rate decrease resulted in a one-time tax expense of $5.9 million (i.e., the
write down of deferred tax asset balances and the valuation allowance.). The large amount of federal
NOLs, offset against the valuation allowance thereon, were included in this re-measurement, acting as
a significant driver in the large adjustment.
• The Act imposes a one-time transition tax associated with the deemed mandatory repatriation of
accumulated, and previously undistributed, foreign earnings. The Company has considered estimates
of earnings and profits (E&P) as prepared and maintained for US income tax reporting and performed
other procedures consistent with current guidance, in arriving at the current transition tax estimate of
$38 thousand. The Company will pay this tax liability in the year it is initially assessed and will not
elect to pay over the optional eight-year period.
• GILTI (Global Intangible and Low Taxed Income) is not expected to apply to the Company as it has
been historically subject to full inclusions of Subpart F income, which is excluded from “tested
income” for GILTI purposes. This will be monitored going forward to ensure proper inclusion if
necessary. If indeed levied, the Company will likely elect to treat such GILTI inclusion as a period
expense, not a deferred tax liability.
• Corporate AMT is repealed for tax years beginning after December 31, 2017. For this reason, the
remaining AMT credit carryforward has been re-classified in the tax provision from a deferred tax
asset to a long term receivable. This change reflects the Act’s provision that AMT credits become
refundable over time beginning in 2018.
We previously considered the earnings in our non-US subsidiaries to be indefinitely reinvested and,
accordingly, recorded no deferred income taxes for the year ended December 31, 2016. As of December 31,
2017, Heska is no longer asserting indefinite reinvestment under the exception noted in ASC 740-30-25-3,
which states that the presumption that all undistributed earnings will be transferred to the parent entity may be
overcome, and no income taxes shall be accrued by the parent entity. Prior to the Transition Tax, we had an
excess of the amount for financial reporting over the tax basis in our foreign subsidiaries. While the
Transition Tax resulted in the reduction of the excess of the amount for financial reporting over the tax basis
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
certain income tax effects of tax reform, the entity should recognize provisional amounts and adjust such
amounts as more information becomes available and disclose this information in its financial statements. The
measurement period under SAB 118 is one year from date of enactment (with the approach being similar to
business combinations).
Heska has determined the estimated tax impact of the Act by using the most reliable data available in
accordance with SAB 118. Specifically, at the time the estimated tax reform impact was performed, only the
Final Bill itself and Notice 2018-07 had been released to provide guidance. Therefore, reasonable approaches
and considerations were performed in estimating the overall tax reform impact. Further refinement will be
made to this estimation as the IRS provides further guidance prior to the filing of the Company’s 2017 income
tax returns. The ultimate impact of the Act may differ from this year-end estimate due to changes in
interpretations and assumptions, guidance that may be issued by various US authorities and standard setting
bodies, and actions the Company may take as a result of the new provisions. The Company will refine these
estimates during the one year measurement period in accordance with SAB 118.
The items below outline the 2017 financial statement considerations associated with the most material
provisions of the Act impacting the Company. This list is not intended to be inclusive of all provisions
included in the Act nor all impacts to the Company as a result of the Act.
• The Act reduces the US corporate income tax rate to 21% for tax years beginning after December 31,
2017. The Company’s deferred tax balances were re-measured at 21% as of December 31, 2017. The
total impact of the US tax rate decrease resulted in a one-time tax expense of $5.9 million (i.e., the
write down of deferred tax asset balances and the valuation allowance.). The large amount of federal
NOLs, offset against the valuation allowance thereon, were included in this re-measurement, acting as
a significant driver in the large adjustment.
• The Act imposes a one-time transition tax associated with the deemed mandatory repatriation of
accumulated, and previously undistributed, foreign earnings. The Company has considered estimates
of earnings and profits (E&P) as prepared and maintained for US income tax reporting and performed
other procedures consistent with current guidance, in arriving at the current transition tax estimate of
$38 thousand. The Company will pay this tax liability in the year it is initially assessed and will not
elect to pay over the optional eight-year period.
• GILTI (Global Intangible and Low Taxed Income) is not expected to apply to the Company as it has
been historically subject to full inclusions of Subpart F income, which is excluded from “tested
income” for GILTI purposes. This will be monitored going forward to ensure proper inclusion if
necessary. If indeed levied, the Company will likely elect to treat such GILTI inclusion as a period
expense, not a deferred tax liability.
• Corporate AMT is repealed for tax years beginning after December 31, 2017. For this reason, the
remaining AMT credit carryforward has been re-classified in the tax provision from a deferred tax
asset to a long term receivable. This change reflects the Act’s provision that AMT credits become
refundable over time beginning in 2018.
We previously considered the earnings in our non-US subsidiaries to be indefinitely reinvested and,
accordingly, recorded no deferred income taxes for the year ended December 31, 2016. As of December 31,
2017, Heska is no longer asserting indefinite reinvestment under the exception noted in ASC 740-30-25-3,
which states that the presumption that all undistributed earnings will be transferred to the parent entity may be
overcome, and no income taxes shall be accrued by the parent entity. Prior to the Transition Tax, we had an
excess of the amount for financial reporting over the tax basis in our foreign subsidiaries. While the
Transition Tax resulted in the reduction of the excess of the amount for financial reporting over the tax basis
24
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
in our foreign subsidiaries and subjected undistributed foreign earnings to an estimated $.02 million of tax
which has been provisionally recorded, an actual repatriation from our non-US subsidiaries could still be
subject to additional foreign withholding taxes and US state taxes. As such, for those investments from which
we were able to make a reasonable estimate of the tax effects of such repatriation, we have recorded a
provisional estimate for withholding and state taxes as a deferred tax liability of $.05 million. We will record
the tax effects of any change in our prior assertion with respect to these investments, and disclose any
unrecognized deferred tax liability for temporary differences related to our foreign investments, if practicable,
in the period that we are first able to make a reasonable estimate, no later than December 2018.
4.
LEASES
In our CCA segment, primarily related to our point of care laboratory products, the Company enters
into sales-type (capital) and operating leases as part of our subscription agreements. Detail of scheduled
minimum lease receipts are as follows in the years ended December 31, (in thousands):
Year
Sales-type leases
Operating leases
2018
$2,119
1,159
2019
$2,288
933
2020
$2,281
605
2021
$2,198
148
2022 Thereafter
$1,794
9
$1,004
—
Our cost of equipment under operating leases at December 31, 2017 and December 31, 2016,
was $10.8 million and $10.5 million, before accumulated depreciation of $5.0 million and $3.7 million, and
the net book value was $5.7 million and $6.8 million, respectively.
5.
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.
25
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, 2017, 2016, and 2015 (in thousands,
except per share data):
Years ended December 31,
2017
2016
2015
Net income attributable to Heska Corporation
$
9,953 $
10,508 $
5,239
Basic weighted-average common shares outstanding
Assumed exercise of dilutive stock options and restricted stock units
Diluted weighted-average common shares outstanding
7,026
616
7,642
6,783
578
7,361
6,509
565
7,074
Basic earnings per share
Diluted earnings per share
$
$
1.42 $
1.30 $
1.55 $
1.43 $
0.80
0.74
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
6.
GOODWILL AND OTHER INTANGIBLES
Years ended December 31,
2017
2016
2015
123
234
144
The following summarizes the changes in goodwill during the years ended December 31, 2017 and
2016 (in thousands):
Carrying amount, December 31, 2015
Additions and adjustments
Foreign currency adjustments
Carrying amount, December 31, 2016
Foreign currency adjustments
Carrying amount, December 31, 2017
thousands):
Gross carrying amount
Accumulated amortization
Net carrying amount
20,910
5,761
(24)
26,647
40
26,687
$
$
$
$
$
Year Ended December 31,
2017
2016
$
$
3,309
(1,351)
1,958
3,309
(963)
2,346
Other intangibles assets, net consisted of the following as of December 31, 2017 and 2016 (in
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 2017, 2016, and 2015 (in thousands,
except per share data):
Net income attributable to Heska Corporation
Basic weighted-average common shares outstanding
Assumed exercise of dilutive stock options and restricted stock units
Diluted weighted-average common shares outstanding
Basic earnings per share
Diluted earnings per share
$
$
$
2017
Years ended December 31,
2016
10,508 $
9,953 $
2015
5,239
7,026
616
7,642
6,783
578
7,361
6,509
565
7,074
1.42 $
1.30 $
1.55 $
1.43 $
0.80
0.74
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
6.
GOODWILL AND OTHER INTANGIBLES
Years ended December 31,
2016
2017
2015
123
234
144
The following summarizes the changes in goodwill during the years ended December 31, 2017 and
2016 (in thousands):
Carrying amount, December 31, 2015
Additions and adjustments
Foreign currency adjustments
Carrying amount, December 31, 2016
Foreign currency adjustments
Carrying amount, December 31, 2017
$
$
$
20,910
5,761
(24)
26,647
40
26,687
Other intangibles assets, net consisted of the following as of December 31, 2017 and 2016 (in
thousands):
Gross carrying amount
Accumulated amortization
Net carrying amount
Year Ended December 31,
2016
2017
$
$
3,309
(1,351)
1,958
$
$
3,309
(963)
2,346
26
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Amortization expense relating to other intangibles is as follows (in thousands):
Depreciation expense for property and equipment was $4.3 million, $4.4 million and $4.0 million for
Years Ended December 31,
2016
2015
2017
the years ended December 31, 2017, 2016 and 2015, respectively.
8.
ACCRUED LIABILITIES
Amortization expense
$
388
$
230
$
246
Estimated amortization expense related to intangibles for each of the five years from 2018 through
2022 and thereafter is as follows (in thousands):
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
7.
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
Total property and equipment, net
$
$
388
388
388
384
378
32
1,958
December 31,
2017
2016
$
377 $
2,868
38,432
8,156
3,531
53,364
(36,033)
17,331 $
$
377
2,868
36,588
7,662
1,655
49,150
(32,569)
16,581
The Company has subscription agreements 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
and depreciated, typically over a five to seven-year period depending on the circumstance under which the
instrument is placed with the customer. Total costs transferred from inventory were approximately $1.1
million, $1.8 million and $4.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company has sold certain customer rental contracts and underlying assets to third parties under
agreements 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. Since the Company anticipates it will
regain ownership of the assets underlying these sales, the Company reports these assets as part of property
and equipment and depreciates these assets in accordance with its depreciation policies. The Company had
$0.2 million and $0.3 million of net property and equipment related to these transactions as of December 31,
2017 and December 31, 2016, respectively, all related to Heska Imaging.
27
Accrued liabilities consisted of the following as of December 31, 2017 and 2016 (in thousands):
2017
2016
1,209
$
661
2,547
4,417
$
2,166
748
2,667
5,581
$
$
Other accrued liabilities consists of items that are individually less than 5% of total current liabilities.
Accrued payroll and employee benefits
Accrued property taxes
Other
Total accrued liabilities
9.
CAPITAL STOCK
Stock Plans
We have two stock option plans which authorize granting of stock options, restricted, and stock
purchase rights to our employees, officers, directors and consultants. In 1997, the board of directors adopted
the 1997 Stock Incentive Plan (the "1997 Plan") and terminated two prior stock 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 2016, the stockholders approved a further amendment to the 1997 Plan to
authorize an additional 500,000 shares to be available for issuance thereunder. In May 2003, the stockholders
approved a new plan, the 2003 Equity Incentive Plan (the "2003 Plan"), which allows for the granting of stock
options/restricted stock 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, 2017 was 320,039.
Stock Options
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 we issue: 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 2017, 2016 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 2017, 2016 and 2015. Our risk-free interest rate input was determined based on the US
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation expense for property and equipment was $4.3 million, $4.4 million and $4.0 million for
the years ended December 31, 2017, 2016 and 2015, respectively.
8.
ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of December 31, 2017 and 2016 (in thousands):
Accrued payroll and employee benefits
Accrued property taxes
Other
Total accrued liabilities
2017
2016
1,209
661
2,547
4,417
$
$
2,166
748
2,667
5,581
$
$
Other accrued liabilities consists of items that are individually less than 5% of total current liabilities.
9.
CAPITAL STOCK
Stock Plans
We have two stock option plans which authorize granting of stock options, restricted, and stock
purchase rights to our employees, officers, directors and consultants. In 1997, the board of directors adopted
the 1997 Stock Incentive Plan (the "1997 Plan") and terminated two prior stock 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 2016, the stockholders approved a further amendment to the 1997 Plan to
authorize an additional 500,000 shares to be available for issuance thereunder. In May 2003, the stockholders
approved a new plan, the 2003 Equity Incentive Plan (the "2003 Plan"), which allows for the granting of stock
options/restricted stock 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, 2017 was 320,039.
Stock Options
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 we issue: 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 2017, 2016 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 2017, 2016 and 2015. Our risk-free interest rate input was determined based on the US
28
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Treasury yield curve at the time of option issuance in 2017, 2016 and 2015. Our expected dividends inputs
were zero in all periods as we did not anticipate paying dividends in the foreseeable future.
December 31, 2017.
The following table summarizes information about stock options outstanding and exercisable at
Weighted average assumptions used in 2017, 2016 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
2017
1.76%
4.8 years
41%
0%
2016
1.76%
4.5 years
41%
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,
2017
2016
2015
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options
Outstanding at beginning of period
829,617
$ 23.203
940,610
$ 14.163
1,074,251
$ 10.110
Granted at Market
Canceled
Exercised
Outstanding at end of period
Exercisable at end of period
27,050
$ 99.087
(18,331) $ 57.197
(207,489) $ 11.520
630,847
$ 29.312
129,855
$ 67.706
(463) $ 14.881
(240,385) $ 11.886
$ 23.203
829,617
146,446
$ 36.904
(28,440) $ 10.080
(251,647) $ 10.559
$ 14.163
940,610
456,802
$ 18.316
532,703
$ 12.140
621,559
$ 10.269
The total estimated fair value of stock options granted were computed to be approximately $1.0
million, $3.2 million and $1.6 million during the years ended December 31, 2017, 2016 and 2015,
respectively. The amounts are amortized ratably over the vesting periods of the options. The weighted average
estimated fair value of options granted was computed to be approximately $37.35, $24.59 and $11.35 during
the years ended December 31, 2017, 2016 and 2015, respectively. The total intrinsic value of options
exercised was $17.7 million, $9.9 million and $4.7 million during the years ended December 31, 2017, 2016
and 2015, respectively. The cash proceeds from options exercised was $1.8 million, $1.9 million and $1.8
million during the years ended December 31, 2017, 2016 and 2015, respectively.
29
Options Outstanding
Options Exercisable
Number of
Options
Outstanding
December 31,
at
2017
Weighted
Average
Remaining
Contractual
Life in Years
Weighted
Average
Exercise
Price
Number of
Options
Exercisable
December 31,
at
2017
Weighted
Average
Exercise
Price
97,743
132,096
132,976
144,683
123,349
630,847
2.68
5.77
6.18
7.85
9.02
6.52
$
$
$
$
$
$
5.404
7.548
14.456
37.055
78.497
29.312
97,743
132,096
108,852
90,388
27,723
456,802
$
$
$
$
$
$
5.404
7.548
13.680
35.785
76.389
18.316
Exercise Prices
$ 4.40 - $ 6.90
$ 6.91 - $ 8.35
$ 8.36 - $18.13
$18.14 - $39.76
$39.77 - $108.25
$ 4.40 - $108.25
As of December 31, 2017, there was approximately $3.5 million of total unrecognized compensation
cost related to outstanding stock options. That cost is expected to be recognized over a weighted-average
period of 2.1 years with all cost to be recognized by the end of December 2019, assuming all options vest
according to the vesting schedules in place at December 31, 2017. As of December 31, 2017, the aggregate
intrinsic value of outstanding options was approximately $32.6 million and the aggregate intrinsic value of
exercisable options was approximately $28.3 million.
Employee Stock Purchase Plan
Under the 1997 Employee Stock Purchase Plan (the "ESPP"), we are authorized to issue up to
450,000 shares of common stock to our employees, of which 419,651 had been issued as of December 31,
2017. 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 5 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.
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
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
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes information about stock options outstanding and exercisable at
December 31, 2017.
Options Outstanding
Options Exercisable
Number of
Options
Outstanding
at
December 31,
2017
Weighted
Average
Remaining
Contractual
Life in Years
Weighted
Average
Exercise
Price
Number of
Options
Exercisable
at
December 31,
2017
Weighted
Average
Exercise
Price
97,743
132,096
132,976
144,683
123,349
630,847
2.68
5.77
6.18
7.85
9.02
6.52
$
$
$
$
$
$
5.404
7.548
14.456
37.055
78.497
29.312
97,743
132,096
108,852
90,388
27,723
456,802
$
$
$
$
$
$
5.404
7.548
13.680
35.785
76.389
18.316
Exercise Prices
$ 4.40 - $ 6.90
$ 6.91 - $ 8.35
$ 8.36 - $18.13
$18.14 - $39.76
$39.77 - $108.25
$ 4.40 - $108.25
As of December 31, 2017, there was approximately $3.5 million of total unrecognized compensation
cost related to outstanding stock options. That cost is expected to be recognized over a weighted-average
period of 2.1 years with all cost to be recognized by the end of December 2019, assuming all options vest
according to the vesting schedules in place at December 31, 2017. As of December 31, 2017, the aggregate
intrinsic value of outstanding options was approximately $32.6 million and the aggregate intrinsic value of
exercisable options was approximately $28.3 million.
Employee Stock Purchase Plan
Under the 1997 Employee Stock Purchase Plan (the "ESPP"), we are authorized to issue up to
450,000 shares of common stock to our employees, of which 419,651 had been issued as of December 31,
2017. 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 5 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.
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
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
30
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
We issued 10,983, 17,826 and 16,673 shares under the ESPP for the years ended December 31, 2017,
2016 and 2015, respectively.
For the years ended December 31, 2017, 2016 and 2015, 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
2017
0.74%
1.2 years
45%
0%
2016
0.54%
1.2 years
42%
0%
2015
0.27%
1.2 years
36%
0%
The weighted-average fair value of the purchase rights granted was $15.72, $8.23 and $6.25 per share
for the years ended December 31, 2017, 2016 and 2015, respectively.
Restricted Stock
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"). Of the 63,572 shares, 39,217 shares were issued from the 1997
Plan and 24,355 shares were issued from the 2003 Plan. The shares were issued in five tranches and were
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 vested on April 30, 2016,
of which 2,525 shares were withheld for tax purposes.
On March 26, 2014, we issued 110,000 shares to Mr. Wilson from the 1997 Plan 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 were to vest on the succeeding March 26 until
all shares were vested in full as of March 26, 2017. On May 6, 2014, we issued an additional 130,000 shares
31
to Mr. Wilson following a 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 "2015 MIP Grants"). The Company
issued 52,956 shares under the Performance Grants and 24,649 shares under the 2015 MIP Grants from the
1997 Plan. The Performance Grants have met the underlying performance condition based on the Company's
2015 financial performance and are to cliff vest on March 17, 2018, subject to other vesting provisions in the
underlying restricted stock grant agreement. The 2015 MIP Grants were subject to the Company’s
achievement of certain financial goals and other vesting provisions in the underlying restricted stock grant
agreement. On March 2, 2016, the Company vested 14,364 shares related to the 2015 MIP Grants based on
the respective performance criteria, including 4,788 shares withheld for tax, and canceled the remaining
10,285 shares. The compensation expense is based on the closing market price on the date of the grant.
On March 2, 2016, the Company issued 15,000 unvested shares to certain Executive Officers related
to performance-based restricted stock grants as part of the Company’s 2016 Management Incentive Plan (the
"2016 MIP Grants") from the 1997 Plan. Of these, 14,629 vested, 371 were forfeited, and 4,133 were
withheld for tax. The 2016 MIP Grants vested during the three months ended March 31, 2017. The
compensation expense is based on the closing market price on the date of the grant.
On May 1, 2017, the Company issued 2,720 shares of our Common Stock to the Company's non-
employee directors from the 2003 Plan, with a subsequent grant of 567 shares to a new non-employee director
on June 12, 2017 from the 2003 Plan. These grants are to vest (the "Vesting Time") in full on the latter of (i)
the one year anniversary of the date of grant and (ii) the Company’s Annual Meeting of Stockholders for the
year following the year of grant for the award (the "Vesting Meeting"), subject to (i) the non-employee
director's continued service to the Company through the Vesting Time, unless the non-employee director’s
current term expires at the Vesting Meeting in which case vesting is subject to the non-employee director’s
service to the Vesting Meeting and (ii) the non-employee director not engaging in “competition”, as defined in
a restricted stock grant agreement executed by the non-employee director, to the Vesting Time. The
compensation expense is based on the closing market price on the date of the grant.
On May 31, 2017, the Company issued 23,700 unvested performance-based restricted stock shares to
certain key employees from the 1997 Plan. The vesting of these shares is subject to the achievement of certain
Company performance and market conditions and, in some instances, a service period requirement, that must
be met on or before May 30, 2024. For the four tranches related to performance conditions, the compensation
expense is based on the closing market price on the date of the grant, $98.66. The award is expensed when
the performance condition is considered probable and taken ratably over the period in which the performance
metrics are expected to be achieved. For the six tranches related to market conditions, which include stock
price targets and outperformance of the S&P, the compensation expense is based on a fair value assigned to
the market metric upon grant using a Monte Carlo model, weighted average value of $69.06, which remains
constant throughout the vesting period, also determined within the model.
On June 15, 2017, the Company issued 6,594 unvested shares to certain Executive Officers related to
performance-based restricted stock grants as part of the Company's 2017 Management Incentive Plan from
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
to Mr. Wilson following a 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 "2015 MIP Grants"). The Company
issued 52,956 shares under the Performance Grants and 24,649 shares under the 2015 MIP Grants from the
1997 Plan. The Performance Grants have met the underlying performance condition based on the Company's
2015 financial performance and are to cliff vest on March 17, 2018, subject to other vesting provisions in the
underlying restricted stock grant agreement. The 2015 MIP Grants were subject to the Company’s
achievement of certain financial goals and other vesting provisions in the underlying restricted stock grant
agreement. On March 2, 2016, the Company vested 14,364 shares related to the 2015 MIP Grants based on
the respective performance criteria, including 4,788 shares withheld for tax, and canceled the remaining
10,285 shares. The compensation expense is based on the closing market price on the date of the grant.
On March 2, 2016, the Company issued 15,000 unvested shares to certain Executive Officers related
to performance-based restricted stock grants as part of the Company’s 2016 Management Incentive Plan (the
"2016 MIP Grants") from the 1997 Plan. Of these, 14,629 vested, 371 were forfeited, and 4,133 were
withheld for tax. The 2016 MIP Grants vested during the three months ended March 31, 2017. The
compensation expense is based on the closing market price on the date of the grant.
On May 1, 2017, the Company issued 2,720 shares of our Common Stock to the Company's non-
employee directors from the 2003 Plan, with a subsequent grant of 567 shares to a new non-employee director
on June 12, 2017 from the 2003 Plan. These grants are to vest (the "Vesting Time") in full on the latter of (i)
the one year anniversary of the date of grant and (ii) the Company’s Annual Meeting of Stockholders for the
year following the year of grant for the award (the "Vesting Meeting"), subject to (i) the non-employee
director's continued service to the Company through the Vesting Time, unless the non-employee director’s
current term expires at the Vesting Meeting in which case vesting is subject to the non-employee director’s
service to the Vesting Meeting and (ii) the non-employee director not engaging in “competition”, as defined in
a restricted stock grant agreement executed by the non-employee director, to the Vesting Time. The
compensation expense is based on the closing market price on the date of the grant.
On May 31, 2017, the Company issued 23,700 unvested performance-based restricted stock shares to
certain key employees from the 1997 Plan. The vesting of these shares is subject to the achievement of certain
Company performance and market conditions and, in some instances, a service period requirement, that must
be met on or before May 30, 2024. For the four tranches related to performance conditions, the compensation
expense is based on the closing market price on the date of the grant, $98.66. The award is expensed when
the performance condition is considered probable and taken ratably over the period in which the performance
metrics are expected to be achieved. For the six tranches related to market conditions, which include stock
price targets and outperformance of the S&P, the compensation expense is based on a fair value assigned to
the market metric upon grant using a Monte Carlo model, weighted average value of $69.06, which remains
constant throughout the vesting period, also determined within the model.
On June 15, 2017, the Company issued 6,594 unvested shares to certain Executive Officers related to
performance-based restricted stock grants as part of the Company's 2017 Management Incentive Plan from
32
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the 1997 Plan. As of December 31, 2017, all shares were forfeited and no compensation expense was
recorded for the period ended December 31, 2017.
11.
COMMITMENTS AND CONTINGENCIES
On December 1, 2017, the Company issued 45,000 unvested performance-based restricted stock
shares from the 1997 Plan to Mr. Wilson. The vesting of these shares is subject to the achievement of certain
Company performance and market conditions and, in some instances, a service period requirement, that must
be met on or before March 31, 2025. For the three tranches (equal tranches of 9,375 restricted shares) related
to performance conditions, the compensation expense is based on the closing market price on the date of the
grant, $86.32. The award is expensed when the performance condition is considered probable and taken
ratably over the period in which the performance metrics are expected to be achieved. For the three tranches
(equal tranches of 5,625 restricted shares) related to market conditions, which include stock price targets, the
compensation expense is based on a fair value assigned to the market metric upon grant using a Monte Carlo
model, weighted average value of $72.95, which remains constant throughout the vesting period, which is
also determined within the model.
As of December 31, 2017, there was approximately $3.2 million of total unrecognized compensation
cost related to restricted stock. The Company expects to recognize this expense over a weighted average
period of 1.4 years.
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.
10.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consisted of the following (in thousands):
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. Royalties of $0.3
million became payable under these agreements in the year ended December 31, 2017, and $0.4 million in
each of the years ended December 31, 2016 and 2015.
The Company has entered into operating leases for its office and research facilities and certain
equipment with future minimum payments as of December 31, 2017 as follows (in thousands):
$
$
2,156
2,035
1,835
1,747
1,714
1,617
11,104
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
and 2015.
The Company had rent expense of $1.6 million in each of the years ended December 31, 2017, 2016,
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
("Fauley Complaint"). The Company does not have insurance coverage for the Fauley Complaint. The
Company intends to defend itself vigorously in this matter and at this time is unable to estimate a possible
loss or a range of loss. At December 31, 2017, 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 was $0.2
million and $0.4 million as of December 31, 2017 and 2016, respectively.
Balances at December 31, 2015
Other comprehensive income (loss)
Balances at December 31, 2016
Other comprehensive income (loss)
Balances at December 31, 2017
$
$
Minimum
pension
liability
Foreign
currency
translation
673
(75)
598
123
721
(576) $
75
(501)
12
(489) $
$
Sale of
equity
investment
90
$
(90)
—
—
— $
$
Total
accumulated
other
comprehensive
income
187
(90)
97
135
232
33
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11.
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. Royalties of $0.3
million became payable under these agreements in the year ended December 31, 2017, and $0.4 million in
each of the years ended December 31, 2016 and 2015.
The Company has entered into operating leases for its office and research facilities and certain
equipment with future minimum payments as of December 31, 2017 as follows (in thousands):
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
$
$
2,156
2,035
1,835
1,747
1,714
1,617
11,104
The Company had rent expense of $1.6 million in each of the years ended December 31, 2017, 2016,
and 2015.
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
("Fauley Complaint"). The Company does not have insurance coverage for the Fauley Complaint. The
Company intends to defend itself vigorously in this matter and at this time is unable to estimate a possible
loss or a range of loss. At December 31, 2017, 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 was $0.2
million and $0.4 million as of December 31, 2017 and 2016, respectively.
34
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12.
INTEREST AND OTHER EXPENSE (INCOME)
14.
SEGMENT REPORTING
Interest and other expense (income) consisted of the following (in thousands):
Interest income
Interest expense
Other expense (income), net
2017
Year Ended December 31,
2016
2015
$
$
(167) $
245
(228)
(150) $
(124) $
160
(7)
29 $
(172)
200
102
130
Cash paid for interest was $206 thousand, $78 thousand and $90 thousand for the years ended
December 31, 2017, 2016 and 2015, respectively.
13.
CREDIT FACILITY AND LONG-TERM DEBT
On July 27, 2017, we entered into a Credit Agreement (the "Credit Agreement") with JPMorgan
Chase Bank, N.A. ("Chase"), which provides for a revolving credit facility of up to $30.0 million (the "Credit
Facility"). The Credit Facility provides us with the ability to borrow up to $30.0 million, although the amount
of the Credit Facility may be increased by an additional $20.0 million up to a total of $50.0 million subject to
receipt of additional lender commitments and other conditions. Any interest on borrowings due is to be
charged at either the (i) rate of interest per annum publicly announced from time to time by Chase at its prime
rate in effect at its principal offices in New York City, subject to a floor, minus 1.65%, or (ii) the interest rate
per annum equal to (a) LIBOR for the interest period in effect multiplied by (b) Chase's Statutory Reserve
Rate (as defined in the Credit Agreement), plus 1.10% and payable monthly. There is an annual minimum
interest charge of $60 thousand under the Credit Agreement. Borrowings under the Credit Facility are subject
to certain financial and non-financial covenants and are available for various corporate purposes, including
general working capital, capital investments, and certain permitted acquisitions. The Credit Agreement also
permits us to issue letters of credit. The maturity date of the Credit Facility is July 27, 2020. The foregoing
discussion of the Credit Facility is a summary only and is qualified in its entirety by reference to the full text
of the Credit Agreement, a copy of which has been filed as an exhibit to the Company's Current Report on
Form 8-K filed with the SEC on August 2, 2017. At December 31, 2017, we had $6.0 million of borrowings
outstanding on this line of credit and we were in compliance with all financial covenants. In connection with
the Credit Agreement, the Company incurred debt issuance costs of $120 thousand. These costs are included
in other non-current assets on the Company's consolidated balance sheet, and will be amortized to interest
expense ratably over the term of the agreement.
Concurrent with the Credit Agreement, we repaid all outstanding balances and closed our $15.0
million asset-based revolving line of credit with Wells Fargo, which had a maturity date of December 31,
2017. Our outstanding balance under this arrangement at December 31, 2016 was $0.7 million. Our ability to
borrow under this line of credit varied based upon available cash, eligible accounts receivable and eligible
inventory. On December 31, 2016, any interest on borrowings due was to be charged at a stated rate of three
month LIBOR plus 2.25% and payable monthly. Under this agreement, we were 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 was based on a fixed charge coverage ratio,
as defined in our agreement with Wells Fargo. Failure to comply with any of the covenants, representations or
warranties could result in our being in default on the loan and could cause all outstanding amounts payable to
Wells Fargo to become immediately due and payable or impact our ability to borrow under the agreement.
35
The Company is comprised of two reportable segments, Core Companion Animal Health ("CCA")
and Other Vaccines, Pharmaceuticals and Products ("OVP"). The CCA segment includes point of care
diagnostic laboratory instruments and supplies, and imaging instruments and software and services as well as
single use diagnostic and other tests, pharmaceuticals and vaccines, primarily for canine and feline use. 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 OVP segment includes private label vaccine and pharmaceutical production, primarily for
cattle, but also for other species including equine, porcine, avian, feline and canine. All OVP products are sold
by third parties under third-party labels.
following table (in thousands):
Summarized financial information concerning the Company's reportable segments is shown in the
Core
Companion
Animal Health
Other Vaccines,
Pharmaceuticals
and Products
$
105,191 $
24,150 $
129,341
Year Ended December 31, 2017
Total revenue
Operating Income
Income before income taxes
Total assets
Net assets
Capital expenditures
Depreciation and amortization
Year Ended December 31, 2016
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
$
107,398 $
22,685 $
130,083
Core
Companion
Animal Health
Other Vaccines,
Pharmaceuticals
and Products
$
84,249 $
20,348 $
104,597
Total
18,219
18,369
135,787
100,440
3,469
4,754
Total
16,533
16,504
130,844
86,975
3,417
4,645
Total
8,557
8,427
109,719
63,528
3,773
4,187
5,563
5,541
23,819
24,456
3,260
1,018
3,518
3,566
19,849
18,903
2,282
845
3,646
3,591
17,152
15,353
2,596
709
12,656
12,828
111,968
75,984
209
3,736
13,015
12,938
110,995
68,072
1,135
3,800
4,911
4,836
92,567
48,175
1,177
3,478
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14.
SEGMENT REPORTING
The Company is comprised of two reportable segments, Core Companion Animal Health ("CCA")
and Other Vaccines, Pharmaceuticals and Products ("OVP"). The CCA segment includes point of care
diagnostic laboratory instruments and supplies, and imaging instruments and software and services as well as
single use diagnostic and other tests, pharmaceuticals and vaccines, primarily for canine and feline use. 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 OVP segment includes private label vaccine and pharmaceutical production, primarily for
cattle, but also for other species including equine, porcine, avian, feline and canine. All OVP products are sold
by third parties under third-party labels.
Summarized financial information concerning the Company's reportable segments is shown in the
following table (in thousands):
Year Ended December 31, 2017
Total revenue
Operating Income
Income before income taxes
Total assets
Net assets
Capital expenditures
Depreciation and amortization
Year Ended December 31, 2016
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
36
Core
Companion
Animal Health
$
Other Vaccines,
Pharmaceuticals
and Products
Core
Companion
Animal Health
$
Other Vaccines,
Pharmaceuticals
and Products
Core
Companion
Animal Health
$
Other Vaccines,
Pharmaceuticals
and Products
105,191 $
12,656
12,828
111,968
75,984
209
3,736
107,398 $
13,015
12,938
110,995
68,072
1,135
3,800
84,249 $
4,911
4,836
92,567
48,175
1,177
3,478
24,150 $
5,563
5,541
23,819
24,456
3,260
1,018
22,685 $
3,518
3,566
19,849
18,903
2,282
845
20,348 $
3,646
3,591
17,152
15,353
2,596
709
Total
129,341
18,219
18,369
135,787
100,440
3,469
4,754
Total
130,083
16,533
16,504
130,844
86,975
3,417
4,645
Total
104,597
8,557
8,427
109,719
63,528
3,773
4,187
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue is attributed to individual countries based on customer location. Total revenue by principal
15.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (Unaudited)
geographic area was as follows (in thousands):
United States
Canada
Europe
Other International
Total
For the Years Ended December 31,
2016
2015
2017
$
$
116,823 $
2,924
4,780
4,814
129,341 $
120,082 $
2,378
4,781
2,842
130,083 $
97,164
1,833
2,086
3,514
104,597
Total assets by principal geographic areas were as follows (in thousands):
United States
Europe
Total
2017
As of December 31,
2016
$
$
132,413 $
3,374
135,787 $
127,827 $
3,017
130,844 $
2015
106,780
2,939
109,719
In our CCA segment, revenue from Butler Animal Health Supply, LLC d/b/a Henry Schein Animal
Health ("Henry Schein") represented approximately 13%, 13%, and 10% of our consolidated revenue for the
years ended December 31, 2017, 2016, and 2015, respectively. Revenue from Merck entities, including
Merck Animal Health, represented approximately 12% for the year ended December 31, 2017, and 11% each
for the years ended December 31, 2016 and 2015. Revenue from De Lage Landen Financial Services, Inc.
("DLL"), represented approximately 7%, 11%, and 10% of our consolidated revenue for the years ended
December 31, 2017, 2016, and 2015, respectively; DLL is a third-party that provides financing and leasing for
our customers, primarily for our imaging products. In our OVP segment, revenue from Eli Lilly entities,
including Elanco, represented approximately 11%, 12% and 12% for the years ended December 31, 2017,
2016, and 2015, respectively. No other customer accounted for more than 10% of our consolidated revenue
for the years ended December 31, 2017, 2016, or 2015.
37
The following tables present quarterly unaudited results for the two years ended December 31, 2017
and 2016 (amounts in thousands, except per share data).
2017
Total revenue (revised)
Gross profit
Operating income
Net income
Net income attributable to Heska Corporation
Basic earnings (loss) per share attributable to Heska
Corporation
Diluted earnings (loss) per share attributable to
Heska Corporation
2016
Total revenue
Gross profit
Operating income
Net income
Net income attributable to Heska Corporation
Basic earnings per share attributable to Heska
Diluted earnings per share attributable to Heska
Corporation
Corporation
Q1
Q2
Q3
Q4
Total
$ 29,559
$ 33,405
$ 30,336
$ 36,041
$ 129,341
13,209
14,929
13,553
2,788
4,303
4,606
0.67
0.60
1,970
1,447
1,186
0.18
0.17
4,560
3,139
3,333
0.47
0.44
3,556
2,742
2,522
0.38
0.35
3,778
3,083
3,083
0.43
0.40
4,492
3,343
3,347
0.49
0.45
16,570
7,093
(1,069)
(1,069)
(0.15)
(0.14)
6,515
4,633
3,453
0.50
0.46
58,261
18,219
9,456
9,953
1.42
1.30
53,892
16,533
12,165
10,508
1.55
1.43
$ 27,146
$ 29,965
$ 33,430
$ 39,542
$ 130,083
11,442
12,682
13,718
16,050
For each of the quarters included in the Company’s Form 10-Qs for the year ended December 31,
2017, revenue and cost of revenue related to CCA distributor sales were overstated by $0.8 million, $0.9
million, and $1.1 million for the first, second, and third quarters, respectively. On December 31, 2017, an
adjustment was made to reduce cost of revenue and full year revenue by $2.8 million, resulting in no impact
on gross profit or net income and an increase to gross profit percentage of 1.3% for the full year and 1.2%,
1.2%, and 1.6% for the first, second, and third quarters, respectively. Management considered the impact to
current and past financial statements under the SEC’s authoritative guidance on materiality and determined
that the issue was not material, and therefore, the prior quarters’ Form 10-Qs were not amended. Impacts to all
periods in 2017, 2016 and 2015 were immaterial.
The following table illustrates the correction shown in the statements of income in Form 10-Q:
Three Months Ended
March 31, 2017
Three Months Ended
June 30, 2017
Three Months Ended
September 30, 2017
As
As
As
As
As
As
Reported Adjustment
Revised
Reported Adjustment
Revised
Reported Adjustment
Revised
$ 30,382
$
(823) $ 29,559
$ 34,336
$
(931) $ 33,405
$ 31,428
$
(1,092) $ 30,336
Revenue
Cost of
Revenue
Gross Profit
(17,173)
13,209
Gross Margin
43.5%
44.7%
43.5%
44.7%
43.1%
44.7%
823
(16,350)
(19,407)
931
(18,476)
(17,875)
1,092
(16,783)
— 13,209
14,929
— 14,929
13,553
— 13,553
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (Unaudited)
The following tables present quarterly unaudited results for the two years ended December 31, 2017
and 2016 (amounts in thousands, except per share data).
Q1
Q2
Q3
Q4
Total
Total revenue (revised)
Gross profit
Operating income
Net income
Net income attributable to Heska Corporation
Basic earnings (loss) per share attributable to Heska
Corporation
Diluted earnings (loss) per share attributable to
Heska Corporation
$ 29,559
13,209
2,788
4,303
4,606
$ 33,405
14,929
4,560
3,139
3,333
$ 30,336
13,553
3,778
3,083
3,083
$ 36,041
16,570
7,093
(1,069)
(1,069)
$ 129,341
58,261
18,219
9,456
9,953
0.67
0.60
0.47
0.44
0.43
0.40
(0.15)
(0.14)
1.42
1.30
2017
2016
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
$ 27,146
11,442
1,970
1,447
1,186
$ 29,965
12,682
3,556
2,742
2,522
$ 33,430
13,718
4,492
3,343
3,347
$ 39,542
16,050
6,515
4,633
3,453
$ 130,083
53,892
16,533
12,165
10,508
0.18
0.17
0.38
0.35
0.49
0.45
0.50
0.46
1.55
1.43
For each of the quarters included in the Company’s Form 10-Qs for the year ended December 31,
2017, revenue and cost of revenue related to CCA distributor sales were overstated by $0.8 million, $0.9
million, and $1.1 million for the first, second, and third quarters, respectively. On December 31, 2017, an
adjustment was made to reduce cost of revenue and full year revenue by $2.8 million, resulting in no impact
on gross profit or net income and an increase to gross profit percentage of 1.3% for the full year and 1.2%,
1.2%, and 1.6% for the first, second, and third quarters, respectively. Management considered the impact to
current and past financial statements under the SEC’s authoritative guidance on materiality and determined
that the issue was not material, and therefore, the prior quarters’ Form 10-Qs were not amended. Impacts to all
periods in 2017, 2016 and 2015 were immaterial.
The following table illustrates the correction shown in the statements of income in Form 10-Q:
Three Months Ended
March 31, 2017
Three Months Ended
June 30, 2017
Three Months Ended
September 30, 2017
As
Reported Adjustment
As
Revised
As
Reported Adjustment
As
Revised
As
Reported Adjustment
As
Revised
$ 30,382
$
(823) $ 29,559
$ 34,336
$
(931) $ 33,405
$ 31,428
$
(1,092) $ 30,336
(17,173)
13,209
823
(16,350)
(19,407)
931
(18,476)
(17,875)
1,092
(16,783)
— 13,209
14,929
— 14,929
13,553
— 13,553
Revenue
Cost of
Revenue
Gross Profit
Gross Margin
43.5%
44.7%
43.5%
44.7%
43.1%
44.7%
38
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16.
SUBSEQUENT EVENTS
On March 7, 2018, the Compensation Committee of the Company's Board of Directors authorized the
issuance of 128,500 shares of performance-based restricted common stock and stock options with 130,000
underlying shares of common stock under the 1997 Plan, including 118,500 shares of performance-based
restricted common stock and stock options with 120,000 underlying shares of common stock granted to
Company Executive Officers. The vesting of the performance-based restricted shares is subject to the
achievement of certain Company performance and market conditions and, in some instances, a service period
requirement. The shares are to be forfeited if the applicable performance or market condition is not met by the
date in each fiscal year that the Company's independent registered public accountants issue their financial
report on the Company's prior fiscal year financial statements in 2025 or March 31, 2025, respectively, with
the exception of 27,539 shares of restricted common stock with vesting tied to the Company's stock
outperforming the S&P 500 Index over a two or four year time period, which will be forfeited if not achieved
at the specified time. The stock options are to vest annually in three approximately equal tranches. No other
material recognized or non-recognizable subsequent events were identified.
39
40
41
Onward
2018
ONGOING OFFICERS
Kevin S. Wilson, Chief Executive Officer and President
Jason A. Napolitano, Chief Operating Officer, Chief Strategist and Secretary
Nancy Wisnewski, Ph.D., Executive Vice President, Diagnostic Operations and Product Development
Steven M. Eyl, Executive Vice President, Global Sales and Marketing
Steven M. Asakowicz, Executive Vice President, Companion Animal Health Sales
Rodney A. Lippincott, Executive Vice President, Companion Animal Health Sales
Catherine I. Grassman, Vice President, Chief Accounting Officer and Controller
Laurie E. Peterson, Vice President, Heska Des Moines*
Daniel J. Pollack, Vice President, Financial Planning and Business Analytics*
BOARD OF DIRECTORS
Sharon J. Larson, Chair of the Board; Principal and CEO of SLR Associates, LLC
G. Irwin Gordon, Former Executive Vice President and Chief Revenue Officer of Invitation Homes
Scott W. Humphrey, Former President and Chief Executive Officer of One Hope United
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, Owner and President of Whitewater Advisors, LLC
LOCATIONS
Corporate Office • 3760 Rocky Mountain Ave • Loveland CO 80538 • 970.493.7272
Des Moines IA • 515.263.8600
Fribourg, Switzerland • + 41 26 347 21 40
CONTACTS
Investor Relations • investorrelations@heska.com
Marketing • marketing@heska.com
Product Orders • 800.464.3752
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
Corporation. ©2018 Heska Corporation. All Rights Reserved. HESKA is a registered trademark of Heska Corporation in the U.S. and other countries. 18LT0301