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
2018
A N N U A L
R E P O R T
1
CLEARED FOR LAUNCH
2018 Heska Corporation Annual Report
This report was finalized on March 25, 2019 and speaks only as of such date or, with respect to historical
information (including the financial data included herein), to such earlier date as may be expressly stated.
Information contained herein has not been updated for the passage of time or otherwise from such dates.
This report also contains express or implied forward-looking information about the future plans, financial
condition and operating performance of Heska Corporation (“Heska”) that are not statements of historical
fact. These are forward-looking statements within the meaning of the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995. These statements are based on current expectations, and factors
that could cause our actual business and financial results to differ materially from those expressed in Heska’s
forward-looking statements include the following: risks related to relying on historical results to project future
performance; uncertainties related to Heska’s ability to enter successfully markets throughout the world in an
economically sustainable manner; competition and uncertainties related to Heska’s ability to gain customers
currently serviced by competitors, gain new customers and maintain existing customers; uncertainties related
to Heska’s ability to successfully launch new products with currently projected capabilities, including where
Heska is reliant on one or more third parties for development or other technical work to be done; uncertainties
related to spending in the veterinary marketplace, including Heska’s ability to predict the sustainability of
current trends and future trends; uncertainties related to any product’s ability to perform and be recognized as
anticipated, in particular when such product is under development; uncertainties related to Heska’s ability to
sell and market its products in an economically sustainable fashion, including related to varying international
customs, cultures, languages and sales cycles; uncertainties related to Heska’s ability to identify, investigate and
complete acquisitions, investments and other strategic development opportunities in a manner than creates,
rather than diminishes, shareholder value; 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 benefit from such reputations; uncertainties related to Heska’s ability to supply capital necessary for its
initiatives, including Heska’s ability to raise capital in the future if necessary; 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 with foreign political and
economic climates, and currency fluctuations; risks related to Heska’s reliance on third parties with exclusive
marketing rights to certain Heska products; uncertainties related to Heska’s reliance on third-parties to supply
certain of its products, which is substantial; and the risks and uncertainties set forth in Heska’s filings and future
filings with the Securities and Exchange Commission (“SEC”), including those articulated in Heska’s Annual
Report on Form 10-K for the twelve month period ended December 31, 2018. Heska does not undertake any
obligation to update any forward-looking statement except as may be required by law.
2
March 15, 2019
Dear Shareholder,
Thank you for your interest in Heska and the good mission we pursue. Heska is honored to make a
difference in the lives of millions of people through our efforts in animal health. Heska’s point-of-care
diagnostics are often a pet’s only healthcare voice in their times of need and are regularly the key
information underpinning their preventative and predictive healthcare solutions. We are thankful and
humbled to be part of a very select group of companies doing this good work while building value
for shareholders.
Long-term followers of Heska are familiar with our strong belief in the power of five-year plans to
create substantial and sustainable value. Under Act One (2013-2017), our first five-year plan, Heska
retooled to focus on core business lines and strategic assets for the future, while deemphasizing
legacy business lines that lacked the same opportunity to add value and build sustainable growth.
Because we believe in optimizing what works before scaling it, Act One focused on products and
product roadmaps that solve our customers’ most important problems, in unique ways, to make
Heska solutions highly profitable for users and Heska. Our efforts in this regard grew our lines of the
future to 70% of sales in 2018; we see this trend continuing, as our most valuable diagnostics and
allergy products are projected to grow to over 90% of total sales by the end of Act Two.
2018 was the first year of our Act Two (2018-2022) five-year plan. In 2018, Heska continued to prepare
the ground for major growth, even as we faced challenges from perennially strong competitors
and sometimes from ourselves, as we missed the mark in some areas. Because we believe a key job
of leadership is to define reality and to adjust to it proactively, we were clear-eyed in facing these
challenges and we are better prepared for the inevitable, next tests. While 2018 had its challenges,
Heska did “punch above its weight” in our most important Point of Care Lab Diagnostics business, by
gaining domestic market share for the fifth year in a row, to reach 2,175 multi-year subscribers, which
drove Point of Care Lab Diagnostics Consumables sales growth of 14.3% at gross margins that were
up 170 basis points. Heska subscriber metrics were also quite strong, with a 95% Rate of Retention,
20% growth in Months Under Subscription, and an increase in Minimum Contract Subscription Value
of 28%. Heska’s Point of Care Lab Diagnostics business is performing wonderfully. Heska’s future is
now firmly in animal health point-of-care diagnostics and informatics, where our innovations are
developed, made, or sold by Heska to solve important problems across the globe. We have targeted
this critical value creation opportunity since 2013 and we have made excellent progress. With the
“mix” now strongly favoring Heska’s high-margin product lines and multi-year subscriptions, Heska is
positioned to scale.
3
2019 is the second year of our Act Two (2018-2022) five-year plan, and we are focused on realizing
the promise of last year’s $19MM of investments in R&D and sales team expansions, to pursue
our most aggressive product launch cycle ever. If successful, we will capture decades of growth
potential in domestic and new international markets. In 2019, Heska goes global, with launches
into Australia, the European Union, and other international markets to directly sell our expanding
product portfolio at greater scale. Key to our international launch is Heska’s upcoming Element RC
rotor-style chemistry, which is engineered to deliver more and superior tests than the competition,
in a smaller, easier-to-use, and lower cost per result platform. For domestic and international markets,
Heska is launching the industry’s most advanced immunodiagnostics platform in 2019. The all new
Element i+ is designed to bring the power of multiplex testing to our Element i franchise, in a highly
differentiated, faster, lower cost per result technology that supports a test menu pipeline that can
drive growth over the next decades. With more to come in 2019 and 2020, we have a great deal of
work and opportunity ahead, as we continue to innovate to leapfrog the competition, expand our
geographic footprint, extend our subscriber base, leverage our market access and expertise, and
execute on important business development, licensing, partnership, and acquisition opportunities.
While we know the competition votes “no” on our plans every day, we are energized by this fact and
excited by the opportunity to convince their customers, our customers, and greenfield customers
of the superior value of Heska products and services. We aim to deliver these messages to a global
animal healthcare industry that continues to see favorable, broad-based trends that are increasingly
driving meaningful investment and strategic activity amongst customers, suppliers, and potential
partners. As a leader in the space, our unique strengths point towards an important and rapidly
scalable role for Heska in the race to serve animals and pets of all types and nationalities. We are
committed to the necessary time, investments, and efforts to reach our potential and we are grateful
for the chance to work for you as we proceed down this road together.
Respectfully,
Kevin S. Wilson
Chief Executive Officer and President
4
5
To the Stockholders and
Board of Directors of Heska Corporation
Our audit 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 audit 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 audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
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 (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) 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 (3) 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.
We have served as the Company’s auditor since 2006.
Denver, Colorado
March 7, 2019
6
Report of Independent Public Accounting Firm
To the Shareholders and Board of Directors of
Heska Corporation
Loveland, Colorado
OPINION ON THE CONSOLIDATED FINANCIAL STATEMENTS
We have audited the accompanying consolidated balance sheets of Heska Corporation (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 two year period ended December 31, 2017, and the related
notes (collectively referred to as the “financial statements”).
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 two year period ended December 31, 2017, in conformity with accounting principles generally accepted in the
United States of America.
BASIS FOR OPINION
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud.
March 19, 2018
Denver, Colorado
EKS&H LLLP
7
8
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
Current assets:
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of
$245 and $215, respectively
Due from – related parties
Inventories, net
Lease receivable, current, net of allowance for doubtful accounts of
$40 and $0, respectively
Other current assets
Total current assets
Property and equipment, net
Goodwill
Other intangible assets, net
Deferred tax asset, net
Lease receivable, non-current
Investments in unconsolidated affiliates
Other non-current assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Due to – related parties
Accrued liabilities
Current portion of deferred revenue, and other
Total current liabilities
Deferred revenue, net of current portion
Line of credit and other long-term borrowings
Other liabilities
Total liabilities
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, $.01 par value, 2,500,000 shares authorized, none issued or
outstanding
Common stock, $.01 par value, 10,250,000 and 10,000,000 shares authorized,
respectively, none issued or outstanding
Public common stock, $.01 par value, 10,250,000 and 10,000,000 shares authorized,
7,675,692 and 7,302,954 shares issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
—
—
77
257,034
277
(134,979)
122,409
$
156,452
$
See accompanying notes to consolidated financial statements.
9
December 31,
2018
2017
$
13,389
$
9,659
16,454
—
25,104
2,989
4,471
62,407
15,981
26,679
9,764
14,121
11,908
8,018
7,574
15,367
1
32,596
2,069
3,096
62,788
17,331
26,687
1,958
11,877
9,615
—
5,188
156,452
$
135,444
$
$
7,469
$
226
10,142
2,526
20,363
7,082
6,031
567
34,043
9,489
1,828
4,074
3,992
19,383
8,431
6,000
1,190
35,004
—
—
73
243,598
232
(143,463)
100,440
135,444
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Revenue:
Core companion animal
Other vaccines and pharmaceuticals
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 and equity in losses of unconsolidated affiliates
Income tax (benefit) expense:
Current income tax expense
Deferred income tax (benefit) expense
Total income tax (benefit) expense
Net income before equity in losses of unconsolidated affiliates
Equity in losses of unconsolidated affiliates
Net income, after equity in losses of unconsolidated affiliates
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,
2018
2017
2016
$ 108,924
$ 105,191
$
107,398
18,522
127,446
24,150
129,341
22,685
130,083
70,808
71,080
76,191
56,638
58,261
53,892
24,663
3,334
24,847
52,844
3,794
(13)
3,807
140
(2,255)
(2,115)
5,922
(72)
5,850
—
5,850
$
0.81
0.74
$
$
7,220
7,856
23,225
2,004
14,813
40,042
18,219
(150)
18,369
49
8,864
8,913
9,456
—
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
—
12,165
1,657
10,508
1.55
1.43
6,783
7,361
$
$
$
See accompanying notes to consolidated financial statements.
10
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31,
2018
2017
2016
Net income, after equity in losses of unconsolidated affiliates
$
5,850
$
9,456
$ 12,165
Other comprehensive income (loss):
Minimum pension liability
Sale of equity investment
Foreign currency translation
Comprehensive income
70
—
(25)
5,895
12
—
123
9,591
75
(90)
(75)
12,075
Comprehensive (loss) income attributable to non-controlling interest
Comprehensive income attributable to Heska Corporation
—
$
5,895
(497)
$ 10,088
1,657
$ 10,418
See accompanying notes to consolidated financial statements.
11
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Balances, January 1, 2016
6,625
$
66
$
227,267
$
187
$
(163,992) $
63,528
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
Stockholders'
Equity
Net income, after equity in losses of
unconsolidated affiliates
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 loss
—
175
226
—
—
—
Balances, December 31, 2016
7,026
$
Net income, after equity in losses of
unconsolidated affiliates
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
Balances, December 31, 2017
Adoption of accounting standards
Balances, January 1, 2018, as adjusted
Net income, after equity in losses of
unconsolidated affiliates
Issuance of common stock, net of shares
withheld for employee taxes
Issuance of common stock related to
acquisition of assets from Cuattro, LLC
Stock-based compensation
Other comprehensive income
—
277
—
—
—
—
7,303
$
—
7,303
—
318
55
—
—
Balances, December 31, 2018
7,676
$
—
2
2
—
—
—
70
—
3
—
—
—
—
73
—
73
—
3
1
—
—
77
—
6,347
1,616
2,260
1,145
—
—
—
—
—
—
(90)
12,165
12,165
—
—
—
—
—
6,349
1,618
2,260
1,145
(90)
$
238,635
$
97
$
(151,827) $
86,975
—
1,373
2,745
845
—
—
$
243,598
$
—
243,598
—
2,759
5,450
5,227
—
—
—
—
—
—
135
232
—
232
—
—
—
—
45
9,456
—
—
—
(1,092)
—
9,456
1,376
2,745
845
(1,092)
135
$
(143,463) $
100,440
2,634
(140,829)
5,850
—
—
—
—
2,634
103,074
5,850
2,762
5,451
5,227
45
$
257,034
$
277
$
(134,979) $
122,409
See accompanying notes to consolidated financial statements.
12
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2017
2016
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income, after equity in losses from unconsolidated affiliates
Adjustments to reconcile net income to cash provided by operating activities:
$
5,850
$
9,456
$
12,165
Depreciation and amortization
Deferred income tax (benefit) expense
Stock-based compensation
Other losses (gains)
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
Acquisition of intangible asset
Investments in unconsolidated affiliates
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
Net cash provided by financing activities
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
NON-CASH TRANSACTIONS:
Transfers of equipment between inventory and property and equipment, net
Common stock issued as partial consideration of Cuattro acquisition transactions (See Note 3)
$
$
$
4,595
(2,255)
5,227
80
(1,076)
6,046
1
(920)
(505)
(2,020)
(1,477)
6,146
(2,294)
(871)
(3,240)
13,287
—
(2,750)
(8,091)
—
(1,358)
25
(12,174)
4,034
(1,271)
(126)
3,000
(3,000)
(10)
—
2,627
(10)
3,730
9,659
13,389
1,449
5,450
$
$
$
4,754
8,864
2,745
(46)
5,243
(13,834)
99
(1,244)
(474)
3,143
250
(1,380)
(4,782)
(984)
(1,401)
10,409
—
—
—
(13,757)
(3,469)
57
(17,169)
2,452
(1,076)
(965)
40,307
(34,979)
(68)
(120)
5,551
74
(1,135)
10,794
9,659
$
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
—
—
—
(3,417)
—
(3,302)
2,382
(762)
—
34,792
(34,262)
(747)
—
1,403
(52)
3,904
6,890
10,794
1,637
$
— $
1,250
6,349
See accompanying notes to consolidated financial statements.
13
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 diagnostic
laboratory instruments and supplies; digital imaging diagnostic products, software and services; vaccines;
local and cloud-based data services; allergy testing and immunotherapy; and single-use offerings such as in-
clinic diagnostic tests and heartworm preventive products. Our core focus is on supporting veterinarians in the
canine and feline healthcare space.
Basis of Presentation and Consolidation
In the opinion of management, the accompanying Consolidated Financial Statements contain all adjustments,
consisting of normal, recurring adjustments, necessary to present fairly the financial position of the Company
as of December 31, 2018 and 2017, as well as the results of our operations, statements of stockholders' equity
and cash flows for the twelve months ended December 31, 2018, 2017 and 2016.
The audited Consolidated Financial Statements included herein have been prepared pursuant to the rules and
regulations of the SEC. Our audited 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 audited Consolidated Financial Statements are stated in U.S. Dollars
and have been prepared in accordance with accounting principles generally accepted in the U.S. ("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 GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. Significant estimates are required
when establishing the allowance for doubtful accounts and the net realizable value of inventory; determining
future costs associated with warranties provided; determining the period over which our obligations are
fulfilled under agreements to license product rights and/or technology rights; evaluating long-lived and
intangible assets and investments for estimated useful lives and impairment; estimating the useful lives of
instruments under leasing arrangements; determining the allocation of purchase price under purchase
accounting; estimating the expense associated with the granting of stock options; and 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 off-
balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other
14
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
Henry Schein represented 12% and 17% of our consolidated accounts receivable at December 31, 2018 and
2017, respectively. Merck entities represented approximately 10% and 15% of our consolidated accounts
receivable at December 31, 2018 and 2017, respectively. DLL represented 8% and 11% of our consolidated
accounts receivable at December 31, 2018 and 2017, respectively. Eli Lilly entities, including Elanco,
represented approximately 32% and 4% of our consolidated accounts receivable at December 31, 2018 and
2017, respectively. No other customer accounted for more than 10% of our consolidated accounts receivable
at December 31, 2018 or 2017.
We have established an allowance for doubtful accounts based upon factors surrounding the credit 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,
2016
2017
2018
$
$
215 $
104
(74)
245 $
237 $
168
(190)
215 $
189
163
(115)
237
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 foreign 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 1.6 million and 1.1 million Euros at December 31, 2018
and 2017, respectively. We held 0.2 million and 0.1 million Swiss Francs at December 31, 2018 and 2017,
respectively. The majority of our cash and cash equivalents are held at U.S.-based or Swiss-based financial
institutions in accounts not insured by governmental entities.
Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, short-term trade receivables and payables and
the Company's revolving line of credit. The carrying values of cash and cash equivalents and short-term trade
receivables and payables approximate fair value 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 similar debt with similar
15
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
maturities and collateral, and at December 31, 2018 and 2017, 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. This
estimate is calculated utilizing various information including assumptions of future market demand, market
conditions and remaining shelf life.
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,
2018
2017
15,000 $
3,592
8,085
(1,573)
25,104 $
18,465
4,296
11,465
(1,630)
32,596
$
$
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
Office furniture and equipment
Computer hardware and software
Leasehold and building improvements
Estimated
Useful Life
10 to 20 years
2 to 7 years
3 to 7 years
3 to 5 years
5 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.
16
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investments in Unconsolidated Affiliates
Investments in unconsolidated affiliates are measured and recorded as either non-marketable equity securities
or equity method investments. Non-marketable equity securities are equity securities without readily
determinable fair value that are measured and recorded using a measurement alternative which measures the
securities at cost minus impairment, if any, plus or minus changes from qualifying observable price changes.
Equity method investments are equity securities in investees we do not control but over which we have the
ability to exercise significant influence. When the equity method of accounting is determined to be
appropriate, the initial measurement of the investment includes the cost of the investment and all direct
transaction costs incurred to acquire the investment. Equity method investments are measured at cost minus
impairment, if any, plus or minus our share of equity method investee income or loss, which will be recorded
as a separate line on the income statement. Both types of investments will be evaluated for impairment if a
triggering event occurs.
Goodwill, Intangible and Other Long-Lived Assets
Goodwill is initially valued based on the excess of the purchase price of a business combination over the fair
value of acquired net assets recognized and represents the future economic benefits arising from other assets
acquired that could not be individually identified and separately recognized. Intangible assets other than
goodwill are initially valued at fair value. If a quoted price in an active market for the identical asset is not
readily available at the measurement date, the fair value of the intangible asset is estimated based on
discounted cash flows using market participant assumptions, which are assumptions that are not specific to
the Company. The selection of appropriate valuation methodologies and the estimation of discounted cash
flows require significant assumptions about the timing and amounts of future cash flows, risks, appropriate
discount rates, and the useful lives of intangible assets. When material, we utilize independent valuation
experts to advise and assist us in determining the fair values of the identified intangible assets acquired in
connection with a business acquisition and in determining appropriate amortization methods and periods for
those intangible 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 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.
We performed qualitative assessments in the fourth quarters of 2018, 2017, and 2016 and determined that no
indications of impairment existed.
We assess the realizability of intangible assets other than goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. If an impairment review is triggered,
we evaluate the carrying value of intangible assets based on estimated undiscounted future cash flows over
the remaining useful life of the primary asset of the asset group and compare that value to the carrying value
of the asset group. The cash flows that are used contain our best estimates, using appropriate and customary
17
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
assumptions and projections at the time. If the net carrying value of an intangible asset exceeds the related
estimated undiscounted future cash flows, an impairment to adjust the intangible asset to its fair value would
be reported as a non-cash charge to earnings. If necessary, we would calculate the fair value of an intangible
asset using the present value of the estimated future cash flows to be generated by the intangible asset, and
applying a risk-adjusted discount rate. We had no impairments of our intangible assets during the years ended
December 31, 2018, 2017, and 2016.
Revenue Recognition
We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which
we adopted on January 1, 2018, using the modified retrospective transition approach. See "Adoption of New
Accounting Pronouncements" below for impacts of adoption.
We generate our CCA segment revenue through the sale of products, either by outright purchase by our
customers or through a subscription agreement whereby our customers receive instruments and pay us a
monthly fee for the usage of the instrument as well as the consumables needed to conduct testing. Outright
sales to customers are the majority of both Point of Care imaging diagnostic transactions and the sale of
pharmaceuticals and vaccines, while subscription placement is the majority of Point of Care laboratory
transactions.
For outright sales of products, revenue is recognized when control of the promised product or service is
transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled
to in exchange for those products or services (the transaction price). Taxes assessed by governmental
authorities and collected from the customer are excluded from our revenue recognition. A performance
obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of
account under ASC 606. For instruments, consumables and most software licenses sold by the Company,
control transfers to the customer at a point in time. To indicate the transfer of control, the Company must have
a present right to payment, legal title must have passed to the customer, the customer must have the
significant risks and rewards of ownership and where acceptance is not a formality, the customer must have
accepted the product or service. Heska’s principal terms of sale are FOB Shipping Point, or equivalent, and,
as such, we primarily transfer control and record revenue for product sales upon shipment. If a performance
obligation to the customer with respect to a sales transaction remains unfulfilled following shipment (typically
owed installation or acceptance by the customer), revenue recognition for that performance obligation is
deferred until such commitments have been fulfilled. For extended warranty and service plans, control
transfers to the customer over the term of the arrangement. Revenue for extended warranties and service is
recognized based upon the period of time elapsed under the arrangement.
Our revenue under subscription agreements relates to OTL arrangements or STL arrangements. Determination
of an OTL or STL is primarily determined as a result of the length of the contract as compared to the
estimated useful life of the instrument, among other factors. Leases are outside of the scope of ASC 606 and
are therefore accounted for in accordance with ASC 840, Leases. A STL would result in earlier recognition of
instrument revenue as compared to an OTL, which is generally upon installation of the instruments. The cash
collected under both arrangements is over the term of the contract. The cost of the customer-leased
instruments is removed from inventory and recognized in the Consolidated Statements of Income. Instrument
lease revenue for OTL agreements is recognized on a straight-line basis over the life of the lease, and the costs
of customer-leased instruments are recorded within property and equipment in the accompanying
Consolidated Balance Sheets and depreciated over the instrument’s estimated useful life. The depreciation
expense is reflected in cost of revenue in the accompanying Consolidated Statements of Income. The OTLs
and STLs are not cancellable until after an initial term. OTLs may include a minimum utilization rather than a
minimum supply credit. Adoption of ASC 842 (refer to Accounting Pronouncements Not Yet Adopted) may
18
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
impact the classification of this type of lease on a go-forward basis due to the change in lessor requirements
within the new standard.
For contracts with multiple performance obligations, the Company allocates the contracts' transaction price
for each performance obligation on a relative standalone selling price basis using our best estimate of the
standalone selling price of each distinct product or service in the contract. The primary method used to
estimate the standalone selling price is the price observed in standalone sales to customers of a prior period.
Changes in these values can impact the amount of consideration allocated to each component of the contract.
When prices in standalone sales are not available, we may use a cost-plus margin approach. Allocation of the
transaction price is determined at the contracts' inception. The Company does not adjust the transaction price
for the effects of a significant financing component when the period between the transfer of the promised
good or service to the customer and payment for that good or service by the customer is expected to be one
year or less. This allocation approach also applies to contracts for which a portion of the contract relates to a
lease component.
To the extent the transaction price includes variable consideration, such as future payments based on
consumable usage over time, we apply judgment to determine if the variable consideration should be
constrained. As the variable consideration is highly susceptible to factors outside of the Company’s influence,
and the potential values contain a broad range of possible outcomes given all potential amounts of
consumption that could occur, it is likely that a significant revenue reversal would occur should the variable
consideration be estimated at an amount greater than the minimum stated amount until such a time as the
uncertainty is resolved.
We generate revenue within our OVP segment through contract manufacturing agreements with customers.
The timing of revenue recognition of our customer contracts are generally recognized upon shipment or
acceptance by our customer, under the same guidelines noted above for other outright product sales. Heska
assessed the over-time criteria within ASC 606 and concluded that while 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. Therefore, point in time revenue recognition
has been determined to be appropriate.
Revenue generated from licensing arrangements is recognized based on the underlying term of the contract.
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 and intent 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 that must be made by management. We
must also make estimates regarding our future obligations relating to returns, rebates, allowances and similar
other programs. We do not generally allow return of products or instruments. Distributor rebates are recorded
as a reduction to revenue.
Refer to Note 2 for additional disclosures required by ASC 606.
Prior to the adoption of ASC 606 on January 1, 2018, the Company recognized revenue in accordance with
Topic 605, Revenue Recognition. Our policy was to recognize revenue when the applicable revenue
recognition criteria were met, which generally included the following: persuasive evidence of an arrangement
exists; delivery has occurred or services rendered; price is fixed or determinable; and collectability is
reasonably assured. The adoption of the new revenue standard did not materially change our recognition from
ASC 605 (as disclosed under Adoption of New Accounting Pronouncements).
19
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
Advertising 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, 2018, 2017 and 2016.
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 prior year impact of the
enacted 21% U.S. 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.
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. Extended warranties
20
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
are sold to our customers and revenue is recognized over the term of the warranty agreement, as expected costs
are incurred.
Adoption of New Accounting Pronouncements
Effective January 1, 2018, we adopted FASB ASU 2017-09, Compensation - Stock Compensation (Topic
718): Scope of Modification Accounting, which provides clarification on accounting for modifications in
share-based payment awards. The adoption of this guidance did not have an impact on our consolidated
financial statements or related disclosures as there were no modifications to our share-based payment awards
during 2018.
In March 2018, we adopted FASB ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 118, which updates the income tax accounting to reflect the
SEC's interpretive guidance released on December 22, 2017, when the 2017 Tax Act was signed into law. See
Item 8, Note 4 - Income Taxes, for the impact of adoption to 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 GAAP revenue recognition guidance. ASC 606 outlines
a five-step model, under which Heska recognized revenue as performance obligations within customer
contracts 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 requirements for capitalizing
incremental costs of obtaining a contract and costs to fulfill a contract that meet certain capitalization criteria.
On January 1, 2018, we adopted ASC 606 using the modified retrospective method for all customer contracts
not yet completed as of the adoption date. Results for reporting periods beginning January 1, 2018 are
presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in
accordance with the Company's historic accounting under Topic 605, Revenue Recognition.
We recorded an increase to beginning retained earnings of $2.6 million as of January 1, 2018 due to the
cumulative impact of adopting ASC 606. The impact to beginning retained earnings was primarily driven by
the capitalization of certain costs to obtain our customer contracts, which were primarily sales-related
commissions. The adoption of ASC 606 did not have a significant impact on our Consolidated Financial
Statements as of and for the twelve months ended December 31, 2018. As a result, comparisons of revenues
and operating profit performance between periods are not affected by the adoption of this ASU.
Accounting Pronouncements Not Yet Adopted
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718),
Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects
of share-based compensation issued to non-employees by making the guidance consistent with accounting for
employee share-based compensation. ASU 2018-07 is effective for annual periods beginning after December
15, 2018 and interim periods within those annual periods, with early adoption permitted but no earlier than an
entity’s adoption date of Topic 606. We will adopt the provisions of this ASU in the first quarter of 2019.
Adoption of the new standard is not expected to have a material impact on our Consolidated Financial
Statements.
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
21
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
ASU permits companies to elect a reclassification of the 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 will adopt the
provisions of this ASU in the first quarter of 2019. As of December 31, 2018, the Company does not have any
disproportionate income tax effects in AOCI to reclassify, therefore, adoption of the new standard is not
expected to have a material impact 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. In November 2018, the FASB issued ASU
2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This ASU clarifies
that receivables from operating leases are accounted for using the lease guidance and not as financial
instruments. The amendments in this update are effective for 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. We will adopt the provisions of this ASU in the first quarter of 2020. We are currently
evaluating the effect of this update on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes ASC 840, Leases.
This update requires lessees to recognize a lease liability and a right-of-use ("ROU") 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. In July 2018, the FASB issued ASU 2018-10,
Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases, Targeted Improvements, which
provide additional clarification and implementation guidance on certain aspects of ASU 2016-02 and have the
same effective date and transition requirements. Specifically, ASU 2018-10 provides certain amendments that
affect narrow aspects of the guidance issued in ASU 2016-02, and ASU 2018-11 creates an additional
transition method option allowing entities to record a cumulative effect adjustments to the opening retained
earnings balance in the year of adoption. ASU 2018-11 also allows lessors to not separate nonlease
components from the associated lease component if certain conditions are met. In December 2018, the FASB
issued ASU 2018-20, Leases: Narrow-Scope Improvements for Lessors. This ASU provides an election for
lessors to exclude sales and related taxes from consideration in the contract, requires lessors to exclude from
revenue and expense lessor costs paid directly to a third party by lessees, and clarifies lessors' accounting for
variable payments related to both lease and nonlease components.
Adoption of ASC 842 is required for annual reporting periods beginning after December 15, 2018, including
interim periods within those fiscal years. A modified retrospective transition approach is required, applying
the new standard to all leases existing at the date of initial application. An entity may choose to use either (1)
its effective date or (2) the beginning of the earliest comparative period presented in the financial statements
as its date of initial application. The Company has elected, as of January 1, 2019, to adopt the standard using
the effective date as our date of initial application. The comparative information will not be recast and will
continue to be reported under the accounting standard in effect for those periods. A package of practical
expedients were made available to lessees and will be elected by the Company, which among other things,
allows us to carry forward the historical lease classification.
22
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Heska assessed the impact that the adoption of ASC 842 is expected to have on its Consolidated Financial
Statements by analyzing its current portfolio of leases, including a review of historical accounting policies
and practices to identify potential differences in applying the guidance of ASC 842. We also performed a
comprehensive review of our current processes and systems to determine and implement changes required to
support the adoption of ASC 842 on January 1, 2019.
Based on a review of contracts that convey the right to control use of an identified asset within our Core
Companion Animal ("CCA") segment, we determined we are both a lessee and a lessor. We evaluated the
types of assets, the terms associated with their contracts and the present value of future lease payments
expected to be paid. As a lessor, our revenue under subscription agreements relates to either OTL or STL
arrangements, which will now be recognized under ASC 842. As a lessee, our most significant lease balances
are related to buildings and vehicles which have lease terms through 2023 and 2021, respectively.
Based on a review of contracts that convey the right to control use of an identified asset within our Other
Vaccines and Pharmaceuticals ("OVP") segment, we determined we are only a lessee. We evaluated the types
of assets, the terms associated with their contracts and the present value of future lease payments expected to
be paid. Our OVP segment does not enter into transactions as a lessor and has relatively immaterial
agreements of which were entered into as a lessee.
The standard will not have a material net impact in our Consolidated Balance Sheets, Consolidated
Statements of Income or Consolidated Statements of Cash Flows. The most significant impact will be the
recognition of ROU assets and lease liabilities for the operating leases, of which we are the lessee. The effect
of this update is expected to be a ROU asset and lease liability of between $6.5 to 7.0 million dollars. As a
lessor, accounting for our subscription agreements which are operating-type leases will remain substantially
unchanged.
2.
REVENUE
We separate our goods and services among:
• Point of Care laboratory products including instruments, consumables and services;
• Point of Care imaging products including instruments, software and services;
• Single use pharmaceuticals, vaccines and diagnostic tests primarily related to companion animals; and
• Other vaccines and pharmaceuticals.
23
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes our CCA revenue (in thousands):
Point of Care laboratory revenue:
Consumables
Sales-type leases
Outright instrument sales
Other
Point of Care imaging revenue:
Outright instrument sales
Service revenue
Operating type leases
Other CCA revenue:
Other pharmaceuticals, vaccines and diagnostic tests
Research and development, license and royalty revenue
Year Ended December 31,
2018
$ 57,375
44,771
5,888
4,922
1,794
22,832
19,746
854
2,232
28,717
28,265
452
2017
2016
$
$
54,855
39,161
48,817
36,344
7,382
6,391
1,921
21,907
19,187
713
2,007
28,429
28,008
421
4,754
5,684
2,035
29,609
26,936
1,206
1,467
28,972
28,596
376
Total CCA revenue
$
108,924
$
105,191
$
107,398
Revenue from our OVP segment consists of revenue generated from contract manufacturing agreements and
from other license and research and development revenue. The following table summarizes our OVP revenue
(in thousands):
Contract manufacturing
License, research and development
Total OVP revenue
Remaining Performance Obligations
Year Ended December 31,
2018
2017
2016
$
$
17,508
1,014
18,522
$
$
23,490
660
24,150
$
$
21,477
1,208
22,685
Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to
performance obligations with an original contract term greater than one year which are fully or partially
unsatisfied at the end of the period. Remaining performance obligations include noncancelable purchase
orders, the non-lease portion of minimum purchase commitments under long-term supply arrangements,
extended warranty, service and other long-term contracts. Remaining performance obligations do not include
revenue from contracts with customers with an original term of one year or less, revenue from long-term
supply arrangements with no minimum purchase requirements, revenue expected from purchases made in
excess of the minimum purchase requirements, or revenue from instruments leased to customers. While the
remaining performance obligation disclosure is similar in concept to backlog, the definition of remaining
performance obligations excludes leases and contracts that provide the customer with the right to cancel or
terminate for convenience with no substantial penalty, even if historical experience indicates the likelihood of
cancellation or termination is remote. Additionally, the Company has elected to exclude contracts with
24
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
customers with an original term of one year or less from remaining performance obligations while these
contracts are included within backlog.
As of December 31, 2018, the aggregate amount of the transaction price allocated to remaining minimum
performance obligations was approximately $84.1 million. As of December 31, 2018, the Company expects to
recognize revenue as follows (in thousands):
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Contract Balances
$
$
Revenue
23,194
19,556
15,474
12,281
8,744
4,873
84,122
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled
receivables, deferred revenue, and customer deposits and billings in excess of revenue recognized (contract
liabilities) on the Consolidated Balance Sheets. In addition, the Company defers certain costs incurred to
obtain contracts (contract costs).
Contract Receivables
Certain unbilled receivable balances related to long-term contracts for which we provide a free term to the
customer but have recognized revenue are recorded in other current and other non-current assets. We have no
further performance obligations related to these receivable balances and the collection of these balances
occurs over the term of the underlying contract. The balances as of December 31, 2018 were $0.9 million and
$3.3 million for current and non-current assets, respectively, shown net of related unearned interest. The
balances as of December 31, 2017 were $0.7 million and $3.1 million for current and non-current assets,
respectively.
Contract Liabilities
The Company receives cash payments from customers for licensing fees or other arrangements that extend for
a specified term. These contract liabilities are classified as either current or long-term in the Consolidated
Balance Sheets based on the timing of when the Company expects to recognize revenue. As of December 31,
2018 and 2017, contract liabilities were $9.6 million and $12.3 million, respectively, and are included within
"Current portion of deferred revenue, and other" and "Deferred revenue, net of current portion" in the
accompanying Consolidated Balance Sheets. The decrease in the contract liability balance during the year
ended December 31, 2018 is $4.1 million of revenue recognized during the period, offset by $1.4 million of
additional deferred sales. The decrease in the contract liability balance during the year ended December 31,
2017 is $4.0 million of revenue recognized during the period, offset by $2.5 million of additional deferred
sales.
25
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Contract Costs
The Company capitalizes certain direct incremental costs incurred to obtain customer contracts, typically
sales-related commissions, where the recognition period for the related revenue is greater than one year.
Contract costs are classified as current or non-current, and are included in "Other current assets" and "Other
non-current assets" in the Consolidated Balance Sheets based on the timing of when the Company expects to
recognize the expense. Contract costs are generally amortized into selling and marketing expense with a
certain percentage recognized immediately based upon placement of the instrument with the remainder
recognized on a straight-line basis (which is consistent with the transfer of control for the related goods or
services) over the average term of the underlying contracts, approximately 6 years. Management assesses
these costs for impairment at least quarterly on a portfolio basis and as “triggering” events occur that indicate
it is more-likely-than-not that an impairment exists. The balance of contract costs as of December 31,
2018 and at the date of adoption was $2.5 million and $2.4 million, respectively. Amortization expense for the
year ended December 31, 2018 was approximately $1.0 million, offset by approximately $1.0 million of
additional contract costs capitalized.
Contract liabilities are reported on the accompanying Consolidated Balance Sheets on a contract-by-contract
basis whereas contract costs are calculated and reported on a portfolio basis.
3.
ACQUISITION AND RELATED PARTY ITEMS
Purchase Agreement for Certain Assets
On December 21, 2018, the Company closed a transaction (the "Asset Acquisition") to acquire certain assets
from Cuattro, LLC ("Cuattro"), all related to the CCA segment. Cuattro is owned by Kevin S. Wilson, the
CEO and President of Heska Corporation. Pursuant to the Asset Acquisition, dated November 26, 2018, the
Company issued 54,763 shares of the Company's common stock, $0.01 par value per share (the "Common
Stock"), to Cuattro on the Closing Date, at an aggregate value equal to approximately $5.4 million based on
the adjusted closing price per share of the Common Stock as reported on the Nasdaq Stock Market on the
Asset Acquisition agreement date. These shares were issued to Cuattro in a private placement in reliance upon
an exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof and
the safe harbor provided by Rule 506 of Regulation D promulgated thereunder. In addition to the Common
Stock, the Company paid cash in the amount of $2.8 million to Cuattro as part of the transaction. The total
purchase price was determined based on a valuation report from an independent third party. Part of the Asset
Acquisition was an agreement to terminate the supply and license agreement that Heska had been operating
under since the acquisition of Cuattro Veterinary USA, LLC.
The Company evaluated the acquisition of the purchased assets under ASC 805, Business Combinations and
ASU 2017-01, Business Combinations (Topic 805) and concluded that as substantially all of the fair value of
the gross assets acquired is concentrated in an identifiable group of similar assets, the transaction did not meet
the requirements to be accounted for as a business combination and therefore was accounted for as an asset
acquisition. Accordingly, the purchase price of the purchased assets was allocated entirely to an identifiable
intangible asset as identified below. In addition to the software assets acquired, Cuattro is obligated, without
further compensation, to assist the Company with the implementation of third-party image hosting platform
and necessary data migration.
26
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Intangible assets acquired, amortization method and estimated useful life as of December 31, 2018 was as
follows (dollars in thousands) (life in years):
Acquired Technology
Cuattro Veterinary, LLC
Useful Life
10.00
Amortization
Method
Straight-line
Fair Value
$8,200
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
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.
Mr. Wilson is a founder of Cuattro International, Cuattro, LLC, Cuattro Software, LLC and Cuattro 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 purchase
price (in thousands):
Common stock issued - 175,000 shares
Debt assumed
Total fair value of consideration transferred
$
$
6,347
1,535
7,882
27
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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
$
$
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 U.S. 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 Heska
Imaging US, LLC ("U.S. 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 ("U.S. Imaging"). The remaining
minority position (45.4)% in U.S. 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 U.S. Imaging.
28
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 U.S. 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
and Rodney A. Lippincott each serve 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, U.S. Imaging
distributed $2.1 million based on past operating performance, including $1.0 million to its minority interest
members. As of December 31, 2017, U.S. Imaging accrued an additional $0.3 million distribution, including
$0.1 million to its minority interest members, all of which was paid in January 2018.
On June 1, 2017, the Company consolidated its assets and liabilities in the U.S. 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 $4.6 million, $17.7 million and $14.5 million during 2018, 2017 and
2016, respectively, primarily related to digital imaging products, pursuant to an underlying supply contract
that contains minimum purchase obligations, software and services as well as other operating expenses. The
Company charged Cuattro, LLC $3 thousand, $0.1 million and $0.2 million in the years ended December 31,
2018, 2017 and 2016, respectively, for facility usage and other services. As of the December 21, 2018, the
closing date of the aforementioned Asset Acquisition, all supply and license agreements with Cuattro have
been terminated.
The Company had receivables from Cuattro, LLC of approximately $0 and $1 thousand as of December 31,
2018 and 2017, respectively which is included in "Due from - related parties" on the Company's Consolidated
Balance Sheets. Heska Imaging owed Cuattro $0.2 million and $1.7 million as of December 31, 2018 and
2017, respectively, which is included in "Due to - related parties" on the Company's Consolidated Balance
Sheets.
Heska Corporation charged U.S. Imaging $2.9 million from January 1, 2017 to May 31, 2017, prior to the
acquisition of the minority interest, and $5.3 million for the year ended December 31, 2016, for sales and
other administrative related expenses.
4.
INCOME TAXES
Income Taxes
As of December 31, 2018, the Company had a domestic federal net operating loss carryforward ("NOL"), of
approximately $74.3 million and a domestic research and development tax credit carryforward of
approximately $0.5 million. Our federal NOL is expected to expire as follows if unused: $68.3 million in
2019 through 2023, $5.5 million in 2024 and 2025 and $0.5 million in 2027 and later.
The Company is subject to income taxes in the U.S. federal jurisdiction, and various foreign, state and local
jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws
and regulations and require significant judgment to apply. Although the U.S. and many states generally have
statutes of limitations ranging from 3 to 5 years, those statutes could be extended due to the Company’s net
operating loss and tax credit carryforward positions in a number of the Company’s tax jurisdictions. In the
U.S., the tax years 2015 - 2017 remain open to examination by the Internal Revenue Service.
29
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Cash paid for income taxes for the years ended December 31, 2018, 2017 and 2016 was $36 thousand, $213
thousand and $357 thousand, respectively.
The components of income before income taxes were as follows (in thousands):
2018
Year Ended December 31,
2017
18,188 $
181
18,369 $
3,602 $
205
3,807 $
2016
16,375
129
16,504
Domestic
Foreign
$
$
30
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
Legal Settlement
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,
2018
2017
1,249 $
110
1,281
476
1,678
3,305
3,065
17,088
38
(3,936)
—
—
24,354
(10,233)
14,121 $
1,321
103
914
442
—
2,002
2,531
22,627
54
(3,757)
(50)
194
26,381
(14,504)
11,877
$
$
The components of the income tax (benefit) expense are as follows (in thousands):
Year Ended December 31,
2017
2018
2016
Current income tax expense:
Federal
State
Foreign
Total current expense
Deferred income tax (benefit) expense:
Federal
State
Foreign
Total deferred (benefit) expense
Total income tax (benefit) expense
$
$
$
$
(115) $
192
63
140 $
(1,877) $
(378)
—
(2,255)
(2,115) $
— $
6
43
49 $
9,736 $
(872)
—
8,864
8,913 $
197
179
31
407
3,545
387
—
3,932
4,339
31
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's income tax (benefit) expense 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,
2017
2018
2016
Statutory federal tax rate
State income taxes, net of federal benefit
Non-controlling interest in Heska Imaging US, LLC
Non-temporary stock option benefit
Meals and entertainment permanent difference
GILTI permanent difference
Other permanent differences
Change in tax rate
Change in valuation allowance
Other deferred differences
Other
Effective income tax rate
21 %
(8)%
— %
(50)%
1 %
1 %
1 %
— %
— %
(21)%
(1)%
(56)%
34 %
(5)%
1 %
(30)%
— %
— %
1 %
32 %
16 %
— %
— %
49 %
34 %
2 %
(3)%
(7)%
— %
— %
(1)%
— %
— %
— %
1 %
26 %
In 2018, we had total income tax benefit of $2.1 million, including $2.3 million in domestic deferred income
tax benefit, a non-cash benefit, and $0.1 million in current income tax expense. In 2017, we had total income
tax expense of $8.9 million, including $8.9 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. Income tax expense decreased in 2018 from 2017 from the recognition
of $1.9 million in tax benefits related to stock based compensation deductions. 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 U.S. Tax Cuts and Jobs Act, offset by the reduction of tax expense from stock based
compensation deductions.
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,
2018, 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, 2018.
U.S. Tax Reform
On December 22, 2017, the tax legislation commonly known as the U.S. Tax Cuts and Jobs Act (the "Act")
was signed into law. This enactment resulted in a number of significant changes to U.S. federal income tax
law for U.S. corporations. Most notably, the statutory U.S. federal corporate income tax rate was changed
from 35% to 21% for corporations; a one-time transition tax via a mandatory deemed repatriation of
post-1986 undistributed foreign earnings; 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.
32
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Shortly after enactment, the 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 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. The measurement period for these changes ended on December 22, 2018. In the fourth
quarter of 2017, the Company recorded a provisional net inclusion amount of $38 thousand for the one-time
transition tax. After finalizing the accounting for the transition tax, the Company recorded an additional $10
thousand for the net inclusion of the transition tax in the fourth quarter of 2018. The Company elected to pay
this tax liability in one payment instead of the optional eight year period. As of December 31, 2018, the
Company completed its analysis of the impact of the Act in accordance with SAB 118 and the amounts are no
longer considered provisional.
GILTI, added by the Act for years beginning after December 31, 2017, is the excess, if any, of the Company’s
share of our foreign subsidiaries' (CFC) “net CFC tested income” over its “net deemed tangible income” for
the tax year. For 2018, the Company has recorded a GILTI addition to taxable gross income of $230 thousand.
The Company has elected to treat GILTI as a period cost instead of recording a deferred tax liability and to
use the “tax law ordering approach” when assessing the need for a valuation allowance related to the potential
loss of cash tax savings from net operating losses used to offset future GILTI.
The Act made significant changes to IRC §162(m), limit on the deduction for excessive remuneration to
covered employees of public corporations. IRC §162(m) disallows the Company from deducting the
compensation of any covered employee which exceeds $1.0 million with respect to such employee, for the
taxable year. For the limitation, the Company has elected to allocate compensation on a cash first approach.
Tax deductible compensation will be allocated to cash-compensation first and a deferred tax asset will only be
recorded for share-based compensation up to the limit of $1.0 million per covered employee per year. If cash-
based compensation is expected to exceed the limitation, no deferred tax asset will be recorded for any share
based compensation in that taxable year. Any excess compensation over the limitation will be a non-
deductible expense to the Company and would increase our effective tax rate in future periods.
As of December 31, 2017, Heska no longer asserted 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. In 2017, we had an excess
of the amount for financial reporting over the tax basis in our foreign subsidiaries and we recorded an
estimated $0.2 million of deferred tax liability for the unremitted earnings of foreign subsidiaries. In 2018, tax
liability from the GILTI tax resulted in an excess of the amount for tax over the financial reporting basis in
our foreign subsidiaries. Therefore, in accordance with ASC 740, we have removed our deferred tax liability
and have not recorded a deferred tax asset for the excess tax basis in unremitted earnings from foreign
subsidiaries.
33
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5.
SALES-TYPE LEASES
In our CCA segment, primarily related to our Point of Care laboratory products, the Company enters into
sales-type leases as part of our subscription agreements. Detail of scheduled minimum lease receipts for our
sales-type leases are as follows (in thousands):
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
$
$
2,989
3,163
3,089
2,715
1,854
1,087
14,897
34
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income attributable to the Company by the
weighted-average number of common shares outstanding during the period. The computation of diluted EPS
is similar to the computation of basic EPS except that the numerator is increased to exclude charges that
would not have been incurred, and the denominator is increased to include the number of additional common
shares that would have been outstanding (using the if-converted and treasury stock methods), if securities
containing potentially dilutive common shares (stock options and restricted stock awards but excluding
options to purchase fractional shares resulting from the Company's December 2010 1-for-10 reverse stock
split) had been converted to common shares, and if such assumed conversion is dilutive.
The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic
and diluted earnings per share for the years ended December 31, 2018, 2017 and 2016 (in thousands, except
per share data):
Net income attributable to Heska Corporation
Years ended December 31,
2016
2017
2018
$
5,850 $
9,953 $ 10,508
Basic weighted-average common shares outstanding
Assumed exercise of dilutive stock options and restricted stock awards
Diluted weighted-average common shares outstanding
7,220
636
7,856
7,026
616
7,642
6,783
578
7,361
Basic earnings per share
Diluted earnings per share
$
$
0.81 $
0.74 $
1.42 $
1.30 $
1.55
1.43
The following stock options and restricted awards were excluded from the computation of diluted earnings
per share because they would have been anti-dilutive (in thousands):
Stock options
Years ended December 31,
2017
2018
2016
111
123
234
7.
INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The carrying values of investments in unconsolidated affiliates, categorized by type of investment, is as
follows (in thousands):
Equity method investment
Non-marketable equity security investment
Equity Method Investment
December 31, 2018
5,000
$
3,018
8,018
$
On September 24, 2018, the Company invested $5.1 million, including costs, in exchange for a 28.7% interest
of a business as part of our product development strategy. The Company accounts for this investment using
the equity method of accounting. Under the equity method, the carrying value of the investment is adjusted
35
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
for the Company's proportionate share of the investee's reported earnings or losses with the corresponding
share of earnings or losses reported as Equity in Losses of Unconsolidated Affiliates, listed below Net income
(loss) within the Consolidated Statements of Income.
Additionally, the Company entered into a 15-year Manufacturing Supply Agreement, which grants the
Company global exclusivity to specified goods.
Non-Marketable Equity Security Investment
On August 8, 2018, the Company invested $3.0 million, including costs, in MBio Diagnostics, Inc. ("MBio"),
in exchange for 1,714,285 shares of Series B-3 preferred stock, representing a 6.9% interest in MBio. The
Company's investment in MBio is a non-marketable equity security, recorded using the measurement
alternative of cost minus impairment, if any, plus or minus changes resulting from qualifying observable price
changes.
As part of the agreement, the Company entered into a Supply and License Agreement with MBio, which
provides that MBio produce and commercialize products that will enhance the Company's diagnostic
portfolio. As part of this agreement, the Company made upfront payment to MBio of $1.0 million related to a
worldwide exclusive license agreement over a 20-year period, recorded in both short and long-term other
assets. In addition, the agreement provides for an additional contingent payment from Heska to MBio of
$10.0 million, relating to the successful achievement of sales milestones. This potential future milestone
payment has not yet been accrued as it is not deemed by the Company to be probable at this time.
Both parties in this arrangement are active participants and are exposed to significant risks and rewards
dependent on the commercial success of the activities of the collaboration. The parties are actively working
on developing and testing the product as well as funding the research and development. Heska classifies the
amounts paid for MBio's research and development work within the CCA segment research and development
operating segments. Expense is recognized ratably when incurred and in accordance with the development
plan.
The Company evaluated both its equity method investment and non-marketable equity security investment for
impairment as of December 31, 2018, and determined that no indications of impairment existed.
8.
GOODWILL AND OTHER INTANGIBLES
The following summarizes the changes in goodwill during the years ended December 31, 2018 and 2017 (in
thousands):
Carrying amount, December 31, 2016
Foreign currency adjustments
Carrying amount, December 31, 2017
Foreign currency adjustments
Carrying amount, December 31, 2018
$
$
$
26,647
40
26,687
(8)
26,679
36
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other intangibles assets, net consisted of the following as of December 31, 2018 and 2017 (in thousands):
2018
2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Acquired technology
Customer relationships
and other
Total intangible assets
$
$
8,200 $
— $
8,200 $
— $
— $
—
3,303
11,503 $
(1,739)
(1,739) $
1,564
9,764 $
3,309
3,309 $
(1,351)
(1,351) $
1,958
1,958
Amortization expense relating to other intangibles is as follows (in thousands):
Amortization expense
$
388
$
388
$
230
Estimated amortization expense related to intangibles for each of the five years from 2019 through 2023 and
thereafter is as follows (in thousands):
Years Ended December 31,
2017
2016
2018
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
9.
PROPERTY AND EQUIPMENT
Property and equipment, net, consisted of the following (in thousands):
Land
Building
Machinery and equipment
Office furniture and equipment
Computer hardware and software
Leasehold and building improvements
Construction in progress
Less accumulated depreciation
Total property and equipment, net
37
$
$
1,208
1,208
1,203
1,198
851
4,096
9,764
December 31,
2018
2017
$
377 $
2,978
33,087
1,687
4,704
9,953
1,274
54,060
(38,079)
15,981 $
$
377
2,868
32,188
1,665
4,579
8,156
3,531
53,364
(36,033)
17,331
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. Our cost of equipment under operating leases at December 31,
2018 and 2017, respectively, was $10.8 million and $10.8 million, before accumulated depreciation of $6.1
million and $5.0 million.
Depreciation expense for property and equipment was $4.2 million, $4.3 million and $4.4 million for the
years ended December 31, 2018, 2017 and 2016, respectively.
10.
ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
Accrued payroll and employee benefits
Accrued property taxes
Accrued settlement (see Note 13)
Other
Total accrued liabilities
2018
2017
$
$
759
632
6,750
2,001
10,142
$
$
1,209
661
—
2,204
4,074
Other accrued liabilities consists of items that are individually less than 5% of total current liabilities.
11.
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 2018, the stockholders approved a
further amendment to the 1997 Plan to authorize an additional 250,000 shares to be available for issuance
thereunder. In December 2018, the Company's Board of Directors amended the 1997 Plan and renamed it the
"Stock Incentive Plan". 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, 2018 was 252,448.
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. 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
38
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 2018, 2017 and 2016. 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 2018, 2017 and 2016. Our risk-free interest rate input was determined based on the U.S.
Treasury yield curve at the time of option issuance in 2018, 2017 and 2016. Our expected dividends inputs
were zero in all periods as we did not anticipate paying dividends in the foreseeable future. We recognize
forfeitures as they occur.
Weighted average assumptions used in 2018, 2017 and 2016 for each of these four key inputs are listed in the
following table:
Risk-free interest rate
Expected lives
Expected volatility
Expected dividend yield
2018
2.66%
4.9 years
40%
0%
2017
1.76%
4.8 years
41%
0%
2016
1.76%
4.5 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:
Outstanding at beginning of period
Granted at Market
Forfeited
Expired
Exercised
Outstanding at end of period
Exercisable at end of period
Year Ended December 31,
2018
Options
Weighted Average
Exercise Price
630,847
153,700
(18,978)
(896)
(144,120)
620,553
386,176
$
$
$
$
$
$
$
29.312
75.244
53.010
65.414
25.740
40.741
21.214
The total estimated fair value of stock options granted were computed to be approximately $4.4 million, $1.0
million and $3.2 million during the years ended December 31, 2018, 2017 and 2016, 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 $28.81, $37.35 and $24.59 during the years
ended December 31, 2018, 2017 and 2016, respectively. The total intrinsic value of options exercised was
$10.5 million, $17.7 million and $9.9 million during the years ended December 31, 2018, 2017 and 2016,
respectively. The cash proceeds from options exercised was $3.2 million, $1.8 million and $1.9 million during
the years ended December 31, 2018, 2017 and 2016, respectively.
39
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes information about stock options outstanding and exercisable at December 31,
2018.
Number of
Options
Outstanding
at
December 31,
2018
Options Outstanding
Weighted
Average
Remaining
Contractual
Life in
Years
Weighted
Average
Outstanding
Price
Options Exercisable
Number of
Options
Exercisable
at
December 31,
2018
Weighted
Average
Remaining
Contractual
Life in Years
Weighted
Average
Exercise
Price
167,737
128,465
75,972
130,000
118,379
620,553
3.61
5.26
7.03
9.18
8.40
6.45
$
$
$
$
$
$
6.565
15.777
39.745
69.770
85.020
40.741
167,737
127,261
54,133
—
37,045
386,176
3.61
5.25
7.04
0.00
8.12
5.06
$
$
$
$
$
$
6.565
15.631
39.647
—
79.793
21.214
Exercise Prices
$4.50 - $7.36
$7.37 - $32.21
$32.22 - $62.50
$62.51 - $69.77
$69.78 - $108.25
$4.50 - $108.25
As of December 31, 2018, there was approximately $5.3 million of total unrecognized compensation cost
related to outstanding stock options. That cost is expected to be recognized over a weighted-average period of
1.9 years with all cost to be recognized by the end of October 2022, assuming all options vest according to the
vesting schedules in place at December 31, 2018. As of December 31, 2018, the aggregate intrinsic value of
outstanding options was approximately $28.9 million and the aggregate intrinsic value of exercisable options
was approximately $25.2 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 429,729 had been issued as of December 31, 2018. 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 market
40
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 10,078, 10,983 and 17,826 shares under the ESPP for the years ended December 31, 2018, 2017
and 2016, respectively.
For the years ended December 31, 2018, 2017 and 2016, 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
2018
1.67%
1.2 years
42%
0%
2017
0.74%
1.2 years
45%
0%
2016
0.54%
1.2 years
42%
0%
The weighted-average fair value of the purchase rights granted was $18.14, $15.72 and $8.23 per share for the
years ended December 31, 2018, 2017 and 2016, respectively.
Restricted Stock
We have granted non-vested restricted stock awards (“restricted stock”) to management and directors pursuant
to the 1997 Plan. The restricted stock awards have varying vesting periods, but generally become fully vested
between one and four years after the grant date, depending on the specific award, performance targets met for
performance based awards granted to management, and vesting period for time based awards. Management
performance based awards are granted at the target amount of shares that may be earned. We valued the
restricted stock awards related to service and/or company performance targets based on grant date fair value
and expense over the period when achievement of those conditions is deemed probable. For restricted stock
awards related to market conditions, we utilize a Monte Carlo simulation model to estimate grant date fair
value and expense over the requisite period. We recognize forfeitures as they occur.
The following table summarizes restricted stock transactions for the year ended December 31, 2018:
Weighted-
Average Grant
Date Fair Value
Per Award
RSAs
124,943
$
190,730
$
(56,243) $
—
259,430
$
57.67
71.77
28.97
—
74.26
Non-vested as of December 31, 2017
Granted
Vested
Forfeited
Non-vested as of December 31, 2018
41
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The weighted average grant date fair value of awards granted during the year was $71.77, $82.36 and $33.64
for the years ended December 31, 2018, 2017 and 2016, respectively. Fair value of restricted stock vested was
$4.4 million, $3.9 million and $1.5 million for the years ended December 31, 2018, 2017 and 2016,
respectively.
As of December 31, 2018, there was approximately $3.0 million of total unrecognized compensation cost
related to restricted stock. The Company expects to recognize this expense over a weighted average period of
1.6 years. As of December 31, 2018, we reviewed each of the underlying corporate performance targets and
determined that approximately 167,000 of shares of common stock were related to corporate performance
targets in which we did not deem achievement probable. No compensation expense had been recorded at any
period prior to December 31, 2018. The unrecognized compensation cost associated with the restricted stock
awards not deemed probable, based on grant date fair value, is approximately $13.5 million. Any change in
the probability determination could accelerate the recognition of this expense.
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.
12.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consisted of the following (in thousands):
Total
accumulated
other
comprehensive
income
$
$
97
135
232
45
277
Minimum
pension
liability
Foreign
currency
translation
598
123
721
(25)
696
(501) $
12
(489)
70
(419) $
Balances at December 31, 2016
Other comprehensive income
Balances at December 31, 2017
Other comprehensive income (loss)
Balances at December 31, 2018
$
$
42
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13.
COMMITMENTS AND CONTINGENCIES
Royalty Agreements
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 years ended December 31, 2018 and 2017, and $0.4 million in the year
ended December 31, 2016.
Operating Leases
The Company has entered into operating leases for its office and research facilities, vehicles and certain
equipment with future minimum payments as of December 31, 2018 as follows (in thousands):
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
$
$
2,134
1,993
1,859
1,765
2,357
—
10,108
The Company had rent expense, relating to office space, of $1.5 million for the year ended December 31,
2018 and $1.6 million for the years ended December 31, 2017 and 2016. Other rent expense totaled $0.4
million for the years ended December 31, 2018 and 2017 and $0.3 million for the year ended December 31,
2016.
Litigation
From time to time, the Company may be involved in litigation relating to claims arising out of its operations.
The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be
incurred, and the amount can be reasonably estimated.
On October 10, 2018, we reached an agreement in principle to settle the complaint that was filed against the
Company by Shaun Fauley on March 12, 2015 in the U.S. 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. The settlement, which was approved by
the court on February 28, 2019, will require us, among other things, to make available a total of $6.75 million
to pay class members, as well as to pay attorneys' fees and expenses to legal counsel to the class. The
Company has recorded an estimated loss provision of approximately $7.0 million in 2018 in connection with
the settlement agreement and expenses associated with the matter, which is included in general and
administrative expenses in the Consolidated Statements of Income. The Company does not have insurance
coverage for the Fauley Complaint.
At December 31, 2018, 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.
43
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Warranties
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 as of
December 31, 2018 and 2017.
14.
INTEREST AND OTHER (INCOME) EXPENSE
Interest and other (income) expense, net, consisted of the following (in thousands):
Interest income
Interest expense
Other expense (income), net
2018
Year Ended December 31,
2017
2016
$
$
(261) $
310
(62)
(13) $
(167) $
245
(228)
(150) $
(124)
160
(7)
29
Cash paid for interest was $224 thousand, $206 thousand and $78 thousand for the years ended December 31,
2018, 2017 and 2016, respectively.
15.
CREDIT FACILITY AND LONG-TERM DEBT
On July 27, 2017, and as subsequently amended in May and December of 2018, 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. Chase holds first right of priority over all other liens, if any were to exist. 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, although there are currently none outstanding.
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. Additionally, a Facility Amendment has been filed as an exhibit to the Company's Current
Report on Form 10-Q filed with the SEC on August 8, 2018 followed by a second Facility Amendment which
has been filed as an exhibit to this Annual Report on Form 10-K for the year ended December 31, 2018.
As of December 31, 2018 and 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
44
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
incurred debt issuance costs of $120 thousand. These costs are included in other non-current assets on the
Company's Consolidated Balance Sheets, 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.
16.
SEGMENT REPORTING
The Company's two reportable segments are CCA and OVP. The CCA segment includes Point of Care
diagnostic laboratory instruments and consumables, and Point of Care digital imaging diagnostic instruments
and software 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, in addition to other small mammals. All OVP products are
sold by third parties under third party labels.
45
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summarized financial information concerning the Company's reportable segments is shown in the following
tables (in thousands):
Year Ended December 31, 2018
Total revenue
Operating income
Income before income taxes
Investments in unconsolidated affiliates
Total assets
Net assets
Capital expenditures
Depreciation and amortization
Year Ended December 31, 2017
Total revenue
Operating income
Income before income taxes
Investments in unconsolidated affiliates
Total assets
Net assets
Capital expenditures
Depreciation and amortization
Year Ended December 31, 2016
Total revenue
Operating income
Income before income taxes
Investments in unconsolidated affiliates
Total assets
Net assets
Capital expenditures
Depreciation and amortization
$
$
$
Core
Companion
Animal
Other Vaccines
and
Pharmaceuticals
108,924 $
2,040
2,053
8,018
133,586
96,129
180
3,369
18,522 $
1,754
1,754
—
22,866
26,280
1,178
1,226
Core
Companion
Animal
Other Vaccines
and
Pharmaceuticals
105,191 $
12,656
12,828
—
111,625
75,984
209
3,736
24,150 $
5,563
5,541
—
23,819
24,456
3,260
1,018
Core
Companion
Animal
Other Vaccines
and
Pharmaceuticals
107,398 $
13,015
12,938
—
110,995
68,072
1,135
3,800
22,685 $
3,518
3,566
—
19,849
18,903
2,282
845
Total
127,446
3,794
3,807
8,018
156,452
122,409
1,358
4,595
Total
129,341
18,219
18,369
—
135,444
100,440
3,469
4,754
Total
130,083
16,533
16,504
—
130,844
86,975
3,417
4,645
46
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue is attributed to individual countries based on customer location. Total revenue by principal
geographic area was as follows (in thousands):
U.S.
Canada
Europe
Other International
Total
For the Years Ended December 31,
2017
2016
2018
$
$
115,543 $
2,992
5,995
2,916
127,446 $
116,823 $
2,924
4,780
4,814
129,341 $
120,082
2,378
4,781
2,842
130,083
Total assets by principal geographic areas were as follows (in thousands):
U.S.
Europe
Total
2018
As of December 31,
2017
$
$
152,633 $
3,819
156,452 $
132,070 $
3,374
135,444 $
2016
127,827
3,017
130,844
In our CCA segment, revenue from Butler Animal Health Supply, LLC d/b/a Henry Schein Animal Health
("Henry Schein") represented approximately 15%, 13% and 13% of our consolidated revenue for the years
ended December 31, 2018, 2017 and 2016, respectively. Revenue from Merck entities, including Merck
Animal Health, represented approximately 12%, 12% and 11% for the years ended December 31, 2018, 2017
and 2016, respectively. Revenue from De Lage Landen Financial Services, Inc. ("DLL"), represented
approximately 6%, 7% and 11% of our consolidated revenue for the years ended December 31, 2018, 2017
and 2016, respectively; DLL is a third party that provides financing and leasing for our customers, primarily
for our Point of Care imaging products. In our OVP segment, revenue from Eli Lilly entities, including
Elanco, represented approximately 9%, 11% and 12% for the years ended December 31, 2018, 2017 and
2016, respectively. No other customer accounted for more than 10% of our consolidated revenue for the years
ended December 31, 2018, 2017 or 2016.
47
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (Unaudited)
The following tables present quarterly unaudited results for the two years ended December 31, 2018 and 2017
(amounts in thousands, except per share data).
Total revenue
Gross profit
Operating income (loss)
Net income (loss) before equity in losses of
unconsolidated affiliates
Net income (loss), after equity in losses of
unconsolidated affiliates
Net income (loss) attributable to Heska Corporation
Basic earnings (loss) per share attributable to Heska
Corporation
Diluted earnings (loss) per share attributable to
Heska Corporation
Q1
Q2
Q3
Q4
Total
$ 32,765
13,307
1,871
$ 29,662
13,065
2,204
$ 30,955
14,794
(3,595)
$ 34,064
15,472
3,314
$ 127,446
56,638
3,794
2,155
1,897
(1,670)
3,540
2,155
2,155
0.30
0.28
1,897
1,897
0.26
0.24
(1,670)
(1,670)
(0.23)
(0.23)
3,468
3,468
0.47
0.44
5,922
5,850
5,850
0.81
0.74
2018
2017
Total revenue
Gross profit
Operating income
Net income (loss)
Net income (loss) attributable to Heska Corporation
Basic earnings (loss) per share attributable to Heska
Corporation
Diluted earnings (loss) per share attributable to
Heska Corporation
$ 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)
(0.15)
1.42
1.30
Note that the sum of each value line for the four quarters does not necessarily equal the amount reported for
the full year due to rounding.
48
49
Onward 2019
50
OFFICERS
Kevin S. Wilson, Chief Executive Officer and President
Jason A. Napolitano, Chief Operating Officer and Chief Strategist
Nancy Wisnewski, Ph.D., Executive Vice President, Diagnostic Operations and Product Development
Steven M. Eyl, Executive Vice President, Global Sales and Marketing
Jason D. Aroesty, Executive Vice President, International Diagnostics
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
Eleanor F. Baker, Vice President, General Counsel and Secretary*
Glenn R. Frank, Vice President, Research and Development*
Laurie E. Peterson, Vice President, Heska Des Moines*
Daniel J. Pollack, Vice President, Financial Planning and Business Analytics*
Mark N. Skeels, Vice President, Research and Development – Software*
Christopher D. Sveen, Vice President, General Counsel*
BOARD OF DIRECTORS
Scott W. Humphrey, Chair of the Board; Former President and Chief Executive Officer of One Hope United
Mark F. Furlong, Former President and Chief Executive Officer, BMO Harris Bank, N.A.
Sharon J. Larson, Principal and CEO of SLR Associates, LLC
G. Irwin Gordon, Former Executive Vice President and Chief Revenue Officer of Invitation Homes
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 Aurora Borealis Enterprises, LLC and Owner and President of Whitewater Advisors, LLC
LOCATIONS
Corporate Office • 3760 Rocky Mountain Ave • Loveland, CO 80538 • USA • 970.493.7272
Des Moines, IA • USA • 515.263.8600
Fribourg, Switzerland • + 41 26 347 21 40
Nunawading, Australia • 1300 HESKA AU
Les Ulis, France (Optomed: 70%-owned subsidiary). +33 1 69 29 01 98
CONTACTS
Investor Relations • investorrelations@heska.com
Marketing • marketing@heska.com
Product Orders • 800.464.3752
*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. ©2019 Heska Corporation. All Rights Reserved. HESKA is a registered trademark of Heska Corporation in the U.S. and other countries. US19LT0302