(Mark One)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________________
Commission file number: 000-22427
HESKA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
3760 Rocky Mountain Avenue Loveland,
Colorado
(Address of principal executive offices)
77-0192527
(I.R.S. Employer
Identification Number)
80538
(Zip Code)
Registrant's telephone number, including area code: (970) 493-7272
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $0.01 par value
Trading Symbol
HSKA
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange
Act.
Large Accelerated filer ☒
Non-accelerated filer ☐
Accelerated filer ☐
Smaller Reporting Company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of voting common stock held by non-affiliates of the Registrant was approximately $806,427,745 as of June 30, 2020 based upon the closing
price on the Nasdaq Capital Market reported for such date. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other
purpose.
9,477,240 shares of the Registrant's Public Common Stock, $.01 par value, were outstanding at February 25, 2021.
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DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III incorporate by reference information from the Registrant's definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Registrant's 2021 Annual Meeting of Stockholders to be held on or about May 5, 2021.
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity
Securities
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
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PART I
PART II
PART III
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Signatures
HESKA, scil, ALLERCEPT, HemaTrue, Solo Step, Element DC, Element HT5, Element POC, Element i, Element i+, Element COAG,
Element DC5X and Element RC, Element RCX, Element RCX3 and scil vet, scil academy, scil vIP, scil ABC are registered trademarks of
Heska Corporation. DRI-CHEM is a registered trademark of FUJIFILM Corporation. TRI-HEART is a registered trademark of Intervet Inc.,
d/b/a Merck Animal Health, formerly known as Schering-Plough Animal Health Corporation ("Merck Animal Health"), which is a unit of
Merck & Co., Inc., in the United States and is a registered trademark of Heska Corporation in other countries. This Annual Report on Form
10-K also refers to trademarks and trade names of other organizations.
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Statement Regarding Forward Looking Statements
This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For this purpose, any
statements contained herein that are not statements of current or historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, words such as "scheduled," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of
such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ
materially from those expressed or forecasted in any such forward-looking statements as a result of certain factors. Such factors are set forth
in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in
this Form 10-K and include, among others, risks and uncertainties related to:
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the impact of the COVID-19 pandemic on consumer demand, our global supply chain and our financial and operational results;
the success of third parties in marketing our products;
outside business interests of our Chief Executive Officer;
our reliance on third party suppliers and collaborative partners;
our dependence on key personnel;
our dependence upon a number of significant customers;
competitive conditions in our industry;
our dependence on third parties to successfully develop new products;
our ability to market and sell our products successfully;
expansion of our international operations;
the impact of regulation on our business;
the success of our acquisitions and other strategic development opportunities;
our ability to develop, commercialize and gain market acceptance of our products;
cybersecurity incidents and related disruptions and our ability to protect our stakeholders’ privacy;
product returns or liabilities;
volatility of our stock price;
our ability to service our convertible notes and comply with their terms.
Readers are cautioned not to place undue reliance on these forward-looking statements.
Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels
of activity, performance or achievements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements contained herein to reflect the passage of time, any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is based, except as otherwise required by applicable securities
laws. These forward-looking statements apply only as of the date of this Form 10-K or for statements incorporated by reference from our
2021 proxy statement on Schedule 14A, as of the date of the Schedule 14A.
Item 1.
Business
PART I
Unless we state otherwise or the context otherwise requires, the terms "Heska," "we," "our," "us" and the "Company" refer to Heska
Corporation and its consolidated subsidiaries.
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Our Certificate of Incorporation, as amended (the “Charter”), authorizes three classes of stock: Original Common Stock, Public Common
Stock, and Preferred Stock. Pursuant to an NOL Protective Amendment to the Charter adopted in 2010, all shares of Original Common
Stock then outstanding were automatically reclassified into shares of Public Common Stock. Our Public Common Stock trades on the
Nasdaq Stock Market LLC. In this Annual Report on Form 10-K, references to “Public Common Stock” and “common stock” are references
to our Public Common Stock, unless the context otherwise requires.
Overview
We sell veterinary and animal health diagnostic and specialty products. Our offerings include Point of Care diagnostic laboratory instruments
and consumables; Point of Care digital imaging diagnostic products; digital cytology 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.
On February 24, 2013, the Company acquired a majority interest in Cuattro Veterinary USA, LLC which was subsequently renamed Heska
Imaging US, LLC ("U.S. Imaging"). The remaining minority position in U.S. Imaging was purchased on May 31, 2017.
On May 31, 2016, the Company acquired Cuattro Veterinary, LLC ("Cuattro International"), which was subsequently renamed Heska
Imaging International, LLC ("International Imaging"). As of this date the Company's interest in both International Imaging and U.S. Imaging
was transferred to the Company's wholly owned subsidiary, Heska Imaging Global, LLC ("Global Imaging").
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"). Heska Imaging was subsequently dissolved on March 31, 2020.
On June 13, 2017, the Company incorporated Heska Canada Limited in the province of British Columbia, in order to expand our footprint
into more of the North American veterinary market.
On July 26, 2018, the Company incorporated Heska Australia Pty Ltd in the state of Victoria, in order to expand our footprint into the
Australian veterinary market.
On February 22, 2019, the Company acquired 70% of the equity of Optomed. Optomed designs, develops, manufactures and distributes
veterinary imaging solutions, with a primary focus and expertise in endoscopy technologies and has a direct sales presence in France. On
November 4, 2019 the Company acquired A. DUCHENE IMMO ("SCI Duchene"). SCI Duchene owns real estate in which Optomed
operates.
On December 5, 2019, the Company acquired CVM Diagnostico Veterinario, S.L. and CVM Ecografia, jointly known as the CVM
Companies ("CVM"). CVM is a Spanish company that primarily sells and performs marketing of medical equipment to veterinary clinics.
On April 1, 2020, the Company completed the acquisition of scil animal care company GmbH ("scil") from Covetrus, Inc. scil represents a
key milestone in the Company's long-term strategic plan creating a global veterinary diagnostics company with leadership positions in key
geographic markets. Scil has operations in Germany, France, Italy, Spain, Canada, and Malaysia.
On October 5, 2020 the Company acquired the remaining 30% minority interest in Optomed. The Company had previously acquired 70% of
the equity of Optomed in February 2019. The purchase allows the Company to assume full control of the business operations.
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On February 1, 2021 the Company acquired Lacuna Diagnostics, Inc. ("Lacuna"). Lacuna is a United States based company that specializes
in digital cytology services. The purchase allows the Company to broaden our point of care diagnostics offering.
Products and Services
Our business is composed of two operating and reportable segments: North America and International. North America consists of the United
States, Canada and Mexico. International consists of geographies outside of North America, primarily our operations in Australia, France,
Germany, Italy, Malaysia, Spain and Switzerland. Point of Care laboratory and imaging products, which are the Company's core strategic
focus, are included in both segments. The North America segment also includes the contract manufacturing of vaccines and pharmaceutical
products.
Our major product categories sold in both segments include: Point of Care laboratory instruments and consumables; digital imaging
diagnostic instruments, software and services; digital cytology services; local and cloud-based data services; allergy testing and
immunotherapy; and single use offerings such as in-clinic diagnostic tests and heartworm preventive products. The North America segment
also includes private label vaccine and pharmaceutical production, which are sold by third parties under third party labels.
For the year ended December 31, 2020, our North America and International segments represent approximately 66% and 34% of our total
revenue, respectively.
Point of Care Laboratory and Imaging Diagnostics
We offer a line of veterinary Point of Care (stationary and portable) laboratory diagnostic instruments for testing blood and other biological
materials, for use in diagnostic imaging and for other uses, some of which are described below. We also market and sell consumable supplies
and services for these instruments. Our line of veterinary instruments includes the following:
®
Blood Chemistry. Element DC Veterinary Chemistry Analyzer (the "Element DC") is an easy-to-use, robust system that uses dry slide
technology for blood chemistry and electrolyte analysis and has the ability to run 22 tests at a time with a single blood sample. Test slides are
available as both pre-packaged panels as well as individual slides. The Element DC5x Veterinary Chemistry Analyzer (the "Element
DC5x"), launched during 2018, delivers faster run times, higher throughput, and allows simultaneous staging of five patient samples. The
Element DC and Element DC5x utilize the same test slides. We are supplied with the Element DC and Element DC5x, as well as the
affiliated test slides and supplies, under a contractual agreement with FUJIFILM Corporation.
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We also market and distribute the Element RC and Element RCX , easy-to-use, compact chemistry systems that utilize load-and-go rotors
for blood chemistry and electrolyte analysis. A small volume of whole blood can be loaded on the rotor, eliminating the need for external
centrifugation. Rotors of various test menus are available, providing results in some cases for up to 21 measured tests, including additional
calculated values. The Element RC3X launched during 2020 and delivers a three-bay rotor solution for higher throughput and additional
testing parameters. We are supplied with the Element RC and the Element RCX and RC3X under contractual agreements with various
suppliers.
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Hematology. The Element HT5 Hematology Analyzer (the "HT5") is a true 5-part hematology analyzer which measures key parameters
such as white blood cell count, red blood cell count, platelet count and hemoglobin levels in animals. The HT5 can generate results in less
than a minute with 15 µL of sample. We are supplied with the HT5 and affiliated reagents and supplies under a contractual agreement with
Shenzen
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Mindray Bio-Medical Electronics Co., Ltd. ("Mindray"). We also market the scil Vet abc Plus + , a 4-part hematology analyzer that
provides results in less than a minute with 10 µL of sample.
TM
Blood Gases and Electrolytes. The Element POC Blood Gas & Electrolyte Analyzer (the "EPOC") is a handheld, wireless analyzer which
delivers rapid blood gas, electrolyte, metabolite and basic blood chemistry testing. The EPOC features test cards with room temperature
storage which can offer results with less than 100 µL of sample as well as WiFi and Bluetooth connectivity.
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Immunodiagnostics. The Element i Immunodiagnostic Analyzer (the "Element i") utilizes fluorescence immunoassay technology to ensure
sensitivity for accurate in-clinic detection of Total T4, TSH, Cortisol, Bile Acids, and Progesterone. The Element i is a benchtop technology
with a test time of 10 minutes or less per analyte. Along with confidence in results, this measurement principle allows for simplified reagents
and testing protocols. The Element i+ Immunodiagnostic Analyzer (the "Element i+"), launched during 2020, utilizes patented fluorescence
waveguide immunoassay technology with laser evanescent illumination for accurate in-clinic detection of Total T4 and Cortisol. The Element
i+ delivers results in as little as 5 minutes from a sample volume of 100ul, using microfluidic cartridges stored at room temperature. The
Element i+ analyzer system has capability of high sensitivity and specificity multiplexed assays in a single microfluidic cartridge, offering
future menu expansions in endocrine, inflammatory, infectious disease, and other diagnostic target areas. The Cube-Vet
benchtop analyzer used for the determination of the parameters fibrinogen, cCRP, SAA, T4, fructosamine, pancreas-specific lipase (dog /
cat), ammonia, GLDH, lactate, progesterone, bile acids, phenobarbital and SDMA.
is a compact
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Coagulation. The Element COAG Veterinary Analyzer (the "Element COAG") is a compact benchtop, cartridge-based system used for
coagulation and specialty testing. There are five test cartridges offered: the PT/aPTT Coag Combo, Equine Fibrinogen, Canine Fibrinogen,
Canine DEA 1 Blood Typing and Feline A and B Blood Typing. Each of these cartridges perform accurate, automated analysis using less
than 100 µL of sample in just minutes.
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IV Pumps. The VET/IV 2.2 infusion pump is a compact, affordable IV pump that allows veterinarians to easily provide regulated infusion
of fluids for their patients.
TM
Digital Radiography. We sell hardware, including digital radiography detectors, acquisition workstation equipment, positioning aides,
viewing computers, radiographic generators, anti-scatter grids and other accessories for use in digital radiography imaging diagnostics. With
this hardware, we also provide licensed embedded software, support, data hosting, warranty and other services. CloudDR solutions
combine flat panel digital radiography detectors, acquisition workstations and acquisition software to produce, review, archive and share
radiographic image studies, primarily in fixed location companion animal veterinary settings.
TM
We also sell mobile digital radiography products, primarily for equine use, such as the Cuattro Uno, a full powered, portable digital
radiography generator integrated with an embedded touchscreen acquisition and review function. In addition to Cuattro Uno, we sell the
Cuattro Hub, a mobile digital radiography acquisition console that is capable of operating as a general full field wireless x-ray imager and as
the control and display for DentiPod
, a large format equine intraoral dental sensor, and SonoPod
, a wireless ultrasound.
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In Europe, we sell radiography solutions, including flat panel or image plate x-ray scanners, acquisition workstations and acquisition
software to produce, review, and archive radiographic image studies, primarily in fixed location companion animal veterinary settings.
Ultrasound Systems. We sell ultrasound products, including affiliated probes and peripherals, with varying features and corresponding price
points from various suppliers.
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Diagnostic Data and Support. Cloudbank is an automatic, secure, web-based image storage solution designed to interface with the imaging
products we sell. HeskaView+ is a Picture Archival and Communications Systems (PACS) for web or local viewing, reporting, planning
and email sharing of studies on Internet devices, including personal computers, tablet devices and smartphones. SupportCloud
package including call center voice and remote diagnostics, recovery and other services, such as the provision of warranty-related loaner
is supported by the
units, to support customers. Access and operation between our imaging devices, Cloudbank
acquisition software used in the equipment we sell. On December 21, 2018, we closed on the purchase of the acquisition software previously
provided by Cuattro in the amount of $8.2 million and terminated a supply and license agreement. See Note 3 to the financial statements
included under Item 8 of this Annual Report on Form 10-K for related party and acquisition disclosures.
and SupportCloud
is a support
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HeskaView and Heska’s Data Capture Utility (DCU) are modern and intuitively operated practice information software applications for point
of care devices. The HeskaView software can be used as independent practice information reporting software for Heska analyzers.
HeskaView and the DCU can be used as a middleware to bi-directionally connect Heska’s analyzers to a wide variety of Veterinary Practice
Management Software platforms used throughout North America.
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scil vIP is a modern and intuitively operated practice information software for point of care devices. The software can be used as
independent practice information software or as middleware to connect POC equipment throughout Europe. It further provides a web
interface allowing the users to access the software even more easily.
Point of Care Heartworm Diagnostic Tests
Heartworm infections of dogs and cats are caused by the parasite Dirofilaria immitis. This parasitic worm is transmitted in larval form to
dogs and cats through the bite of an infected mosquito. Larvae develop into adult worms that live in the pulmonary arteries and heart of the
host, where they can cause serious cardiovascular, pulmonary, liver and kidney disease. Our canine and feline heartworm diagnostic tests use
monoclonal antibodies or a recombinant heartworm antigen, respectively, to detect heartworm antigens or antibodies circulating in the blood
of an infected animal.
Heartworm Preventive Products
We have an agreement with Merck Animal Health, a unit of Merck & Co., Inc., granting Merck Animal Health the exclusive distribution and
marketing rights for our canine heartworm prevention product, Tri-Heart Plus Chewable Tablets, ultimately sold to or through veterinarians
in the U.S. Tri-Heart Plus Chewable Tablets (ivermectin/pyrantel) are indicated for use as a monthly preventive treatment of canine
heartworm infection and for treatment and control of ascarid and hookworm infections. We manufacture Tri-Heart Plus Chewable Tablets at
our Des Moines, Iowa production facility.
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Allergy Products and Services
Allergy is common in companion animals. Clinical symptoms of allergy are variable, but are often manifested as persistent and serious skin
disease in dogs and cats. Clinical management of allergic disease is problematic, as there are a large number of allergens that may give rise to
these conditions. Although skin testing is often regarded as the most accurate diagnostic procedure, such tests can be painful, subjective and
inconvenient. The effectiveness of the immunotherapy that is prescribed to treat symptoms of allergic disease is inherently limited by
inaccuracies in the diagnostic process.
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We believe that our ALLERCEPT Definitive Allergen Panels provide the most accurate determination of which we are aware of the specific
allergens to which an animal, such as a dog, cat or horse, is reacting. The panels use a highly specific recombinant version of the natural IgE
receptor to test the serum of potentially allergic animals for IgE directed against a panel of known allergens. A typical test panel consists
primarily of various pollen, grass, mold, insect and mite allergens. The test results serve as the basis for prescription ALLERCEPT Therapy
Shots and ALLERCEPT Therapy Drops. We operate veterinary laboratories in Loveland, Colorado and Fribourg, Switzerland which both
offer blood testing using our ALLERCEPT Definitive Allergen Panels.
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We sell kits to conduct blood testing using our ALLERCEPT Definitive Allergen Panels to third party veterinary diagnostic laboratories
outside of the U.S. We also sell products to screen for the presence of allergen-specific IgE to these customers. Animals testing positive for
allergen-specific IgE using these screening tests are candidates for further evaluation using our ALLERCEPT Definitive Allergen Panels.
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Veterinarians who use our ALLERCEPT Definitive Allergen Panels often purchase our ALLERCEPT Therapy Shots or ALLERCEPT
Therapy Drops. These prescription immunotherapy treatment sets are formulated specifically for each allergic animal and contain only the
allergens to which the animal has significant levels of IgE antibodies. The prescription formulations are administered in a series of
subcutaneous injections (Shots) or by daily sublingual (under the tongue) administration (Drops), with doses increasing over several months,
to ameliorate the allergic condition of the animal. Immunotherapy is generally continued for an extended time. We offer canine, feline and
equine subcutaneous and sublingual immunotherapy treatment products. We believe our ALLERCEPT Therapy Drops offer a convenient
alternative to subcutaneous injection, thereby increasing the likelihood of pet owner compliance.
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Other Vaccines and Pharmaceuticals ("OVP")
We developed a line of bovine vaccines that are licensed by the U.S. Department of Agriculture ("USDA"). In January 2015, we signed a
long-term Master Supply Agreement related to these vaccines with Eli Lilly operating through Elanco.
We manufacture biological and pharmaceutical products for a number of other animal health companies. We manufacture products for
animals other than cattle including horses, pigs, chickens, cats and dogs. Our offerings range from providing complete turnkey services
which include research, licensing, production, labeling and packaging of products to providing any one of these services as needed by our
customers as well as validation support and distribution services.
Marketing, Sales and Customer Support
We currently market our products to veterinarians through an outside field organization, a telephone sales force and independent third-party
distributors, as well as through trade shows, print advertising and through other distribution relationships, such as Merck Animal Health in
the case of our heartworm preventive. As of December 31, 2020, our customer facing sales, installed base support and utilization
organization consisted of 144 and 124 individuals in various parts of our North America and International segments, respectively.
Veterinarians may obtain our products directly from us or indirectly through others. All of our products ultimately are sold primarily to or
through veterinarians. The acceptance of our products by veterinarians is critical to our success. Internationally, we market our products to
veterinarians primarily through third-party veterinary diagnostic laboratories and independent third party distributors, but through our recent
acquisitions of scil, Optomed and CVM, and organic efforts in Australia, we have begun to market directly.
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We have a staff dedicated to customer and product support including veterinarians, technical support specialists and service technicians.
Individuals from our product development group may also be used as a resource in responding to certain product inquiries.
All OVP products are marketed and sold by third-parties under third-party labels.
We grant third parties rights to our intellectual property as well as our products, with our compensation often taking the form of royalties
and/or milestone payments.
Manufacturing
The majority of our revenue is from proprietary products manufactured by third parties. Third parties manufacture our veterinary instruments,
including affiliated consumables and supplies, as well as other products including key components of our heartworm point-of-care diagnostic
tests.
Our facility in Des Moines, Iowa is a USDA, Food and Drug Administration ("FDA") and Drug Enforcement Agency ("DEA") licensed
biological and pharmaceutical manufacturing facility. This facility currently has the capacity to manufacture more than 50 million doses of
vaccine each year. We expect that we will, for the foreseeable future, manufacture most, or all of our pharmaceutical and biological products
at this facility, as well as most, or all, of our recombinant proteins and other proprietary reagents for our diagnostic tests. We currently
manufacture our canine heartworm prevention product, our allergy treatment products and all our OVP products at this facility.
The OVP products for our North America segment are purchased in both finished and bulk format, and we perform all phases of
manufacturing, including growth of the active bacterial and viral agents, sterile filling, lyophilization and packaging at this facility. We
manufacture our various allergy products at our Des Moines facility, our Loveland facility and our Fribourg facility. We believe the raw
materials for most of the products we manufacture are readily available from more than one source.
Product Development
We are committed to providing innovative products to address the health needs of companion animals. We may obtain such products from
external sources, external collaboration or internal research and development.
We are committed to identifying external product opportunities and creating business and technical collaborations that lead to high value
veterinary products. We believe that our active participation in scientific networks and our reputation for investing in research enhances our
ability to acquire external product opportunities. We have collaborated, and intend to continue to do so, with a number of companies and
universities.
Internal research and development is managed on a case-by-case basis. We employ individuals with expertise in various applicable areas and
will form multidisciplinary product-associated teams as appropriate.
Intellectual Property
We believe that patents, trademarks, copyrights and other proprietary rights represent opportunities to grow our business and maintain or
enhance our competitive position. We also rely upon trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position. The proprietary technologies of our OVP products are primarily protected
through trade secret protection of, for example, our manufacturing processes in this area.
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We actively seek patent protection both in the U.S. and abroad. Our issued patent portfolios primarily relate to allergy, diagnostic and
detection tests, and vaccine delivery technologies. As of December 31, 2020, we owned, co-owned or had rights to 5 issued U.S. patents
expiring at various dates from April 2021 to April 2024 and had 2 pending U.S. patent application. Our corresponding foreign patent
portfolio as of December 31, 2020 included 7 issued patents in various foreign countries expiring at various dates from February 2021 to
August 2024 and no pending applications.
We also have obtained exclusive and non-exclusive licenses for numerous other patents held by academic institutions and for-profit
companies.
Seasonality
While we do not experience significant seasonal fluctuations in our sales throughout the year, we generally experience higher sales in the
fourth quarter due to industry trade shows and other similar activities.
Government Regulation
Although the majority of our revenue is from the sale of unregulated items, many of our products or products that we may develop are, or
may be, subject to extensive regulation by governmental authorities in the U.S., including the USDA and the FDA and by similar agencies in
other countries. These regulations govern, among other things, the development, testing, manufacturing, labeling, storage, pre-market
approval, advertising, promotion, sale and distribution of our products. Satisfaction of these requirements can take several years to achieve
and the time needed to satisfy them may vary substantially, based on the type, complexity and novelty of the product. Any product that we
develop must receive all relevant regulatory approval or clearances, if required, before it may be marketed in a particular country. The
following summarizes the major U.S. government agencies that regulate animal health products:
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USDA. Vaccines and certain single use, point-of-care diagnostics are considered veterinary biologics and are therefore
regulated by the Center for Veterinary Biologics, or CVB, of the USDA. In contrast to vaccines, single use, point-of-care
diagnostics can typically be licensed by the USDA in about two years, at considerably less cost. However, vaccines or
diagnostics that use innovative materials, such as those resulting from recombinant DNA technology, usually require
additional time to license. The USDA licensing process involves the submission of several data packages. These packages
include information on how the product will be manufactured, information on the efficacy and safety of the product in
laboratory and target animal studies and information on performance of the product in field conditions.
FDA. Pharmaceutical products, which typically include synthetic compounds, are approved and monitored by the Center for
Veterinary Medicine of the FDA. Under the Federal Food, Drug and Cosmetic Act, the same statutory standard for FDA
approval applies to both human and animal drugs: demonstrated safety, efficacy and compliance with FDA manufacturing
standards. However, unlike human drugs, neither preclinical studies nor a sequential phase system of studies are
required. Rather, for animal drugs, studies for safety and efficacy may be conducted immediately in the species for which the
drug is intended. Thus, there is no required phased evaluation of drug performance, and the Center for Veterinary Medicine
will review data at appropriate times in the drug development process. The time and cost for developing companion animal
drugs may be significantly less than for drugs for livestock animals, which generally have enhanced standards designed to
ensure safety in the food chain.
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•
EPA. Products that are applied topically to animals or to premises to control external parasites are regulated by the
Environmental Protection Agency, or EPA.
After we have received regulatory licensing or approval for our products, numerous regulatory requirements typically apply. Among the
conditions for certain regulatory approvals is the requirement that our manufacturing facilities or those of our third-party manufacturers
conform to current Good Manufacturing Practices or other manufacturing regulations, which include requirements relating to quality control
and quality assurance as well as maintenance of records and documentation. The USDA, FDA and foreign regulatory authorities strictly
enforce manufacturing regulatory requirements through periodic inspections and/or reports.
A number of our animal health products are not regulated. For example, certain products such as our ALLERCEPT panels are not regulated
by either the USDA or FDA. Similarly, none of our veterinary instruments requires regulatory approval to be marketed and sold in the U.S.
®
We have pursued CE Marking for imaging equipment and regulatory approval outside the U.S. based on market demographics of foreign
countries. For marketing outside the U.S., we are subject to foreign regulatory requirements governing regulatory licensing and approval for
many of our products. Licensing and approval by comparable regulatory authorities of foreign countries must be obtained before we can
market products in those countries. Product licensing approval processes and requirements vary from country to country and the time
required for such approvals may differ substantially from that required in the U.S. We cannot be certain that approval of any of our products
in one country will result in approvals in any other country.
To date, we or our distributors have sought regulatory approval for certain of our products from the Canadian Center for Veterinary
Biologics, or CCVB (Canada); the Japanese Ministry of Agriculture, Forestry and Fisheries, or MAFF (Japan); the Australian Department of
Agriculture, Fisheries and Forestry, or ADAFF (Australia); the Republic of South Africa Department of Agriculture, or RSADA (South
Africa); the Agriculture, Fisheries and Conservation Department, or ADCD (Hong Kong); the Macau Animal Health Division of Animal
Control and Inspection, or IACM (Macau); the Spanish Ministry for Agriculture, Fisheries and Food; and from the relevant regulatory
authorities in certain other countries requiring such approval.
The heartworm and allergy products previously discussed which have received regulatory approval in the U.S. and/or elsewhere are
summarized below:
Products
ALLERCEPT Allergy Treatment Sets
SOLO STEP CH
SOLO STEP FH
TRI-HEART Plus Heartworm Preventive
Country
Regulated
Agency
U.S.
Canada
U.S.
EU
Canada
U.S.
Canada
U.S.
Hong Kong
Macau
Yes
Yes
Yes
No-in most countries
Yes
Yes
Yes
Yes
Yes
Yes
USDA
CCVB
USDA
CCVB
USDA
CCVB
FDA
AFCD
IACM
Status
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
-9-
Customer Concentration
The information concerning our significant customers included in our Risk Factors section of this Annual Report under the caption “The loss
of significant customers who, for example, are historically large purchasers or who are considered leaders in their field could damage
our business and financial results” is incorporated herein by reference thereto.
Competition
Our market is intensely competitive. Our competitors include independent animal health companies and major pharmaceutical companies
that have animal health divisions. We also compete with independent, third party distributors, including distributors who sell products under
their own private labels. In the Point of Care diagnostic testing market, our major competitors include IDEXX Laboratories, Inc. ("IDEXX")
and Zoetis Inc. ("Zoetis"). Idexx has a larger veterinary product and service offering than we do and a large sales infrastructure network and a
well-established brand name. Zoetis also has a large sales infrastructure network.
In our North America segment, the OVP products we manufacture for sale by third parties compete with similar products offered by a
number of other companies, some of which have substantially greater financial, technical, research and other resources than us and may have
more established marketing, sales, distribution and service organizations than we do. Companies with a significant presence in the animal
health market such as CEVA Santé Animale, Elanco, Merck, Sanofi, Vétoquinol S.A., Virbac S.A. and Zoetis may be marketing or
developing products that compete with our products or would compete with them if successfully developed. These and other competitors and
potential competitors may have substantially greater financial, technical, research and other resources and larger, more established marketing,
sales, distribution and service organizations than we do. Our competitors may offer broader product lines and have greater name recognition
than we do.
Environmental Regulation
In connection with our product development activities and manufacturing of our biological, pharmaceutical, diagnostic and detection
products, we are subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage,
handling and disposal of certain materials, biological specimens and wastes. Although we believe that we have complied with these laws,
regulations and policies in all material respects and have not been required to take any significant action to correct any noncompliance, we
may be required to incur significant costs to comply with environmental and health and safety regulations in the future. Although we believe
that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be held
liable for any damages that result and any such liability could exceed our resources.
-10-
Human Capital Resources
As of December 31, 2020, we employed approximately 602 persons, 360 of which resided in North America and 242 internationally. We
employ temporary workers on a need only basis to maintain business flexibility and a dynamic workforce. We are committed to employee
diversity and inclusion and the support of traditionally underrepresented groups in management. Our workforce is approximately 50%
women and 50% men with 40% of our management team (defined as Director, Vice President and Executive Vice President) represented by
women. In 2020, we experienced an employee turnover rate of approximately 13% globally.
We believe that the current and future success of our company’s ability to execute on its strategic initiatives is highly dependent upon our
ability to recruit, retain and reward our employees. We engage in targeted recruitment strategies to fill highly skilled positions. Our
employees enjoy competitive compensation plans including market rate targeted salaries, robust benefits including retirement plans and
employee stock purchase plan opportunities, and the opportunity for participation in short and long term incentive programs. Our
compensation philosophy is designed to provide an appealing, market-based and rewarding compensation program that encourages high
personal and company performance, strong cultural and ethical behavior, and incentives aligned with shareholder interests. Our aim is to
attract, engage and retain highly qualified, motivated, and creative people who will fulfill our mission to be the “voice of the pet,” while
delivering on Heska goals in a healthy, honest, and sustainable manner.
We are committed to providing a workplace that protects the health and well-being of our employees. All employees are required to abide by
our Code of Conduct and Ethics, company health and safety parameters and contribute to a positive and friendly company culture. Due to the
COVID-19 pandemic and in consideration of our employees’ safety, in March 2020, we implemented strict work from home policies for all
employees with the ability to work remotely at all of our locations. At our Des Moines, Iowa manufacturing facility, we instituted staggered
start times, designated building entry/exit protocols and closed common areas to maximize “social distancing” guidelines. As of December
31, 2020, we continue to enforce these safety precautions and abide by Center for Disease Control (“CDC”) guidelines, while tentatively
planning limited return to work procedures in the second half of 2021.
Our Chief Administrative Officer is responsible for developing and executing the Company’s human capital strategy and updates the Board
on human capital matters.
Where You Can Find Additional Information
Our principal executive offices are located at 3760 Rocky Mountain Avenue, Loveland, Colorado 80538. Our telephone number is 970-493-
7272 and our Internet address is www.heska.com. References to our website in this Annual Report on Form 10-K are inactive textual
references only and the content of our website should not be deemed incorporated by reference for any purpose.
Because we believe it provides useful information in a cost-effective manner to interested investors, we make available free of charge, via a
link on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practical after we electronically
file such material with, or furnish it to, the Securities and Exchange Commission (the "SEC").
In addition, you may also review and download a copy of this Annual Report on Form 10-K, including any exhibits and any schedules filed
therewith, and our other periodic and current reports, proxy and information statements, and other information that we file with the SEC,
without charge, by visiting the SEC's website (http://www.sec.gov).
-11-
Information About Our Executive Officers
Our executive officers and their ages as of February 26, 2021 are as follows:
Name
Kevin S. Wilson
Catherine Grassman
Nancy Wisnewski, Ph.D.
Steven M. Eyl
Christopher Sveen
Eleanor Baker
36
Position
Age
48 Chief Executive Officer and President
45
58
55
38
Executive Vice President, Chief Financial Officer
Executive Vice President, Chief Operating Officer
Executive Vice President, Chief Commercial Officer, and President, scil animal care company
Executive Vice President, Chief Administrative Officer, General Counsel and Corporate
Secretary, Heska and President, Diamond Animal Health
Executive Vice President, Managing Director and Chief Operating Officer scil animal care
company
Kevin S. Wilson was appointed President and Chief Executive Officer effective March 31, 2014. He previously served as our President and
Chief Operating Officer from February 2013. Mr. Wilson became a member of our Board of Directors in May 2014. Mr. Wilson is a founder,
member and officer of Cuattro, LLC, an imaging diagnostic company. Since 2008, he has been involved in developing technologies for
radiographic imaging with Cuattro, LLC and as a founder of Cuattro Software, LLC, Cuattro Medical, LLC and Cuattro Veterinary, LLC. Mr.
Wilson served on the board of various private, non-profit and educational organizations from 2005 to 2011. He was a founder of Sound
Technologies, Inc., a diagnostic imaging company, in 1996. After Sound Technologies, Inc. was sold to VCA Antech, Inc. in 2004,
Mr. Wilson served as Chief Strategy Officer for VCA Antech, Inc. until 2006. Mr. Wilson attended Saddleback College.
Catherine Grassman, CPA, was appointed Executive Vice President, Chief Financial Officer on May 6, 2019. She previously served as Vice
President and Chief Accounting Officer from December 2017 to May 2019 and as Corporate Controller from January 2017 to December
2017. Ms. Grassman has been a central figure in the Company’s accounting and finance leadership. Prior to joining Heska, Ms. Grassman
was Corporate Controller of KeyPoint Government Solutions, a mid-sized private-equity backed, background investigation services
company. She also spent more than 15 years with PricewaterhouseCoopers, LLP as a senior manager in the audit practice. She is licensed in
Colorado as a Certified Public Accountant and possesses a Master of Accountancy and a Bachelor of Business Administration from Stetson
University.
Nancy Wisnewski, Ph.D. was appointed Executive Vice President, Chief Operating Officer in August 2019. She previously served as
Executive Vice President, Diagnostic Operations and Product Development from September 2016 to August 2019, as Executive Vice
President, Product Development and Customer Service from April 2011 to September 2016 and as Vice President, Product Development and
Technical Customer Service from December 2006 to April 2011. From January 2006 to November 2006, Dr. Wisnewski was Vice President,
Research and Development. Dr. Wisnewski held various positions in Heska's Research and Development organization between 1993 and
2005. She holds a Ph.D. in Parasitology/Biochemistry from the University of Notre Dame and a BS in Biology from Lafayette College.
Steven M. Eyl was appointed Executive Vice President, Global Sales and Marketing in September 2016. He previously served as our
Executive Vice President, Commercial Operations from May 2013 to September 2016. Mr. Eyl was a principal of Eyl Business Services, a
consulting firm, from January 2012 to May 2013. He was President of Sound Technologies, Inc. ("Sound") from 2000 to 2011, including
after Sound's acquisition by VCA Antech, Inc. in 2004. Mr. Eyl has an extensive background in medical technology sales. He is a graduate of
Indiana University.
-12-
Christopher Sveen, Esq. was appointed Executive Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary of
Heska Corporation and President, Diamond Animal Health in April 2020, previously serving as Vice President, General Counsel from
December 2018 to April 2020. Before joining Heska, Mr. Sveen served as a Private Banker at J.P. Morgan Private Bank in Chicago from
August 2015 to May 2018 and prior to that as a civil litigation and trial attorney at a boutique litigation firm. Mr. Sveen received his Juris
Doctor from Chicago-Kent College of Law in 2009 and his Master of Business Administration (MBA) from the Kelley School of Business at
Indiana University in 2015. He is licensed to practice law in Illinois and Colorado.
Eleanor Baker, Esq. was appointed Executive Vice President, Managing Director of scil in April 2020, previously serving as Vice President,
General Counsel since November 2017. Previously, Ms. Baker worked at KPMG, LLP as a technology and innovation solutions consultant
from 2015 to November 2017. Ms. Baker received her Juris Doctor from Wake Forest School of Law, a Master of Laws from University of
Houston and her undergraduate degree from Texas A&M University. She is licensed to practice law in Texas and Colorado.
Item 1A. Risk Factors
Risk Factors Summary
Pursuant to Item 105(b) of Regulation S-K, the following represents a summary of the principal factors that make an investment in our
common stock speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks
summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be
carefully considered, together with other information in this Form 10-K and our other filings with the SEC, before making an investment
decision regarding our common stock.
Risks related to our business and industry
•
•
The COVID-19 pandemic is adversely impacting consumer demand, our global supply chain and our financial and operational
results.
If the third parties that have substantial marketing rights for certain of our historical products, existing products or future products
under development are not successful in marketing those products, then our sales and financial position may suffer.
• Our Chief Executive Officer has acknowledged outside business interests which may occupy a portion of his time.
• We rely substantially on third party suppliers. The loss of products or delays in product availability from one or more third party
suppliers could substantially harm our business.
• We depend on key personnel for our future success. If we lose our key personnel or are unable to attract and retain additional
•
personnel, we may be unable to achieve our goals.
The loss of significant customers who, for example, are historically large purchasers or who are considered leaders in their field
could damage our business and financial results.
• We operate in a highly competitive industry, which could render our products obsolete or substantially limit the volume of products
that we sell. This would limit our ability to compete and maintain sustained profitability.
• We often depend on third parties for products we intend to introduce in the future. If our current relationships and collaborations are
not successful, we may not be able to introduce the products we intend to introduce in the future.
• We may be unable to market and sell our products successfully.
• We face risks associated with our international operations and our international expansion may not generate the results we anticipate.
-13-
• We may face costly legal disputes, including disputes related to our intellectual property or technology or that of our suppliers or
•
collaborators.
Interpretation of existing legislation, regulations and rules, including financial accounting standards, or implementation of future
legislation, regulations and rules could cause our costs to increase or could harm us in other ways.
• We are currently evaluating, and we intend to pursue, acquisitions and other strategic development opportunities, which may not
have desired results and could be detrimental to our financial position.
• Obtaining and maintaining regulatory approvals in order to market our products may be costly and could delay the marketing and
sales of our products. Failure to meet all regulatory requirements could cause significant losses from affected inventory and the loss
of market share.
• Our future revenues depend on successful product development, commercialization and/or market acceptance, any of which can be
slower than we expect or may not occur.
• Many of our expenses are fixed and if factors beyond our control cause our revenue to fluctuate, this fluctuation could cause greater
than expected losses, cash flow and liquidity shortfalls.
• Cyberattack related breaches of our information technology systems could have an adverse effect on our business.
• We may be unable to protect our stakeholders’ privacy or we may fail to comply with privacy laws.
• We may not be able to achieve sustained profitability or increase profitability on a quarterly or annual basis.
• We may face product returns and product liability litigation in excess of, or not covered by, our insurance coverage or indemnities
and/or warranties from our suppliers. If we become subject to product liability claims resulting from defects in our products, we may
fail to achieve market acceptance of our products and our sales could substantially decline.
• We may be held liable for the release of hazardous materials, which could result in extensive remediation costs or otherwise harm our
business.
Risks related to our common stock
• Our stock price has historically experienced high volatility, and could do so in the future, including experiencing a material price
decline resulting from a large sale in a short period of time. This volatility could affect the value of our common stock.
• Our NOL Protective Amendment could adversely impact the value and trading liquidity of our common stock.
•
If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock
could decline.
• We have not declared or paid any dividends on our common stock since 2012 and we do not anticipate paying any cash dividends in
the foreseeable future.
• We have fewer than 300 holders of record, which could allow us to terminate voluntarily the registration of our common stock with
the SEC and after which we would no longer be eligible to maintain the listing of our common stock on The Nasdaq Capital Market.
We may also be unable to otherwise maintain our listing on The Nasdaq Capital Market.
Provisions in our Certificate of Incorporation and bylaws and under Delaware law might discourage, delay or prevent a change of
control of our company or changes in our management and, therefore, depress the trading price of our common stock.
•
Risks related to the outstanding Notes
•
Servicing our debt will require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our
substantial debt.
-14-
• We may not have the ability to raise the funds necessary to settle conversions of our convertible notes (the "Notes") in cash or to
repurchase the Notes upon a fundamental change, and our future debt may contain, limitations on our ability to pay cash upon
conversion or repurchase of the Notes.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
•
Risk Factors
Our future operating results may vary substantially from period to period due to a number of factors, many of which are beyond our control.
The following discussion highlights the material factors and the possible impact of these factors on future results of operations. If any of the
following factors actually occur, our business, financial condition or results of operations could be harmed. In that case, the price of our
Public Common Stock could decline and investors in our Public Common Stock could experience losses on their investment.
Risks related to our business and industry
The COVID-19 pandemic is adversely impacting consumer demand, our global supply chain and our financial and operational results.
With the recent acquisition of scil, our worldwide operations make us vulnerable to risks from a global public health crisis, such as the
COVID-19 pandemic. We expect a future adverse impact to our financial results as the pandemic spreads through domestic and foreign
markets and if local governmental authorities institute or extend “shelter at home” protective measures. While the pace and ability of
governmental authorities to contain the COVID-19 pandemic remains uncertain, we expect this global public health crisis to have an adverse
impact on our financial results, including revenues, earnings and cash flows through at least the first half of 2021; specifically as a result of:
•
Temporary closure or reduced hours of veterinary clinics where we sell our products and services, resulting in decreased visits and
testing;
• Reduction in consumer discretionary spending on their pets’ health and wellbeing;
•
Potential supply chain disruption caused by customs restrictions of cross border trade, and other factors related to COVID-19
pandemic;
Potential supply chain disruption as suppliers consider focusing research and development efforts on human health away from animal
health;
•
• Governmental orders that create an array of restrictions on our customers, our employees and the pets they serve to limit the spread
of the COVID-19 pandemic;
Lower productivity due to reduced travel, work from home policies or shelter in place orders; and
•
• Overall slowdown in foreign and domestic economies resulting in stagnating wage growth, reduced discretionary spending and
temporary or permanent staffing layoffs.
As a result of the COVID-19 pandemic, we have implemented strict work from home policies for all employees with the ability to work
remotely at all of our locations. At our Des Moines, Iowa manufacturing facility, production schedules remain on track for order fulfillment
but we have instituted staggered start times, designated building entry/exit protocols and closed common areas to maximize “social
distancing” guidelines. Companywide, we enacted travel restrictions. The restricted travel policies for our sales force may adversely affect
our customers' ability or willingness to purchase our products and services, delay customer capital spending and reduce our ability to provide
on-site customer service. While we are unable to predict the duration of the financial and operational impact due to the COVID-19 pandemic,
we expect it could have
-15-
minimal adverse impact on our business through at least the first half of 2021. The COVID-19 pandemic could also have the effect of
heightening other risk factors described in this report.
If third parties that have substantial marketing rights for certain of our historical products, existing products or future products under
development are not successful in marketing those products, then our sales and financial position may suffer.
We are party to agreements with Merck Animal Health (“MAH”) for our canine heartworm preventive product, TRI-HEART Plus Chewable
Tablets, and Elanco for certain bovine vaccines, which have been sold primarily under the Titanium and MasterGuard brands. Either of these
marketing partners may not devote sufficient resources to marketing our products and our sales and financial position could suffer
significantly as a result. For example, in 2020, MAH failed to market, sell and support our heartworm preventive product, which resulted in
depressed OVP product annual revenue in our North America segment. Furthermore, there may be nothing to prevent these partners from
pursuing alternative technologies, products or supply arrangements, including as part of mergers, acquisitions or divestitures. Third party
marketing assistance may not be available in the future on reasonable terms, if at all. If the third parties with marketing rights for our
products were to merge or go out of business, the sale and promotion of our products could be diminished.
Our Chief Executive Officer has acknowledged outside business interests which may occupy a portion of his time.
Mr. Wilson’s employment agreement with us acknowledges that Mr. Wilson has business interests in Cuattro, LLC, Cuattro Software, LLC
and Cuattro Medical, LLC which may require a portion of his time, resources and attention during his working hours. If Mr. Wilson is
distracted by these or other business interests, he may not contribute as much as he otherwise would have to enhancing our business, to the
detriment of our shareholder value.
Cuattro, LLC charged Heska Imaging $0, $6.0 thousand, and $4.6 million during 2020, 2019, and 2018, respectively, primarily related to
digital imaging products, for which there was an underlying supply contract with minimum purchase obligations, software and services as
well as other operating expenses.
We rely substantially on third party suppliers. The loss of products or delays in product availability from one or more third party suppliers
could substantially harm our business.
To be successful, we must contract for the supply of, or manufacture ourselves, current and future products of appropriate quantity, quality
and cost. Such products must be available on a timely basis and be in compliance with any regulatory requirements. Similarly, we must
provide ourselves, or contract for the supply of, certain services. Such services must be provided in a timely and appropriate manner. Failure
to do any of the above could substantially harm our business.
We rely on third party suppliers to manufacture those products we do not manufacture ourselves and to provide services we do not provide
ourselves. Proprietary products provided by these suppliers represent a majority of our revenue. We currently rely on these suppliers for our
point of care laboratory instruments and consumable supplies for these instruments, for our imaging products and related software and
services, for key components of our point-of-care diagnostic tests as well as for the manufacture of other products.
The loss of access to products from one or more suppliers could have a significant, negative impact on our business. Major suppliers that sell
us proprietary products are FUJIFILM Corporation and Shenzen Mindray Bio-Medical Electronics Co., Ltd. We often purchase products
from our suppliers under agreements that are of limited duration or potentially can be terminated on short notice subsequent to unfavorable
legal action. In the case of our point of care laboratory instruments and our digital radiography solutions, post-termination,
-16-
we are typically entitled to non-exclusive access to consumable supplies, or ongoing non-exclusive access to products and services to meet
the needs of an existing customer base, respectively, for a defined period upon expiration of exclusive rights, which could subject us to
competitive pressures in the period of non-exclusive access. There can be no assurance that our suppliers will meet their obligations under
any agreements we may have in place with them or that we will be able to compel them to do so. Risks of relying on suppliers include:
• Inability to meet minimum obligations. Current agreements, or agreements we may negotiate in the future, may commit us to certain
minimum purchase or other spending obligations. It is possible we will not be able to create the market demand to meet such obligations,
which could create a drain on our financial resources and liquidity. Some agreements may require minimum purchases and/or sales to
maintain product rights and we may be significantly harmed if we are unable to meet such requirements and lose product rights.
• Loss of exclusivity. In the case of our point of care laboratory instruments, if we are entitled to non-exclusive access to consumable supplies
for a defined period upon expiration of exclusive rights, we may face increased competition from a third party with similar non-exclusive
access or our former supplier, which could cause us to lose customers and/or significantly decrease our margins and could significantly
affect our financial results. In addition, current agreements, or agreements we may negotiate in the future, with suppliers may require us to
meet minimum annual sales levels to maintain our position as the exclusive distributor of these products. We may not meet these minimum
sales levels and maintain exclusivity over the distribution and sale of these products. If we are not the exclusive distributor of these
products, competition may increase significantly, reducing our revenues and/or decreasing our margins.
• Changes in economics. An underlying change in the economics with a supplier, such as a large price increase or new requirement of large
minimum purchase amounts, could have a significant, adverse effect on our business, particularly if we are unable to identify and
implement an alternative source of supply in a timely manner.
• The loss of product rights upon expiration or termination of an existing agreement. Unless we are able to find an alternate supply of a
similar product, we would not be able to continue to offer our customers the same breadth of products and our sales and operating results
would likely suffer. In the case of an instrument supplier, we could also potentially suffer the loss of sales of consumable supplies, which
would be significant in cases where we have built a significant installed base, further harming our sales prospects and opportunities. Even
if we were able to find an alternate supply for a product to which we lost rights, we would likely face increased competition from the
product whose rights we lost being marketed by a third party or the former supplier and it may take us additional time and expense to gain
the necessary approvals and launch an alternative product.
• High switching costs. In our point of care laboratory instrument products, we could face significant competition and lose all or some of the
consumable revenues from the installed base of those instruments if we were to switch to a competitive instrument. If we need to change to
other commercial manufacturing contractors for certain of our regulated products, additional regulatory licenses or approvals generally
must be obtained for these contractors prior to our use. This would require new testing and compliance inspections prior to sale, thus
resulting in potential delays. Any new manufacturer would have to be educated in, or develop, substantially equivalent processes necessary
for the production of our products. We likely would have to train our sales force, distribution network employees and customer support
organization on the new product and spend significant funds marketing the new product to our customer base.
-17-
• The involuntary or voluntary discontinuation of a product line. Unless we are able to find an alternate supply of a similar product in this or
similar circumstances with any product, we would not be able to continue to offer our customers the same breadth of products and our sales
would likely suffer. Even if we are able to identify an alternate supply, it may take us additional time and expense to gain the necessary
approvals and launch an alternative product, especially if the product is discontinued unexpectedly.
• Inconsistent or inadequate quality control. We may not be able to control or adequately monitor the quality of products we receive from
our suppliers. Poor quality items could damage our reputation with our customers.
• Limited capacity or ability to scale capacity. If market demand for our products increases suddenly, our current suppliers might not be able
to fulfill our commercial needs, which would require us to seek new manufacturing arrangements and may result in substantial delays in
meeting market demand. If we consistently generate more demand for a product than a given supplier is capable of handling, it could lead
to large backorders and potentially lost sales to competitive products that are readily available. This could require us to seek or fund new
sources of supply, which may be difficult to find or may require terms that are less advantageous if available at all.
• Regulatory risk. Our manufacturing facility and those of some of our third party suppliers are subject to ongoing periodic unannounced
inspection by regulatory authorities, including the FDA, USDA and other federal, state and foreign agencies for compliance with strictly
enforced Good Manufacturing Practices, regulations and similar foreign standards. We do not have control over our suppliers’ compliance
with these regulations and standards. Regulatory violations could potentially lead to interruptions in supply that could cause us to lose sales
to readily available competitive products. If one of our suppliers is unable to provide a raw material or finished product due to regulatory
issues, it could have a material adverse financial impact on our business and could expose us to legal action if we are unable to perform on
contracts to our customers involving related products.
• Developmental delays. We may experience delays in the scale-up quantities needed for product development that could delay regulatory
submissions and commercialization of our products in development, causing us to miss key opportunities.
• Limited geographic rights. We typically do not have global geographic rights to products supplied by third parties. If we were to determine
a market opportunity in a geography where we did not have distribution rights and were unable to obtain such rights from the supplier, it
might hamper our ability to succeed in such geography and our sales and profits would be lower than they otherwise would have been.
• Limited intellectual property rights. We typically do not have intellectual property rights, or may have to share intellectual property rights,
to the products supplied by third parties and any improvements to the manufacturing processes or new manufacturing processes for these
products.
• Changes to United States tariff and import/export regulations. Changes to United States trade policies, treaties and tariffs could have a
material adverse effect on global trade. These changes could result in increased costs of goods imported into the United States for the
Company and our third party suppliers. Our third party suppliers may limit their trade with companies in the United States, including us.
• Global human and animal health risk. Several of our suppliers have operations in areas that may be susceptible to public health
emergencies that could restrict global trade generally, and our access to consumables and product, specifically. The risk of infectious
disease in humans and animals may limit trade and product access with third party suppliers with companies inside and outside the United
States,
-18-
including us. In particular, the use of animal bi-product may affect our consumable supply as a result of global animal health risks.
Potential problems with suppliers such as those discussed above could substantially decrease sales, lead to higher costs and/or damage our
reputation with our customers due to factors such as poor quality goods or delays in order fulfillment, resulting in our being unable to sell our
products effectively and substantially harming our business.
We depend on key personnel for our future success. If we lose our key personnel or are unable to attract and retain additional personnel,
we may be unable to achieve our goals.
Our future success is substantially dependent on the efforts of our senior management and other key personnel, including our Chief Executive
Officer (“CEO”) and President, Kevin Wilson. The loss of the services of members of our senior management or other key personnel may
significantly delay or prevent the achievement of our business objectives. Although we have employment agreements with many of these
individuals, all are at-will employees, which means that either the employee or Heska may terminate employment at any time without prior
notice. If we lose the services of, or fail to recruit, key personnel, the growth of our business could be substantially impaired. We do not
maintain key person life insurance for any of our senior management or key personnel.
The loss of significant customers who, for example, are historically large purchasers or who are considered leaders in their field could
damage our business and financial results.
We are dependent upon a number of significant customers. Revenue from Covetrus, Inc., formerly known as Henry Schein Animal Health
("Covetrus"), represented approximately 6%, 14% and 15% of our consolidated revenue for the years ended December 31, 2020, 2019 and
2018, respectively. Revenue from Merck entities, including Merck Animal Health, represented approximately 5%, 1% and 12% of our
consolidated revenue for the years ended December 31, 2020, 2019 and 2018, respectively. No other customer accounted for more than 10%
of our consolidated revenue for the years ended December 31, 2020, 2019 or 2018.
Covetrus represented 9% and 19% of our consolidated accounts receivable at December 31, 2020 and 2019, respectively. No other customer
accounted for more than 10% of our consolidated accounts receivable at December 31, 2020 or 2019. The loss of, or material reduction in
business from, any of our significant customers could adversely affect our business and financial results.
We operate in a highly competitive industry, which could render our products obsolete or substantially limit the volume of products that
we sell. This would limit our ability to compete and maintain sustained profitability.
The market in which we compete is intensely competitive. Our competitors include independent animal health companies and major
pharmaceutical companies that have animal health divisions. We also compete with independent, third party distributors, including
distributors that sell products under their own private labels. In the point-of-care diagnostic testing market, our major competitors include
IDEXX Laboratories, Inc. and Zoetis Inc.. The OVP products manufactured by our North America segment for sale by third parties compete
with similar products offered by a number of other companies, some of which have substantially greater financial, technical, research and
other resources than us and may have more established marketing, sales, distribution and service organizations than those of our OVP
product customers. Competitors may have facilities with similar capabilities to our Des Moines, Iowa facility, which they may operate and
sell at a lower unit price to customers than we sell our OVP products for, which could cause us to lose customers. Companies with a
significant presence in the companion animal health market, such as CEVA Sante´ Animale, Elanco, Merck, Sanofi, Vétoquinol S.A. and
Virbac S.A. may be marketing or developing products
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that compete with our products or would compete with them if developed. These and other competitors and potential competitors may have
substantially greater financial, technical, research and other resources and larger, more established marketing, sales and service organizations
than we do. For example, if Zoetis devotes its significant commercial and financial resources to growing its market share in the veterinary
allergy market, our allergy-related sales could suffer significantly. Our competitors may offer broader product lines and have greater name
recognition than we do. Our competitors may also develop or market technologies or products that are more effective or commercially
attractive than our current or future products or that would render our technologies and products obsolete. Further, additional competition
could come from new entrants to the animal health care market. Moreover, we may not have the financial resources, technical expertise or
marketing, sales or support capabilities to compete successfully. Zoetis has recently launched allergy products which may diminish the
competitiveness and sales prospects for our own allergy immunotherapy products. IDEXX has recently launched an SDMA test in its point of
care laboratory chemistry line, which may cause veterinary customers to prefer IDEXX products to ours.
If we fail to compete successfully, our ability to achieve sustained profitability will be limited and sustained profitability, or profitability at
all, may not be possible.
We benefit from relationships or collaboration with third parties, including but not limited to, companies, buying groups, veterinary hospital
groups and reference laboratory entities that operate in our markets. Beneficial third party, semi-competitive, directly competitive and
cooperative relationships that affect how we go to market, develop products, generate leads and other commercial efforts of Heska may be
negatively affected as a result of consolidation, acquisition, merger, exclusive arrangement or other agreements or activities between and
amongst those third parties and others.
We may depend on third parties for products we intend to introduce in the future. If our current relationships and collaborations are
not successful, we may not be able to introduce the products we intend to introduce in the future.
We are occasionally dependent on third parties and collaborative partners to perform research and development activities to successfully
develop new products. We routinely discuss Heska marketing in the veterinary market instruments being developed by third parties for use in
the human health care market. In the future, one or more of these third parties or collaborative partners may not complete research and
development activities in a timely fashion, or at all. Even if these third parties are successful in their research and development activities, we
may not be able to come to an economic agreement with them. If these third parties or collaborative partners fail to complete research and
development activities or fail to complete them in a timely fashion, or if we are unable to negotiate economic agreements with such third
parties or collaborative partners, our ability to introduce new products may be impacted negatively and our revenues may decline.
We may be unable to market and sell our products successfully.
We may not develop and maintain marketing and/or sales capabilities successfully, and we may not be able to make arrangements with third
parties to perform these activities on satisfactory terms, or at all. If our marketing and sales strategy is unsuccessful, our ability to sell our
products will be negatively impacted and our revenues will decrease. This could result in the loss of distribution rights for products or failure
to gain access to new products and could cause damage to our reputation and adversely affect our business and future prospects. The market
for companion animal healthcare products is highly fragmented. Because our proprietary products are generally available only to
veterinarians or by prescription and our medical instruments require technical training to operate, we ultimately sell all our products primarily
to or through veterinarians. The acceptance of our products by veterinarians is critical to our success. Changes in our ability
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to obtain or maintain such acceptance or changes in veterinary medical practice could significantly decrease our anticipated sales. As the vast
majority of cash flow to veterinarians ultimately is funded by pet owners without private insurance or government support, our business may
be more susceptible to severe economic downturns than other health care businesses that rely less on individual consumers.
For our Point of Care laboratory blood diagnostics products, we primarily rely on contracts with our veterinary customers for their use of our
owned equipment and our consumable supplies over a multiple year period. If veterinarians under these contracts experience a significant
downturn in their business, they may not fulfill their use and financial obligations under these contracts. If veterinarians breach our contracts,
and we are unable to collect on default payment provisions or otherwise enforce the terms of our contracts, our business will be adversely
affected. If we have to litigate against customer(s) to enforce our contracts, our expenses may increase, our sales may decrease to those
customers, and our reputation may suffer. If significant numbers of our customers under contracts for use of our equipment and consumable
supplies do not renew their contracts, our business will be adversely affected.
We have entered into agreements with independent third party distributors who we anticipate will market and sell our products to a greater
degree than in the recent past. Independent third party distributors may be effective in increasing sales of our products to veterinarians,
although we would expect a corresponding lower gross margin as such distributors typically buy products from us at a discount to end user
prices. It is possible new or existing independent third party distributors could cannibalize our direct sales efforts and lower our total gross
margin. For us to be effective when working with an independent third party distributor, the distributor must agree to market and/or sell our
products and we must provide proper economic incentives to the distributor as well as contend effectively for the time, energy and focus of
the employees of such distributor given other products the distributor may be carrying, potentially including those of our competitors. If we
fail to be effective with new or existing independent third party distributors, our financial performance may suffer.
We face risks associated with our international operations and our international expansion may not generate the results we anticipate.
A core component of our future growth strategy is international expansion. As we continue to expand our international footprint, we will be
increasingly susceptible to the risks associated with international operations including, but not limited to, the following:
• uncertain political and economic climates and fluctuations in exchange rates that may increase the volatility of foreign-based revenue and
expenses;
• burdens of complying with and unexpected changes in foreign laws, accounting and legal standards, regulatory requirements, taxes,
tariffs and other barriers or trade restrictions;
• lack of experience in connection with the customs, cultures, languages and sales cycle;
• reduced or altered protection for intellectual property rights; and
• data privacy laws in foreign countries, which require that data storage and processing be subject to laws different than the United States.
As a result of these and other factors, international expansion may be more difficult and not generate the results we anticipate, which
could negatively impact our business.
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We may face costly legal disputes, including disputes related to our intellectual property or technology or that of our suppliers or
collaborators.
We may face legal disputes related to our business. Even if meritless, these disputes may require significant expenditures on our part and
could entail a significant distraction to members of our management team or other key employees. For example, it took us until October 10,
2018, to reach an agreement in principle to settle the complaint that was filed against the Company by Shaun Fauley on March 12, 2015 in
the United States District Court for the 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 “Fauley class
action”). The settlement, which was approved by the court on February 28, 2019, required us, among other things, to pay $6.75 million to
class members, as well as to pay attorneys’ fees and expenses to legal counsel to the class, which we paid in full on April 3, 2019. Insurance
coverage may not cover any costs required to litigate a legal dispute or an unfavorable ruling or settlement. We did not have insurance
coverage for the settlement arrangement regarding the Fauley class action and had to borrow under our Credit Facility to fund the settlement.
A legal dispute leading to an unfavorable ruling or settlement, whether or not insurance coverage may be available for any portion thereof,
could have material adverse consequences on our business. Moreover, we may have to use legal means and incur affiliated costs to secure
the benefits to which we are entitled under third party agreements, such as to collect payment for goods shipped to third parties, which would
reduce our income as compared to what it otherwise would have been.
We may become subject to patent infringement claims and litigation in the United States or other countries or interference proceedings
conducted in the United States Patent and Trademark Office, or USPTO, to determine the priority of inventions. The defense and prosecution
of intellectual property suits, USPTO interference proceedings and related legal and administrative proceedings are likely to be costly, time-
consuming and distracting. As is typical in our industry, from time to time we and our collaborators and suppliers have received, and may in
the future receive, notices from third parties claiming infringement and invitations to take licenses under third-party patents. Any legal action
against us or our collaborators or suppliers may require us or our collaborators or suppliers to obtain one or more licenses in order to market
or manufacture affected products or services. We or our collaborators or suppliers may not, however, be able to obtain licenses for technology
patented by others on commercially reasonable terms, or at all, or to develop alternative approaches to access or replace such technology if
we or they are unable to obtain such licenses or if current and future licenses prove inadequate, any of which could substantially harm our
business.
We may also need to pursue litigation to enforce any patents issued to us or our collaborative partners, to protect trade secrets or know-how
owned by us or our collaborative partners, or to determine the enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference proceedings will likely result in substantial expense to us and significant diversion of the efforts of our technical and
management personnel. Any adverse determination in litigation or interference proceedings could subject us to significant liabilities to third
parties. Further, as a result of litigation or other proceedings, we may be required to seek licenses from third parties which may not be
available on commercially reasonable terms, or at all.
Interpretation of existing legislation, regulations and rules, including financial accounting standards, or implementation of future
legislation, regulations and rules could cause our costs to increase or could harm us in other ways.
As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses due to our compliance
with regulations and disclosure obligations applicable to us, including compliance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-
Oxley Act, as well as rules implemented
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by the SEC and the Nasdaq Stock Market. We prepare our financial statements in conformance with GAAP. These accounting principles are
established by and are subject to interpretation by the SEC, the FASB and others which interpret and create accounting policies. These rules
and regulations will continue to cause us to incur significant legal and financial compliance costs and will make some activities more time-
consuming and costly. A change in those policies or how those policies are interpreted can have a significant effect on our reported results
and may affect our reporting of transactions completed before a change is made effective. Such changes may require us to incur additional
compliance costs, adversely affect our reported financial results and the way we conduct our business or have a negative impact on us if we
fail to track such changes.
If our regulators and/or auditors adopt or interpret more stringent standards than we anticipate, we could experience unanticipated changes in
our reported financial statements, including but not limited to restatements, which could adversely affect our business due to litigation and
investor confidence in our financial statements. In addition, changes in the underlying circumstances to which we apply given accounting
standards and principles may affect our results of operations and have a negative impact on us. For example, we review goodwill recognized
on our consolidated balance sheets at least annually and if we were to conclude there was an impairment of goodwill, we would reduce the
corresponding goodwill to its estimated fair value and recognize a corresponding expense in our statement of operations. This impairment
and corresponding expense could be as large as the total amount of goodwill recognized on our consolidated balance sheets, which was $88.3
million at December 31, 2020 and $36.2 million at December 31, 2019. There can be no assurance that future goodwill impairments will not
occur if projected financial results are not met, or otherwise.
We are currently evaluating, and we intend to pursue, acquisitions and other strategic development opportunities, which may not have
desired results and could be detrimental to our financial position.
We continue to evaluate, and we intend to pursue, acquisitions and other strategic development opportunities, including minority investments
where strategic, such as our acquisition of scil in 2020. The ultimate business and financial performance of these opportunities may not
create, and may end up adversely affecting materially, the value we hope to enhance by pursuing them. Any acquisition may significantly
underperform relative to our financial expectations and may serve to diminish rather than enhance shareholder value. We may also diminish
our cash resources or dilute stockholders in order to finance any such acquisition or other strategic transaction.
The success of any acquisition will depend on, among other things, our ability to integrate assets and personnel acquired in these transactions
and to apply our internal controls process to these acquired businesses. The integration of acquisitions is likely to require significant attention
from our management, and the diversion of management’s attention and resources could have a material adverse effect on our ability to
manage our business. Furthermore, we may not realize the degree or timing of benefits we anticipated when we first entered into the
acquisition transaction. If actual integration costs are higher than amounts originally anticipated, if we are unable to integrate the assets and
personnel acquired in an acquisition as anticipated, or if we are unable to fully benefit from anticipated synergies, our business, financial
condition, results of operations and cash flows could be materially adversely affected. Furthermore, it is possible we will use management
time and resources to pursue opportunities we ultimately are unable or decide not to consummate, in which case, we may not be able to
utilize such management time and resources on what may have proved to be more productive matters in other areas of our business.
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Obtaining and maintaining regulatory approvals in order to market our products may be costly and could delay the marketing and sales
of our products. Failure to meet all regulatory requirements could cause significant losses from affected inventory and the loss of market
share.
Many of the products we develop, market or manufacture may subject us to extensive regulation by one or more of the USDA, the FDA, the
EPA and foreign and other regulatory authorities. These regulations govern, among other things, the development, testing, manufacturing,
labeling, storage, pre-market approval, advertising, promotion and sale of some of our products. Satisfaction of these requirements can take
several years and time needed to satisfy them may vary substantially, based on the type, complexity and novelty of the product. The decision
by a regulatory authority to regulate a currently non-regulated product or product area could significantly impact our revenue and have a
corresponding adverse impact on our financial performance and position while we attempt to comply with the new regulation, if such
compliance is possible at all.
The effect of government regulation may be to delay or to prevent marketing of our products for a considerable period of time and to impose
costly procedures upon our activities. We may not be able to estimate the time to obtain required regulatory approvals accurately and such
approvals may require significantly more time than we anticipate. We have experienced in the past, and may experience in the future,
difficulties that could delay or prevent us from obtaining the regulatory approval or license necessary to introduce or market our products.
Such delays in approval may cause us to forego a significant portion of a new product’s sales in its first year due to seasonality and advanced
booking periods associated with certain products. Regulatory approval of our products may also impose limitations on the indicated or
intended uses for which our products may be marketed.
Difficulties in making established products to all regulatory specifications may lead to significant losses related to affected inventory as well
as market share. Among the conditions for certain regulatory approvals is the requirement that our facilities and/or the facilities of our third
party manufacturers conform to current Good Manufacturing Practices and other analogous or additional requirements. If any regulatory
authority determines that our manufacturing facilities or those of our third party manufacturers do not conform to appropriate manufacturing
requirements, we or the manufacturers of our products may be subject to sanctions, including, but not limited to, warning letters,
manufacturing suspensions, product recalls or seizures, injunctions, refusal to permit products to be imported into or exported out of the
United States, refusals of regulatory authorities to grant approval or to allow us to enter into government supply contracts, withdrawals of
previously approved marketing applications, civil fines and criminal prosecutions. Furthermore, third parties may perceive procedures
required to obtain regulatory approval objectionable and may attempt to disrupt or otherwise damage our business as a result. In addition,
certain of our agreements may require us to pay penalties if we are unable to supply products, including for failure to maintain regulatory
approvals.
Any of these events, alone or in combination with others, could significantly damage our business or results of operations.
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Our future revenues depend on successful product development, commercialization and/or market acceptance, any of which can be
slower than we expect or may not occur.
The product development and regulatory approval process for many of our potential products is extensive and may take substantially longer
than we anticipate. Research projects may fail. New products that we may be developing for the veterinary marketplace may not perform
consistently within our expectations. Because we have limited resources to devote to product development and commercialization, any delay
in the development of one product or reallocation of resources to product development efforts that prove unsuccessful may delay or
jeopardize the development of other product candidates. If we fail to successfully develop new products and bring them to market in a timely
manner, our ability to generate additional revenue will decrease.
Even if we are successful in the development of a product or obtain rights to a product from a third party supplier, we may experience delays
or shortfalls in commercialization and/or market acceptance of the product. For example, veterinarians may be slow to adopt a product, a
product may not achieve the anticipated technical performance in field use or there may be delays in producing large volumes of a product.
The former is particularly likely where there is no comparable product available or historical precedent for such a product. The ultimate
adoption of a new product by veterinarians, the rate of such adoption and the extent veterinarians choose to integrate such a product into their
practice are all important factors in the economic success of any new products and are factors that we do not control to a large extent. If our
products do not achieve a significant level of market acceptance, demand for our products will not develop as expected and our revenues will
be lower than we anticipate.
Many of our expenses are fixed and if factors beyond our control cause our revenue to fluctuate, this fluctuation could cause greater
than expected losses, cash flow and liquidity shortfalls.
We believe that our future operating results will fluctuate on a quarterly basis due to a variety of factors which are generally beyond our
control, including:
• supply of products, including minimum purchase agreements, from third party suppliers or termination, cancellation or expiration of
such relationships;
• competition and pricing pressures from competitive products;
• the introduction of new products or services by our competitors or by us;
• large customers failing to purchase at historical levels;
• fundamental shifts in market demand;
• manufacturing delays;
• shipment problems;
• information technology problems, which may prevent us from conducting our business effectively, or at all, and may also raise our
costs;
• regulatory and other delays in product development;
• product recalls or other issues which may raise our costs;
• changes in our reputation and/or market acceptance of our current or new products; and
• changes in the mix of products sold.
We have high operating expenses, including those related to personnel. Many of these expenses are fixed in the short term and may
increase over time. If any of the factors listed above cause our revenues to decline, our operating results could be substantially harmed.
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Cyberattack related breaches of our information technology systems could have an adverse effect on our business.
Cyberattacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect and defend
against, notwithstanding our ongoing evaluation of and improvements to the preventive measures we take on to reduce the risks associated
with these threats based on our own experience and those observed in the broader market. Cyberattacks, ranging from the use of malware,
computer viruses, dedicated denial of services attacks, credential harvesting, social engineering and other means for obtaining unauthorized
access to our Company's confidential information or assets or disrupting our Company’s ability to operate normally, could have a material
adverse effect on our business. Cyberattacks may cause equipment failures, loss of information or assets, including sensitive personal
information of third-party vendors, customers or employees, or valuable technical and marketing information, as well as disruptions to our or
our vendor or customers’ operations. These attacks may be committed by company employees or external actors operating in any geography,
including jurisdictions where law enforcement measures to address such attacks are unavailable or ineffective. Cyberattacks may occur alone
or in conjunction with physical attacks, especially where disruption of service is an objective of the attacker. The preventive actions we take
on an ongoing basis to reduce the risks and mitigate the potential damages associated with cyberattacks, including protection of our systems,
networks and assets and the retention of cybersecurity insurance policies, may be insufficient to repel or mitigate entirely the effects of a
cyberattack.
We devote significant resources to network security, data encryption and other security measures to protect our systems and data, but these
security measures cannot provide absolute security. To the extent we were to experience a breach of our systems and were unable to protect
sensitive data in the wake of the breach, such a breach could materially damage business partner and customer relationships and reduce or
otherwise negatively impact access to online services. Moreover, if a computer security breach affects our systems or results in the
unauthorized release of Personally Identifiable Information (“PII”), our reputation and brand could be materially damaged; use of our
products and services could decrease, we could suffer from reputational harm impacting sales revenue, and we could be faced with
unforeseen regulatory investigation, remediation and litigation costs. Our cybersecurity insurance policies may not cover the full extent, or
any, of the potential financial harm that could be caused by a breach of our systems, including in respect of theft or possible damages claims
that may be brought against us by our business partners and customers in respect of any such breach.
The frequently changing attack techniques, along with the increased volume and sophistication of the attacks, create additional potential for
us to be adversely impacted by this activity. This impact could result in reputational, competitive, operational or other business harm as well
as management distraction, financial losses and costs, and regulatory action.
We may be unable to protect our stakeholders’ privacy or we may fail to comply with privacy laws.
The protection of customer, employee, supplier and company data is critical and the regulatory environment surrounding information
security, storage, use, processing, disclosure and privacy is demanding, with the frequent imposition of new and changing requirements. In
addition, our customers, employees and suppliers expect that we will protect their personal information. Any actual or perceived significant
breakdown, intrusion, interruption, cyberattack or corruption of customer, employee or supplier data or our failure to comply with federal,
state, local and foreign privacy laws, including the European Union’s General Data Protection Regulation (“GDPR”) and the Health
Insurance Portability and Accountability Act, could result in lost sales, remediation costs, and legal liability including severe penalties,
regulatory action and reputational harm. GDPR became effective in 2018, for example, and requires companies to meet new and enhanced
requirements regarding the handling of personal data, including its use, protection and the rights of data
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subjects to request correction or deletion of their personal data. Failure to meet GDPR requirements could result in penalties of up to 4% of
worldwide revenue. Despite our efforts and investments in technology to secure our computer network, security could be compromised,
confidential information could be misappropriated or system disruptions could occur. Failure to comply with the security requirements or
rectify a security issue may result in fines and the imposition of restrictions on our ability to accept payment by credit or debit cards. In
addition, the payment card industry (“PCI”) is controlled by a limited number of vendors that have the ability to impose changes in PCI’s fee
structure and operational requirements on us without negotiation. Such changes in fees and operational requirements may result in our failure
to comply with PCI security standards, as well as significant unanticipated expenses. Such failures could materially adversely affect our
operating results and financial condition. Furthermore, we maintain cybersecurity insurance coverage at levels that we believe are appropriate
for our business. The costs related to significant security breaches or disruptions, however, could be material and exceed the limits of the
cybersecurity insurance we maintain against such risks. If the amounts of our insurance coverage are inadequate to satisfy any damages and
losses in the event of a cybersecurity incident, we may have to expend significant resources to mitigate the impact of such an incident, and to
develop and implement protections to prevent future incidents of this nature from occurring. Such financial exposure could have a material
adverse effect on our business.
We may not be able to achieve sustained profitability or increase profitability on a quarterly or annual basis.
Prior to 2005, we incurred net losses on an annual basis since our inception in 1988 and, as of December 31, 2020, we had an accumulated
deficit of $150.9 million. Relatively small differences in our performance metrics may cause us to generate an operating or net loss in future
periods. Our ability to be profitable in future periods will depend, in part, on our ability to increase sales, including maintaining and growing
our installed base of instruments and related consumables, to maintain or increase gross margins and to limit the increase in our operating
expenses to a reasonable level as well as avoid or effectively manage any unanticipated issues. We may not be able to generate, sustain or
increase profitability on a quarterly or annual basis. If we cannot achieve or sustain profitability for an extended period, we may not be able
to fund our expected cash needs, including the repayment of debt as it comes due, or continue our operations.
We may face product returns and product liability litigation in excess of, or not covered by, our insurance coverage or indemnities and/or
warranties from our suppliers. If we become subject to product liability claims resulting from defects in our products, we may fail to
achieve market acceptance of our products and our sales could substantially decline.
The testing, manufacturing and marketing of our current products as well as those currently under development entail an inherent risk of
product liability claims and associated adverse publicity. Following the introduction of a product, adverse side effects may be discovered.
Adverse publicity regarding such effects could affect sales of our other products for an indeterminate time period. To date, we have not
experienced any material product liability claims, but any claim arising in the future could substantially harm our business. Potential product
liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. We may
not be able to continue to obtain adequate insurance at a reasonable cost, if at all. In the event that we are held liable for a claim against
which we are not indemnified or for damages exceeding the $10 million limit of our insurance coverage or which results in significant
adverse publicity against us, we may lose revenue, be required to make substantial payments which could exceed our financial capacity
and/or lose or fail to achieve market acceptance.
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We may be held liable for the release of hazardous materials, which could result in extensive remediation costs or otherwise harm our
business.
Certain of our products and development programs produced at our Des Moines, Iowa facility involve the controlled use of hazardous and
biohazardous materials, including chemicals and infectious disease agents. We cannot eliminate the risk of accidental contamination or injury
from these materials. In the event of such an accident, we could be held liable for any fines, penalties, remediation costs or other damages
that result. Our liability for the release of hazardous materials could exceed our resources, which could lead to a shutdown of our operations,
significant remediation costs and potential legal liability. In addition, we may incur substantial costs to comply with environmental
regulations if we choose to expand our manufacturing capacity.
Risks related to our common stock
Our stock price has historically experienced high volatility, and could do so in the future, including experiencing a material price
decline resulting from a large sale in a short period of time. This volatility could affect the value of our common stock.
Should a relatively large stockholder decide to sell a large number of shares in a short period of time, it could lead to an excess supply of
our shares available for sale and correspondingly result in a significant decline in our stock price.
The securities markets have experienced significant price and volume fluctuations and the market prices of securities of many small cap
companies have in the past been, and can in the future be expected to be, especially volatile. During the twelve months ended December 31,
2020, the closing stock price of our common stock has ranged from a low of $52.17 to a high of $151.18, and the closing sale price of our
common stock on February 25, 2021 was $190.51 per share. Fluctuations in the trading price or liquidity of our common stock may adversely
affect our ability to raise capital through future equity financings. Factors that may have a significant impact on the market price and
marketability of our common stock include:
• stock sales by large stockholders or by insiders;
• changes in the outlook for our business;
• our quarterly operating results, including as compared to expected revenue or earnings and in comparison to historical results;
• termination, cancellation or expiration of our third-party supplier relationships;
• announcements of technological innovations or new products by our competitors or by us;
• litigation;
• regulatory developments, including delays in product introductions;
• developments or disputes concerning patents or proprietary rights;
• availability of our revolving line of credit and compliance with debt covenants;
• releases of reports by securities analysts;
• economic and other external factors;
• issuances of equity or equity-linked securities by us; and
• general market conditions
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been
instituted. If a securities class action suit is filed against us, it is likely we would incur substantial legal fees and our management’s attention
and resources would be diverted from operating our business in order to respond to the litigation.
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Our NOL Protective Amendment could adversely impact the value and trading liquidity of our common stock.
On May 4, 2010, our stockholders approved an amendment (the “NOL Protective Amendment”) to our Certificate of Incorporation. The
NOL Protective Amendment places restrictions on the transfer of our common stock that could adversely affect our ability to use our
domestic Federal Net Operating Loss carryforward (“NOL”). In particular, the NOL Protective Amendment prevents the transfer of shares
without the approval of our board of directors if, as a consequence, 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 our board of
directors. Any transfer of shares in violation of the NOL Protective Amendment (a “Transfer Violation”) shall be void ab initio under the our
Certificate of Incorporation and our board of directors has procedures under our 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. The NOL Protective Amendment could have an
adverse impact on the value and trading liquidity of our stock if certain buyers who would otherwise have bid on or purchased our stock,
including buyers who may not be comfortable owning stock with transfer restrictions, do not bid on or purchase our stock as a result of the
NOL Protective Amendment. In addition, because some corporate takeovers occur through the acquirer’s purchase, in the public market or
otherwise, of sufficient shares to give it control of a company, any provision that restricts the transfer of shares can have the effect of
preventing a takeover. The NOL Protective Amendment could discourage or otherwise prevent accumulations of substantial blocks of shares
in which our stockholders might receive a substantial premium above market value and might tend to insulate management and the board of
directors against the possibility of removal to a greater degree than had the NOL Protective Amendment not passed.
In February 2018, our board of directors granted a waiver to a non-affiliated stockholder to allow the purchase, subject to certain limitations,
of up to 730,000 shares of our common stock without causing a Transfer Violation. This waiver can be withdrawn by our board of directors
at any time, in which case the non-affiliated stockholder is to only sell our stock until the non-affiliated stockholder ceases to be a Five
Percent Shareholder (as defined in our Certificate of Incorporation). On August 7, 2019, our board of directors determined to waive the
application of any NOL transfer restrictions contained in our Certificate of Incorporation with respect to the issuance and transfer of our
Notes, any issuance of shares of the Company’s common stock upon conversion of any of the Notes, and any subsequent and further transfer
of any such common stock, to the extent such restrictions would otherwise have been applicable thereto. In January 2020, our board of
directors waived the application of any NOL transfer restrictions contained in our Certificate of Incorporation with respect to the issuance
and sale of the shares of preferred stock and underlying common stock issued in connection with the financing of the scil acquisition. These
waivers, and any similar waivers that our board of directors may grant in the future, may make it more likely that we have a “change of
ownership” as defined under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended, which could place a
significant restriction on our ability to utilize our domestic Federal NOL in the future and materially adversely affect our results of
operations. State net operating loss carryforwards may be similarly or more stringently limited. Any limitations on our ability to use our pre-
change of ownership net operating losses to offset taxable income could potentially result in increased future tax liability to us.
If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock could
decline.
The trading market for our common stock will likely be influenced by research and reports that securities or industry analysts publish about
us or our business. In the event securities or industry analysts cover our company and one or more of these analysts downgrades our stock,
lowers their price target, or publishes
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unfavorable or inaccurate research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage
of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and
trading volume to decline.
We have not declared or paid any dividends on our common stock since 2012 and we do not anticipate paying any cash dividends in the
foreseeable future.
We have not declared or paid any dividends on our common stock since October 2012. We intend to retain any earnings to finance the
operation and expansion of our business, and we do not anticipate paying any cash dividends in the future. As a result, investors in our
common stock may only receive a return on their investment in our common stock if the market price of our common stock increases.
We have fewer than 300 holders of record, which could allow us to terminate voluntarily the registration of our common stock with the
SEC and after which we would no longer be eligible to maintain the listing of our common stock on The Nasdaq Capital Market. We may
also be unable to otherwise maintain our listing on The Nasdaq Capital Market.
We have fewer than 300 holders of record as of our latest information, a fact which could make us eligible to terminate voluntarily the
registration of our common stock with the SEC and therefore suspend our reporting obligations with the SEC under the Exchange Act and
become a non-reporting company. If we were to cease reporting with the SEC, we would no longer be eligible to maintain the listing of our
common stock on The Nasdaq Capital Market, which we would expect to materially adversely affect the liquidity and market price for our
common stock. The Nasdaq Capital Market has several additional quantitative and qualitative requirements companies must comply with to
maintain this listing. While we believe we are currently in compliance with all Nasdaq requirements, there can be no assurance we will
continue to meet Nasdaq listing requirements, that Nasdaq will interpret these requirements in the same manner we do if we believe we meet
the requirements, or that Nasdaq will not change such requirements or add new requirements to include requirements we do not meet in the
future.
If we were delisted from The Nasdaq Capital Market, our common stock may be considered a penny stock under the regulations of the SEC
and would therefore be subject to rules that impose additional sales practice requirements on broker-dealers who sell our securities. The
additional burdens imposed upon broker-dealers may discourage broker-dealers from effecting transactions in our common stock, which
could severely limit market liquidity of the common stock and any stockholder’s ability to sell our securities in the secondary market. This
lack of liquidity would also likely make it more difficult for us to raise capital in the future.
Provisions in our Certificate of Incorporation and bylaws and under Delaware law might discourage, delay or prevent a change of
control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Our Certificate of Incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to
discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may
deem advantageous. These provisions:
• place restrictions on the transfer of our common stock that could adversely affect our ability to use our domestic NOL, which can have an
effect of preventing a takeover;
• provide that our board of directors may, without stockholder approval, issue shares of preferred stock with special voting or economic
rights;
• prohibit stockholders from calling a special meeting of our stockholders;
• provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and
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• establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted
upon by stockholders at stockholder meetings.
Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation
from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the
date on which the stockholder became an “interested’ stockholder and which may discourage, delay, or prevent a change of control of our
company.
Any provision of our Certificate of Incorporation, bylaws or Delaware law that has the effect of delaying or deterring a change in control
could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also negatively affect
the price that some investors are willing to pay for our common stock.
Risks related to the outstanding Notes
Servicing our debt will require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our
substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the amounts
payable under the Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond
our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make
necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as
selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to
refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any
of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
We may not have the ability to raise the funds necessary to settle conversions of the Notes in cash or to repurchase the Notes upon a
fundamental change, and our future debt may contain, limitations on our ability to pay cash upon conversion or repurchase of the Notes.
Holders of the Notes will have the right to require us to repurchase their notes upon the occurrence of a fundamental change at a fundamental
change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. In
addition, upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than
paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted.
However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes
surrendered therefor or Notes being converted. In addition, our ability to repurchase the Notes or to pay cash upon conversions of the Notes
may be limited by law, by regulatory authority or by agreements governing our existing and future indebtedness. Our failure to repurchase
Notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the Notes as required by
the indenture would constitute a default under the indenture. If a fundamental change occurs, or if the Notes are accelerated due to an event
of default under the indenture, such events may lead to a default under agreements governing our future indebtedness. Any future
indebtedness of ours may contain restrictions on our ability to pay cash upon conversion or repurchase of the Notes. If the repayment of the
related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the
indebtedness and repurchase the Notes or make cash payments upon conversions thereof.
-31-
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time
during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion
obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share) or by electing
an exchange process for the Notes and a designated financial institution delivers the applicable conversion consideration, we would be
required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In
addition, even if holders of Notes do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all
or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of
our net working capital.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
Our principal administrative and research and development activities are located in Loveland, Colorado. We lease approximately 60,000
square feet at a facility in Loveland, Colorado under an agreement that expires in 2023. Our principal production facility located in Des
Moines, Iowa, consists of approximately 160,000 square feet of buildings on 34 acres of land, which we own.
In December 2019, we entered into lease agreements for two warehouses in Tudela, Spain for the development of the business activities of
the CVM companies.
On April 1, 2020, we acquired scil, which included property in Germany, France, Spain, Canada, Italy and Malaysia. In Germany, we own an
office space that is approximately 45,000 square feet, and a warehouse that is approximately 15,000 square feet. In France, Spain and
Malaysia, we lease office spaces and warehouses. In Canada, we lease an office space and in Italy, we own an office space, a warehouse, and
a showroom.
Item 3.
Legal Proceedings
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.
As of December 31, 2020, we were not a party to any legal proceedings that are expected, individually or in the aggregate, to have a material
adverse effect on our business, financial condition or operating results.
Item 4.
Mine Safety Disclosures
Not applicable.
-32-
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Public Common Stock is quoted on the Nasdaq Capital Market under the symbol "HSKA".
As of February 25, 2021, there were approximately 250 holders of record of our Public Common Stock, and approximately 4,000 beneficial
stockholders. We do not anticipate any dividend payments in the foreseeable future.
Issuer Purchases of Equity Securities
The following table sets forth information about the Company's purchases of our outstanding Public Common Stock during the quarter ended
December 31, 2020:
Period
October 2020
November 2020
December 2020
Total Number
of Shares
Purchased (1)
Average Price
Paid per Share
(1)
— $
3,127 $
2,825 $
5,952 $
—
121.83
133.13
127.19
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares that
May Yet be Purchased
Under Plans or
Programs
— $
— $
— $
— $
—
—
—
—
(1) Shares of Public Common Stock we purchased between October 1, 2020 and December 31, 2020 were solely for the cancellation of shares of stock withheld for related tax obligations.
-33-
STOCK PRICE PERFORMANCE GRAPH
The following graph provides a comparison over the five-year period ended December 31, 2020 of the cumulative total shareholder return
from a $100 investment in the Company's common stock with the NASDAQ Medical Supplies Index and the NASDAQ Composite Total
Return:
Heska Corporation
NASDAQ Medical Supplies Index
NASDAQ Composite Total Return Index
$
$
$
100
100
100
$
$
$
395
126
116
$
$
$
442
165
151
$
$
$
475
177
147
$
$
$
529
234
200
$
$
$
803
297
291
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
-34-
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the
Consolidated Financial Statements and related Notes included in Item 8 of this Form 10-K. This discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, and can generally be identified by our use of
the words "scheduled," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar
expressions. Such statements, which include statements concerning future revenue sources and concentration, international market expansion,
gross profit margins, selling and marketing expenses, remaining minimum performance obligations, research and development expenses,
general and administrative expenses, capital resources, financings or borrowings and additional losses, are subject to risks and uncertainties,
including, but not limited to, those discussed below and elsewhere in this Form 10-K, particularly in Item 1A. "Risk Factors," that could
cause actual results to differ materially from those projected. The forward-looking statements set forth in this Form 10-K are as of the close
of business on February 25, 2021, and we undertake no duty and do not intend to update this information, except as required by applicable
securities laws. If we updated one or more forward looking statements, no inference should be drawn that we will make additional updates
with respect to those or other forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements set forth above. See "Statement Regarding Forward Looking
Statements."
Overview
We sell advanced veterinary diagnostic and specialty products. Our offerings include Point of Care laboratory instruments and consumables;
Point of Care digital imaging diagnostic instruments; digital cytology 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.
Point of Care laboratory instruments and other sales include outright instrument sales, revenue recognized from sales-type lease treatment,
and other revenue sources, such as charges for repairs. Revenue from Point of Care laboratory consumables primarily involves placing an
instrument under contract in the field and generating future revenue from testing consumables, such as cartridges and reagents, as that
instrument is used. Instruments placed under subscription agreements are considered operating or sales-type
leases, depending on the duration and other factors of the underlying agreement. A loss of, or disruption in, the supply of consumables we are
selling to an installed base of instruments could substantially harm our business. All of our Point of Care laboratory and other non-imaging
instruments and consumables are supplied by third parties, who typically own the product rights and supply the product to
us under marketing and/or distribution agreements. In many cases, we have collaborated with a third party to adapt a human instrument for
veterinary use. Major products in this area include our instruments for chemistry, hematology, blood gas and immunodiagnostic testing and
their affiliated operating consumable.
Radiography is the largest product offering in Point of Care imaging, which includes digital and computed radiography and ultrasound
instruments. Radiography solutions typically consist of a combination of hardware and software placed with a customer, often combined with
an ongoing service and support contract. Our experience has been that most of the revenue is generated at the time of sale in this area, in
contrast to the Point of Care diagnostic laboratory placements discussed above where ongoing consumable revenue is often a larger
component of economic value as a given instrument is used.
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Pharmaceuticals, Vaccines and Diagnostic ("PVD") revenue, includes single use diagnostic and other tests, pharmaceuticals and biologicals
as well as research and development, licensing and royalty revenue. Since items in this area are often single use by their nature, our typical
aim is to build customer satisfaction and loyalty for each product, generate repeat annual sales from existing customers and expand our
customer base in the future. Products in this area are both supplied by third parties and provided by us. Major products and services in this
area include heartworm diagnostic tests and preventives, and allergy test kits, allergy
immunotherapy and testing.
Other Vaccines and Pharmaceuticals ("OVP") revenue is generated in our USDA, FDA and DEA licensed production facility in Des Moines,
Iowa. We view this facility as an asset which could allow us to control our cost of goods on any pharmaceuticals and vaccines that we may
commercialize in the future. We have increased integration of this facility with our operations elsewhere. For example, virtually all of our
U.S. inventory, excluding our imaging products, is stored at this facility and related fulfillment logistics are managed there. Our OVP revenue
includes vaccines and pharmaceuticals produced for third parties. OVP is attributable only to the North America segment.
All of our products are ultimately sold primarily to or through veterinarians. In many cases, veterinarians will mark up their costs to their
customers. The acceptance of our products by veterinarians is critical to our success. These products are sold directly to end users by us as
well as through distribution relationships, such as the sale of kits to conduct blood testing to third-party veterinary diagnostic laboratories and
sales to independent third-party distributors. Revenue from direct sales and distribution relationships represented 72% and 28%, respectively,
of revenue for the year ended December 31, 2020 compared to 64% and 36%, respectively, for the year ended December 31, 2019.
Segment Change
During the second quarter of 2020, following the scil acquisition, the chief operating decision maker (“CODM”) changed how he assesses
performance and allocates resources based on geographic regions. As a result, the Company determined it has two operating and reportable
segments: North America and International. North America consists of the United States, Canada and Mexico. International consists of
geographies outside of North America, primarily our operations in Australia, France, Germany, Italy, Malaysia, Spain and Switzerland. The
Company's core strategic focus on point of care laboratory and imaging products is included in both segments. The North America segment
also includes the contract manufacturing
of vaccines and pharmaceutical products. The Company revised prior comparative periods to conform to the current period segment
presentation. Refer to Note 18 - Segment Reporting to the consolidated financial statements included in Part II. Item 8 of this Annual Report
on Form 10-K for further information.
Impact of COVID-19 Pandemic and Current Economic Environment
Beginning in the first quarter of 2020, to limit the spread of COVID-19, governments took various actions including the issuance of stay-at-
home policies and social distancing procedures and guidelines, causing some businesses to adjust, reduce or suspend business and operating
activities. Veterinary care is widely recognized as an "essential" service for pet owners, and veterinarians continued to deliver essential
medical care for sick and injured pets. The stay-at-home policies deployed early in 2020 to combat the spread of COVID-19 resulted in a
decrease in companion animal clinical visits, including delay of elective procedures and wellness visits and as a result lower demand for
diagnostic testing services. During the second and third quarters of 2020, certain local, state and federal governments began to ease the stay-
at-home policies and allowed more businesses and facilities to re-open, leading to a recovery in companion animal clinical visits and
associated demand for our diagnostic products. Finally, during the fourth quarter, increased restrictions, mainly in the European Union,
certain parts of Canada and Australia, in which we operate, re-emerged. The extent to which
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the continuation, or another wave outbreak of COVID-19, or an outbreak of other health epidemics could impact our business, results of
operations and financial condition, including the potential for write-offs or impairments of assets and suspension of capital investments, will
depend on future developments. We are unable to predict with certainty the effects of the COVID-19 pandemic on our customers, suppliers
and vendors, as well as the actions of governments, and when and to what extent normal economic and operating conditions can resume;
these effects may differ from those assumed in our projected estimates. Even after the COVID-19 pandemic has subsided, we may continue
to experience adverse impacts, mainly in our ability to place new capital equipment, to our business as a result of any economic impact that
has occurred or may occur in the future.
As a result of social distancing measures, on-site installations of POC Lab and Imaging equipment continue to experience intermittent delays.
While not significant to the overall results of the of the year, on-site installations of equipment have been impacted since March. However,
our financial position remains strong. On April 1, 2020, we closed our acquisition of scil; the transaction was fully financed by a preferred
stock offering. We have sufficient liquidity to sustain our operations and do not anticipate a need to access additional capital outside of the
various programs available to our overseas subsidiaries.
While we have experienced some intermittent delays in receiving supply and a slight increase in shipping costs, our supply chain has not
been significantly impacted. Our major research and development projects are continuing to progress substantially as planned but we have
experienced sporadic delays in receiving validation samples and device components as well as inefficiencies in remote collaboration and
field-testing.
We do not know how long COVID-19 related challenges will continue. The ultimate impact on our business will depend on many factors
substantially beyond our control and difficult to predict. In the near-term and with asynchronous variation across geographies, we anticipate
veterinary hospitals may temporarily delay capital equipment investments as a result of heightened conservatism and the effects of social
distancing on in-clinic demonstrations and installations. Despite these headwinds, we believe we are well positioned because: (1) our
customers and products are essential, (2) our main Point of Care laboratory business continues to show healthy consumables use and margin,
(3) our subscriptions model metrics continue to show solid performance, (4) our vaccines and pharmaceuticals business continues to perform
with minimal disruption, (5) our balance sheet is strong, and (6) our employees, logistics, supply chain, and operations continue to operate
well in the current environment and they are fully prepared for both a phased return and an instant return to full capacity.
Critical Accounting Estimates
Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements included in Part II. Item 8 of this Annual
Report on Form 10-K describes the significant accounting policies used in preparation of these consolidated financial statements. We believe
the following critical accounting estimates and assumptions may have a material impact on reported financial condition and operating
performance and involve significant levels of judgment to account for highly uncertain matters or are susceptible to significant change. In
each of these areas, management makes estimates based on historical results, current trends and future projections.
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Deferred Tax Assets – Valuation Allowance
We evaluate our ability to realize the tax benefits associated with a deferred tax asset (“DTA”) by analyzing our forecasted taxable income
using both historical and projected future operating results, the reversal of existing temporary differences, taxable income in prior carry back
years (if permitted) and the availability of tax planning strategies. A valuation allowance is required to be established unless management
determines that it is more likely than not that we will ultimately realize the tax benefit associated with a deferred tax asset. As of December
31, 2020 and 2019, we had valuation allowances of approximately $6.4 million and $5.7 million, respectively.
Business Combinations
We account for transactions that represent business combinations under the acquisition method of accounting, which requires us to allocate
the total consideration paid for each acquisition to the assets we acquire and liabilities we assume based on their fair values as of the date of
acquisition, including identifiable intangible assets. The allocation of the purchase price utilizes significant estimates in determining the fair
values of identifiable assets acquired and liabilities assumed, especially with respect to intangible assets. We may refine our estimates and
make adjustments to the assets acquired and liabilities assumed over a measurement period, not to exceed one year.
Valuation of Goodwill and Intangibles
A significant portion of the purchase price for acquired businesses is generally assigned to intangible assets. 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 Heska. 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. 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.
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.
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As part of our goodwill testing process, we evaluate factors specific to a reporting unit as well as industry and macroeconomic factors that are
reasonably likely to have a material impact on the fair value of a reporting unit. Examples of the factors considered in assessing the fair value
of a reporting unit include: the results of the most recent impairment test, the competitive environment, the regulatory environment,
anticipated changes in product or labor costs, revenue growth trends, the consistency of operating margins and cash flows and current and
long-range financial forecasts. The long-range financial forecasts of the reporting units, which are based upon management’s long-term view
of our markets, are used by senior management and the Board of Directors to evaluate operating performance.
We performed qualitative assessments in the fourth quarters of 2020, 2019 and 2018 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 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, 2020, 2019 and
2018.
These valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may
occur.
Share-Based Compensation Expense
We utilize share-based compensation arrangements as part of our long-term incentive plan. Our share-based compensation programs provide
for grants of many types of awards, but we currently grant stock options, including performance stock options, and restricted stock awards,
along with the issuance of employee stock purchase rights. The total fair value of future awards may vary significantly from past awards
based on a number of factors, including our share-based award practices. Therefore, share-based compensation expense is likely to fluctuate,
possibly significantly, from year to year.
The majority of our currently issued restricted stock awards and performance stock options are tied to Company and market-related
performance metrics and generally include a time vesting component. We also grant stock options and restricted stock awards tied to time
vesting to employees and directors. All significant inputs into the determination of expense as well as the related expense are discussed
further in Note 12 - Capital Stock to the consolidated financial statements included in Part II. Item 8 of this Annual Report on Form 10-K.
Restricted Stock Awards (Time Vesting)
The fair value of restricted stock awards with only time-based vesting terms used in our expense recognition method is measured based on
the number of shares granted and the closing market price of our common stock on the date of grant. Such value is recognized as an expense
over the corresponding requisite service period. Forfeitures are accounted for as they occur.
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Performance-Based Stock Compensation Awards
We also grant restricted stock awards and performance stock options subject to performance vesting criteria, in addition to service, to our
executive officers and other key employees. This type of grant consists of the right to receive shares of, or options to purchase, common
stock, subject to achievement of time-based criteria and certain Company and market performance-related goals over a specified period, as
established by the Compensation Committee of our Board of Directors. We recognize any related share-based compensation expense ratably
over the requisite service period based on the probability assessment on the outcome of the performance condition related to company
performance metrics. The fair value used in our expense recognition method is measured based on the number of shares granted and the
closing market price of our common stock on the date of grant for restricted stock awards and the Black-Scholes model for performance
stock options. The amount of share-based compensation expense recognized in any one period can vary based on the attainment or expected
attainment of the performance goals. If such performance goals are not ultimately met, no compensation expense is recognized and any
previously recognized compensation expense is reversed. We recognize any related share-based compensation expense ratably over the
service period based on the most probable outcome of the performance condition related to market performance metrics. For awards related
to market performance, the fair value used in our expense recognition method is measured based on the number of shares granted, and a
Monte Carlo simulation model, which incorporates the probability of the achievement of the market-related performance goals as part of the
grant date fair value. If such performance goals are not ultimately met, the expense is not reversed.
Recent Accounting Pronouncements
From time to time, the FASB or other standard setting bodies issue new accounting pronouncements. Updates to the FASB ASC are
communicated through issuance of an ASU. Unless otherwise discussed, we believe that recently issued guidance, whether adopted or to be
adopted in the future, is not expected to have a material impact on our Consolidated Financial Statements upon adoption.
To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 1 -
Operations and Summary of Significant Accounting Policies to the consolidated financial statements included in Part II. Item 8 of this
Annual Report on Form 10-K.
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Results of Operations
Our analysis presented below is organized to provide the information we believe will facilitate an understanding of our historical
performance and relevant trends going forward. This discussion should be read in conjunction with our consolidated financial statements,
including the notes thereto, in Part II. Item 8 of this Annual Report on Form 10-K. A discussion of significant changes from the periods
ending December 31, 2019 compared to December 31, 2018 can be found in Part II. Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019.
The following table sets forth, for the periods indicated, certain data derived from our Consolidated Statements of (Loss) Income (in
thousands):
Revenue, net
Gross profit
Operating expenses
Operating (loss) income
Interest and other expense, net
Income before income taxes and equity in losses of unconsolidated affiliates
Income tax expense (benefit)
Net loss before equity in losses of unconsolidated affiliates
Equity in losses of unconsolidated affiliates
Net loss, after equity in losses of unconsolidated affiliates
Net loss attributable to non-controlling interest
Net loss attributable to Heska Corporation
Diluted loss per share attributable to Heska Corporation
Non-GAAP net income per diluted share
(1)(2)
(1)
(2)
Adjusted EBITDA
(2)
Net loss margin
Adjusted EBITDA margin
(2)
$
$
$
$
$
Year Ended December 31,
2020
2019
$
$
$
$
$
197,323
81,290
89,482
(8,192)
5,601
(13,793)
239
(14,032)
(720)
(14,752)
(353)
(14,399)
(1.66)
0.74
22,319
(7.1)%
11.3 %
122,661
54,449
54,122
327
2,910
(2,583)
(1,446)
(1,137)
(594)
(1,731)
(266)
(1,465)
(0.20)
0.49
10,382
(0.9)%
8.5 %
(1)
Shares used in the diluted per share calculation for diluted loss per share attributable to Heska Corporation are (in thousands) 8,653 for the
year ended December 31, 2020 and 7,446 for the year ended December 31, 2019. Shares used in the diluted per share calculation for non-
GAAP net income per diluted share are (in thousands): 9,451 for the year ended December 31, 2020 compared to 7,977 for the year ended
December 31, 2019.
(2)
See “Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA to net income, Non-GAAP net income (loss) per diluted
share to Diluted (loss) earnings per share attributable to Heska Corporation, and Adjusted EBITDA margin to Net loss margin, the closest
comparable GAAP measures, for each of the periods presented.
Revenue
Total revenue increased 61% to $197.3 million in 2020 compared to $122.7 million in 2019. The significant increase in revenue is driven
mainly by the acquisitions of CVM and scil, which represented an increase of $68.2 million of revenue for the twelve months ended
December 31, 2020, which was not included in the
-41-
prior year period. The remaining increase is a result of sales of POC Lab Consumables, contract manufactured product for third parties,
including TriHeart, and immunotherapy products.
Gross Profit
Gross profit increased 49.3% to $81.3 million in 2020 compared to $54.4 million in 2019. Gross margin percent declined to 41.2% in 2020
compared to 44.4% in 2019. The increase in gross profit is due to recent acquisitions of CVM and scil, which represented an increase of
$21.3 million increase in gross profit in the twelve months ended December 31, 2020, which was not included in the prior year period.
Remaining increase in gross profit is due to increased sales of higher margin products such as POC Lab Consumables and contract
manufacturing production increases. The decrease in gross margin percentage is due to lower margin in our newly acquired businesses.
Operating Expenses
Selling and marketing expenses increased 39% to $38.5 million in 2020 compared to $27.7 million in 2019. The increase is a direct result of
international expansion related to recent acquisitions and is in line with management expectations.
Research and development expenses increased 6% to $8.8 million in 2020, compared to $8.2 million in 2019. The increase was primarily
driven by spending on product development for a urine and fecal diagnostic analyzer and enhanced immunodiagnostic offerings. As we
invest in future growth of the Company, the increased research and development expenses is consistent with the spending initiatives of
management.
General and administrative expenses increased 132% to $42.2 million in 2020, compared to $18.2 million in 2019. The increase is driven
primarily by additional expenses related to the impact of international acquisitions compared to the prior year of $11.4 million, as well as
one-time costs primarily related to the acquisition of scil, which were $9.5 million in 2020 compared to $1.0 million in 2019. In addition,
stock-based and other compensation expenses increased by $4.5 million.
Interest and Other (Income) Expense, Net
Interest and other expense, net, was $5.6 million in 2020, compared to $2.9 million in 2019. The increase was primarily driven by interest
expense as a result of the Notes. Refer to Note 16 - Convertible Notes and Credit Facility to the consolidated financial statements included in
Part II, Item 8 of this Annual Report on Form 10-K.
Income Tax (Benefit) Expense
In 2020, we had total income tax expense of $0.2 million compared to a total income tax benefit in 2019 of $1.4 million. See Note 5 - Income
Taxes to the consolidated financial statements included in Part II. Item 8 of this Annual Report on Form 10-K for additional information
regarding our income taxes.
Net (Loss) Income Attributable to Heska Corporation
Net loss attributable to Heska Corporation was $14.4 million in 2020, compared to net loss attributable to Heska Corporation of $1.5 million
in 2019. The difference between this line item and "Net (loss) income after equity in losses of unconsolidated affiliates" is the net income or
loss attributable to the minority interest in our French subsidiary, Optomed, which we purchased in February 2019. The difference between
these line items was a gain of $0.4 million for 2020, and a gain of $0.3 million for 2019. In October 2020, the Company acquired the
remaining 30% minority interest in Optomed.
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Adjusted EBITDA
Adjusted EBITDA in the twelve months ended December 31, 2020 was $22.3 million (11.3% adjusted EBITDA margin), compared to $10.4
million (8.5% adjusted EBITDA margin) in the twelve months ended December 31, 2019. The increase is driven by increased revenue and
gross profit as discussed above. The increases in operating expenses are excluded from adjusted EBITDA. See “Non-GAAP Financial
Measures” for a reconciliation of adjusted EBITDA to net income and adjusted EBITDA margin to net loss margin, the closest comparable
GAAP measures, for each of the periods presented.
Earnings Per Share
Loss per share attributable to Heska was $1.66 per diluted share in the twelve months ended December 31, 2020 compared to loss of $0.20
per diluted share in the twelve months ended December 31, 2019. The decline is primarily due to increases in operating expenses as
discussed above, interest and amortization charges relating to the Notes, and increased deferred income tax expense.
Non-GAAP Earnings Per Share
Non-GAAP EPS was income of $0.74 per diluted share in the twelve months ended December 31, 2020 compared to income of $0.49 per
diluted share in the twelve months ended December 31, 2019. The decline is primarily due to cash interest related to the Notes and increased
deferred income taxes. See “Non-GAAP Financial Measures" for a reconciliation of non-GAAP EPS to net (loss) income attributable to
Heska per diluted share, the closest comparable U.S. GAAP measure, in each of the periods presented.
Non-GAAP Financial Measures
In addition to financial measures presented on the basis of accounting principles generally accepted in the U.S. (“U.S. GAAP”), we also
present EBITDA, adjusted EBITDA, adjusted EBITDA margin, and non-GAAP net income (loss) per diluted share, which are non-GAAP
measures.
These measures should be viewed as a supplement to, not substitute for, our results of operations presented under U.S. GAAP. The non-
GAAP financial measures presented may not be comparable to similarly titled measures of other companies because they may not calculate
their measures in the same manner. Management uses EBITDA, adjusted EBITDA, adjusted EBITDA margin and non-GAAP net income
(loss) per diluted share as key profitability measures, which are included in our quarterly analyses of our operating results to our senior
management team, our annual budget and related goal setting and other performance measurements. We believe these non-GAAP measures
enhance our investors' understanding of our business performance and that not adjusting for the items included in the reconciliations below
would hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses.
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The following tables reconcile our most directly comparable as-reported financial measures calculated in accordance with GAAP to our non-
GAAP financial measures (in thousands, except percentages and per share amounts):
Net loss
(1)
Income tax expense (benefit)
Interest expense
Depreciation and amortization
EBITDA
Acquisition-related and other one-time costs
Stock-based compensation
Equity in losses of unconsolidated affiliates
Net loss attributable to non-controlling interest
(2)
Adjusted EBITDA
(3)
Net loss margin
Adjusted EBITDA margin
(3)
Year Ended
December 31,
2020
2019
$
$
$
$
$
(14,032)
239
5,767
11,385
3,359
9,837
9,490
(720)
353
22,319
$
$
$
(1,137)
(1,446)
2,428
4,916
4,761
981
4,968
(594)
266
10,382
(7.1)%
11.3 %
(0.9)%
8.5 %
(1)
Net loss used for reconciliation represents the "Net loss before equity in losses of unconsolidated affiliates."
(2)
To exclude the effect of one-time charges of $9.8 million for the year ended December 31, 2020 compared to $1.0 million for the year ended December
31, 2019. These costs were incurred primarily as part of the acquisition of scil.
(3)
Net loss margin and adjusted EBITDA margin are calculated as the ratio of net loss and adjusted EBITDA, respectively, to revenue.
GAAP net income attributable to Heska per diluted share
(1)
(2)
Acquisition-related costs and other one-timed costs
Amortization of acquired intangibles
Purchase accounting adjustments related to inventory and fixed asset step-up
Amortization of debt discount and issuance costs
Stock-based compensation
Loss on equity investee transactions
Estimated income tax effect of non-GAAP adjustments
(4)
(3)
Non-GAAP net income per diluted share
Shares used in diluted per share calculations
Year Ended
December 31,
2020
2019
(1.66) $
1.04
0.55
0.08
0.33
1.00
0.08
(0.68)
0.74 $
9,451
(0.20)
0.12
0.16
—
0.23
0.62
0.07
(0.51)
0.49
7,977
$
$
(1)
To exclude the effect of one-time charges of $9.8 million for the year ended December 31, 2020 compared to $1.0 million for the year ended December
31, 2019. These costs were incurred primarily as part of the acquisition of scil.
(2)
To exclude the effect of amortization of acquired intangibles of $5.2 million in the year ended December 31, 2020, compared to $1.3 million in the year
ended December 31, 2019. These costs were incurred as part of the purchase accounting adjustments for the acquisitions of scil, Optomed and CVM.
-44-
(3)
To exclude the effect of purchase accounting adjustments for inventory step up amortization and depreciation related to the step-up of fixed assets of $0.7
million for the year ended December 31, 2020.
(4)
Represents income tax expense utilizing an estimated effective tax rate that adjusts for non-GAAP measures including: acquisition-related and other one-
time costs (excluding items which are not deductible for tax of $4.0 million for the year ended December 31, 2020), amortization of acquired intangibles,
purchase accounting adjustments, amortization of debt discount and issuance costs, and stock-based compensation. This incorporates the tax benefit related
to stock-based compensation of $0.2 million for the year ended December 31, 2020 compared to $1.7 million for the year ended December 31, 2019.
Adjusted effective tax rates are approximately 25% for the year ended December 31, 2020 and 24% for the year ended December 31, 2019.
Analysis by Segment
The North America segment includes sales and costs from the United States, Canada and Mexico. The International segment includes sales
and costs from Australia, France, Germany, Italy, Malaysia, Spain and Switzerland.
The North America segment represented 66.4% of our revenue for the twelve months ended December 31, 2020, and the International
segment represented 33.6% of our revenue for the twelve months ended December 31, 2020.
The following sections and tables set forth, for the periods indicated, certain data derived from our Consolidated Statements of (Loss) Income
(in thousands).
North America Segment
Point of Care laboratory:
Instruments & Other
Consumables
Point of Care imaging
PVD
OVP
Total North America revenue
North America Gross Profit
North America Gross Margin
North America Operating (Loss) Income
North America Operating (Loss) Income Margin
Twelve Months Ended December 31,
Change
2020
2019
Dollar Change
% Change
$
$
$
$
72,910
13,663
59,247
20,651
19,810
17,695
131,066
60,903
46.5 %
(4,977)
(3.8)%
$
$
$
$
66,713
13,446
53,267
21,654
10,966
16,090
115,423
52,334
45.3 %
1,426
1.2 %
$
$
$
$
6,197
217
5,980
(1,003)
8,844
1,605
15,643
8,569
(6,403)
9.3 %
1.6 %
11.2 %
(4.6)%
80.6 %
10.0 %
13.6 %
16.4 %
(449.0)%
North America segment revenue increased 13.6% to $131.1 million for the twelve months ended December 31, 2020, compared to $115.4
million for the twelve months ended December 31, 2019. The $15.6 million increase was driven by a $8.4 million in Tri-Heart sales, an
11.2% increase in POC Lab Consumables, and a $1.6 million increase related to OVP. These increases were partially offset by a 4.6%
decrease in sales from Point of Care Imaging, which was largely expected as a result of the government restrictions in place relating to
COVID-19.
-45-
Gross profit was $60.9 million compared to $52.3 million for the twelve months ended December 31, 2020 and 2019, respectively. The
increase in gross profit for both periods is primarily driven by increased revenue in the current year, specifically related to PVD and POC Lab
Consumables. Gross margin was 46.5% for the twelve months ended December 31, 2020, compared to 45.3% in the twelve months ended
December 31, 2019. The increase is due to increased revenue and margins for consumables, Tri-Heart and OVP, which had reduced
production in the twelve months ended December 31, 2019.
North America operating loss increased $6.4 million to $5.0 million in the twelve months ended December 31, 2020 from income of $1.4
million for the twelve months ended December 31, 2019. While we experienced increased revenue and gross margin in 2020, the increase in
operating loss is driven by one-time transaction related costs primarily relating to the acquisition of scil and increased stock-based and other
compensation expenses in 2020.
International Segment
Point of Care laboratory:
Instruments & Other
Consumables
Point of Care imaging
PVD
Total International revenue
International Gross Profit
International Gross Margin
International Operating (Loss)
International Operating (Loss) Margin
Twelve Months Ended December 31,
Change
2020
2019
Dollar
Change
%
Change
$
$
$
$
$
$
$
$
40,136
7,782
32,354
22,537
3,584
66,257
20,387
30.8 %
(3,215)
(4.9)%
$
$
$
$
419
96
323
3,998
2,821
7,238
2,115
29.2 %
(1,099)
(15.2)%
39,717
7,686
32,031
18,539
763
59,019
18,272
(2,116)
9,479.0 %
8,006.3 %
9,916.7 %
463.7 %
27.0 %
815.4 %
863.9 %
(192.5)%
International revenue was $66.3 million compared to $7.2 million for the twelve months ended December 31, 2020 and 2019, respectively.
The increase is due to the acquisitions of CVM and scil, which contributed approximately $57.8 million of revenue in the twelve months
ended December 31, 2020, that was not included in the comparable period.
Gross profit was $20.4 million compared to $2.1 million for the twelve months ended December 31, 2020 and 2019, respectively. Gross
margin for the International segment was 30.8% for the year ended December 31, 2020, compared to 29.2% for the year ended December 31,
2019. The increase in gross profit and gross margin is driven by increased revenue from the acquisitions of CVM and scil, which contributed
approximately $18.1 million of gross profit that was not included in the comparable period.
International operating loss increased $2.1 million for the year ended December 31, 2020, compared to the prior year. The increase in
operating loss in is driven by increased depreciation and amortization and one-time transaction related costs in the current year; partially
offset by increased International revenue and gross profit discussed above.
-46-
Liquidity, Capital Resources and Financial Condition
We believe that adequate liquidity and cash generation is important to the execution of our strategic initiatives. Our ability to fund our
operations, acquisitions, capital expenditures, and product development efforts may depend on our ability to generate cash from operating
activities, which is subject to future operating performance, as well as general economic, financial, competitive, legislative, regulatory, and
other conditions, some of which may be beyond our control. Our primary source of liquidity is our available cash of $86.3 million, which
includes net proceeds from the issuance of the Notes and cash generated from current operations. In January 2020, the Company transferred
$14.6 million of consideration for the purchase of the CVM companies. Refer to Note 3 - Acquisitions and Related Party Items to the
consolidated financial statements included in Item II. Part 8 of this Annual Report on Form 10-K. Additionally, we financed the acquisition
of scil through a private placement of convertible preferred equity from which we raised $122 million, while we transferred approximately
$110 million in purchase price, netting a remaining $11 million of liquidity. Refer to Note 12 - Capital Stock to the consolidated financial
statements included in Item II. Part 8 of this Annual Report on Form 10-K.
For the year ended December 31, 2020, we had a net loss after equity in losses of unconsolidated affiliates of $14.8 million and net cash used
by operations of $0.7 million. At December 31, 2020, we had $86.3 million of cash and cash equivalents and working capital of $129.2
million. A discussion of significant changes from the periods ending December 31, 2019 compared to December 31, 2018 can be found in
Part II. Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form
10-K for the year ended December 31, 2019.
A summary of our cash provided by and used in operating, investing and financing activities is as follows (in thousands):
Net cash (used in) provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of currency translation on cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of the period
Cash and cash equivalents, end of the period
Year Ended December 31,
2020
2019
$
$
(656) $
(126,597)
123,764
793
(2,696)
89,030
86,334 $
3,296
(1,923)
74,264
4
75,641
13,389
89,030
Net cash used by operating activities was $0.7 million in 2020, compared to net cash provided by operating activities of $3.3 million in 2019,
a decrease of approximately $4.0 million. The decrease in cash from operating activities is primarily due to the $13.0 million decrease in net
income after equity in losses of unconsolidated affiliates for the twelve months ended December 31, 2020 compared to the twelve months
ended December 31, 2019. Net cash also decreased due to significant working capital fluctuations such as a $9.4 million decrease in cash
from accounts receivable driven primarily by increased sales, and a $6.3 million decrease in cash provided by inventories, due to the timing
of purchases and sales. These decreases are partially offset by an increase cash from the aggregate of accounts payable and other liabilities of
$8.4 million (driven by a settlement payment and related legal fees in 2019) and an increase in cash from other assets of $3.3 million. In
addition, the net cash used by operating activities is offset by non-cash transactions, including a $6.5 million increase in depreciation and
amortization driven by the acquisition of scil, a $4.5 million increase in stock-based compensation expense, and a $1.2 million increase
related to amortization of the debt discount.
Net cash used in investing activities was $126.6 million in 2020, compared to net cash used in investing activities of $1.9 million in 2019, an
increase of approximately $124.7 million. The increase in cash used
-47-
for investing activities was driven by a $104.4 million investment for the scil acquisition, net of cash acquired, a $14.4 million payment of
consideration for the December 2019 acquisition of CVM, and a $6.7 million convertible note receivable.
Net cash provided by financing activities was $123.8 million in 2020, compared to net cash provided by financing activities of $74.3 million
in 2019, an increase of approximately $49.5 million. The change was driven primarily by the issuance of preferred stock resulting in $122.0
million in proceeds, primarily used for financing the acquisition of scil, while our Notes financing in 2019 generated net proceeds of $77.1
million, which is net of debt issuance and the repayment of a pre-existing credit facility, resulting in a financing change year over year of
$44.9 million. Additionally, net proceeds from issuance of common stock yielded $4.4 million more in 2020 as compared to 2019.
We believe that our cash, cash equivalents and marketable securities balances, as well as the cash flows generated by our operations, will be
sufficient to satisfy our anticipated cash needs for working capital and capital expenditures, including selling and marketing team expansion
and product development initiatives, for at least the next 12 months. Our belief may prove to be incorrect, however, and we could utilize our
available financial resources sooner the we currently expect. For example, we are actively seeking acquisitions that are consistent with our
strategic direction, which may require additional capital. Our future capital requirements and the adequacy of available funds will depend on
many factors, including those set forth in Part I, Item 1A, "Risk Factors", of this Form 10-K. We may be required to seek additional equity or
debt financing in order to meet these future capital requirements, even in the absence of any acquisitions. In the event that additional
financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise
additional capital when desired, our business, results of operations and financial condition would be adversely affected.
Effect of currency translation on cash
Net effect of foreign currency translations on cash changed $789 thousand to a $793 thousand positive impact in 2020, compared to a $4
thousand positive impact in 2019. The net effect of foreign currency translation on cash changed $14 thousand to a $4 thousand positive
impact in 2019 from a $10 thousand negative impact in 2018. These effects are related to changes in exchange rates between the U.S. Dollar
and the Swiss Franc, Euro, Canadian Dollar, Australian Dollar, and Malaysian Ringgit which are the functional currencies of our subsidiaries.
Material Cash Requirements
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees,
subordinated retained interests, derivative instruments, or other contingent arrangements that expose the Company to material continuing
risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provided financing, liquidity,
market risk or credit risk support to the Company, or engages in leasing, hedging or research and development services with the Company.
Purchase obligations represent contractual agreements to purchase goods or services that are legally binding; specify a fixed, minimum or
range of quantities; specify a fixed, minimum, variable, or indexed price provision; and specify approximate timing of the transaction.
-48-
The following table presents certain future payments due by the Company as of December 31, 2020 (in thousands):
Purchase obligations
Operating lease obligations
Finance lease obligations
Other long term borrowings
(1)
Convertible senior notes
Future interest obligations
(2)
Total
Total
Less Than 1
Year
1 - 3 Years
3 - 5 Years
After 5 Years
$
$
24,991
6,355
574
554
86,250
18,492
137,216
$
$
10,053
2,158
294
—
—
3,235
15,740
$
$
10,551
3,783
198
222
—
6,484
21,238
$
$
4,387
282
64
222
—
6,480
11,435
$
$
—
132
18
110
86,250
2,293
88,803
(1)
Includes the principal amount of the convertible senior notes. Although the notes mature in 2026, they can be converted into cash and shares of our
common stock prior to maturity if certain conditions are met. Any conversion prior to maturity can result in repayments of the principal amounts sooner
than the scheduled repayments as indicated in the table. For additional information, refer to Note 16 - Convertible Notes and Credit Facility to the
consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
(2)
Includes interest payments for both the convertible senior notes and other long term borrowings.
Net Operating Loss Carryforwards
As of December 31, 2020, we had a net operating loss carryforward (“NOL”) and domestic research and development tax credit
carryforward. See Note 5 - Income Taxes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form
10-K for additional information regarding our carryforwards.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk in the areas of changes in U.S. and foreign interest rates and
changes in foreign currency exchange rates as measured against the U.S. Dollar. These exposures are directly related to our normal operating
and funding activities.
Interest Rate Risk
In September 2019, we issued $86.25 million aggregate principal amount of Notes. The fair market value of the Notes is affected by our
common stock price. The fair value of the Notes will generally increase as our common stock price increases and will generally decrease as
our common stock price declines in value. In addition, the fair market value of the Notes is exposed to interest rate risk. Generally, the fair
market value of our fixed interest rate Notes will increase as interest rates fall and decrease as interest rates rise. Additionally, on our balance
sheet we carry the Notes at face value less unamortized discount and debt issuance cost and we present the fair value for required disclosure
purposes only. For additional information, refer to Note 16 - Convertible Notes and Credit Facility to the consolidated financial statements
included in Part II, Item 8 of this Annual Report on Form 10-K and to our consolidated financial statements included herein. We had no
interest rate hedge transactions in place on December 31, 2020.
Foreign Currency Risk
Foreign currency risk may impact our results of operations. In cases where we purchase inventory in one currency and sell corresponding
products in another, our gross margin percentage is typically at risk based on foreign currency exchange rates. In addition, in cases where we
may be generating operating income in foreign currencies, the magnitude of such operating income when translated into U.S. dollars will be
at risk based on foreign currency exchange rates. We had no foreign currency hedge transactions in place on December 31, 2020. We do not
currently consider foreign currency risk to be material to our business.
-50-
Item 8. Financial Statements and Supplementary Data
HESKA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of (Loss) Income
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Note 1, Operations and Summary of Significant Accounting Policies
Note 2, Revenue
Note 3, Acquisition and Related Party Items
Note 4, Investments in Unconsolidated Affiliates
Note 5, Income Taxes
Note 6, Leases
Note 7, Earnings Per Share
Note 8, Goodwill and Other Intangibles
Note 9, Property and Equipment, Net
Note 10, Inventories
Note 11, Accrued Liabilities
Note 12, Capital Stock
Note 13, Accumulated Other Comprehensive Income
Note 14, Commitments and Contingencies
Note 15, Interest and Other Expense (Income), Net
Note 16, Convertible Notes and Credit Facility
Note 17, Convertible Note Receivable
Note 18, Segment Reporting
Note 19, Subsequent Events
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104
107
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Heska Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheet of Heska Corporation and subsidiaries (the “Company”) as of December 31,
2020, the related consolidated statements of loss, comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31,
2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2020 and the results of its operations and its cash flows for the
year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the
Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report
dated February 26, 2021 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit
matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical
audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Stock-based compensation - assessment of probability related to stock-based compensation subject to performance based vesting
requirements
As described further in Note 12 to the financial statements, the Company granted restricted stock awards and stock options. Certain of the
restricted stock awards and stock options have performance based vesting periods, which vest based on when performance targets are met.
Performance based awards are recognized as
-52-
an expense based on the probability of achieving the underlying performance targets. We identified the probability assessment of achieving
the performance targets as a critical audit matter.
The principal consideration for our determination that the probability of achieving the performance targets is a critical audit matter is that the
probability is based on a subjective assessment of the Company’s prospective financial information. The probability assessment requires
management to estimate the successful development and market acceptance of future product introductions, future sales targets, operating
performance, and EBITDA. Changes in the subjective probability assessment can materially affect the amount and timing of the recognition
of stock-based compensation expense and require significant auditor subjectivity in evaluating the reasonableness of those judgments and
estimates.
Our audit procedures related to the probability of achieving the performance targets included the following, among others.
– We tested the design and operating effectiveness of internal controls relating to management’s determination of stock-based
compensation expense, including testing management’s review controls over the identification of the terms of the performance
conditions and the key inputs used in determining the probability of achieving the performance targets.
– We evaluated the reasonableness of management’s prospective financial information by comparing management’s previous forecasts
to actual results to assess management’s ability to accurately forecast actual results. We also evaluated the reasonableness of
forecasted revenue by comparing sales growth to current market and industry trends; operating performance and EBITDA by
comparing to current market and industry trends, historical information, and inquiring of individuals outside of the finance
department; and future product introductions by evaluating the status of development, recent placement history, and inquiring of
individuals outside of the finance department. We also evaluated the consistency of forecasts used in the probability assessment with
other elements of the financial statements that use the forecast as an input.
Business combination of scil animal care company GmbH
As described further in Note 3 to the financial statements, the Company completed the acquisition of scil animal care company GmbH
(“scil”) on April 1, 2020. The Company paid approximately $110.3 million in cash to acquire 100% of the capital stock of scil, which
resulted in the identification and recognition of $44.5 million of other intangible assets. We identified the Company’s determination of the
fair value of customer relationships and the trademarks and trade names not subject to amortization (“trade name”) intangible assets acquired
as a critical audit matter.
The principal considerations for our determination that the Company’s valuation of the customer relationships and the trade name intangible
assets acquired is a critical audit matter due to the high degree of management subjectivity in the related fair value estimates. This requires
management to evaluate historical results and expectations of future operating performance based on relevant information available to them
regarding expectations of industry performance, as well as, expectations for company-specific performance. Significant assumptions
(assumed revenue growth rates, discount rates, and operating margin) utilized to determine the fair value are subject to estimation uncertainty
and require significant auditor subjectivity in evaluating the reasonableness of those judgments and estimates.
Our audit procedures related to the business combination of scil included the following, among others.
– We tested the design and operating effectiveness of internal controls relating to management’s valuation of the customer relationships
and trade name intangible assets, which includes management’s review of the preliminary valuation report for reasonableness of
significant assumptions used in the fair value calculations.
– We evaluated the reasonableness of management’s forecasted revenue growth rate and operating margin by comparing to current
market and industry trends, historical data, and strategic business plans. We performed a sensitivity analysis on the assumed revenue
growth rate and operating margin assumptions. We utilized a valuation specialist to assist in evaluating the appropriateness of the
Company’s selection of valuation methodology and evaluating the reasonableness of the discount rate.
-53-
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2020.
Denver, Colorado
February 26, 2021
-54-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Heska Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Heska Corporation and subsidiaries (the “Company”) as of December 31,
2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the
consolidated financial statements of the Company as of and for the year ended December 31, 2020, and our report dated February 26, 2021
expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over
Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
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 effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial
reporting of scil animal care company GmbH, a wholly-owned subsidiary, whose financial statements reflect total assets and revenues
constituting 45% and 30% , respectively, of the related consolidated financial statement amounts as of and for the year ended December 31,
2020. As indicated in Management’s Report, scil animal care company GmbH was acquired during 2020. Management’s assertion on the
effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of scil animal care
company GmbH.
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
-55-
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.
/s/ GRANT THORNTON LLP
Denver, Colorado
February 26, 2021
-56-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Heska Corporation
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Heska Corporation and subsidiaries (the “Company”) as of December 31, 2019, and the
related statements of income, comprehensive income, stockholders' equity, and cash flows for the years ended December 31, 2019 and 2018,
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, 2019 and the results of its operations and its cash flows for the years ended December 31, 2019 and 2018, in conformity with
accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company adopted the Accounting Standards Codification (ASC) Topic 842, “Leases,”
using the modified retrospective adoption method on January 1, 2019.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Plante & Moran, PLLC
We served as the Company’s auditor from 2006-2020.
Denver, Colorado
February 28, 2020, except for the effects of the change in segments described in Notes 2 and 18, as to which the date is February 26, 2021
-57-
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
2020
2019
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for losses of $769 and $186, respectively
Inventories
Net investment in leases, current, net of allowance for losses of $192 and $105, respectively
Prepaid expenses
Other current assets
ASSETS
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Goodwill
Other intangible assets, net
Deferred tax asset, net
Net investment in leases, non-current
Investments in unconsolidated affiliates
Related party convertible note receivable, net
Other non-current assets
Total assets
Current liabilities:
Accounts payable
Accrued liabilities
Accrued purchase consideration payable
Operating lease liabilities, current
Deferred revenue, current, and other
Total current liabilities
Convertible note, non-current, net
Deferred revenue, non-current
Other long-term borrowings
Operating lease liabilities, non-current
Deferred tax liability
Other liabilities
Total liabilities
LIABILITIES AND STOCKHOLDERS' EQUITY
Redeemable non-controlling interest and mezzanine equity
Stockholders' equity:
Preferred stock, $.01 par value, 2,500,000 shares authorized, none issued or outstanding
Common stock, $.01 par value, 13,250,000 and 10,250,00 shares authorized, respectively, none issued or
outstanding
Public common stock, $.01 par value, 13,250,000 and 10,250,000 shares authorized, 9,475,845 and 7,881,928
shares issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders' equity
Total liabilities, mezzanine equity and stockholders' equity
See accompanying notes to consolidated financial statements.
-58-
$
$
$
$
86,334 $
31,080
40,037
4,794
3,875
5,155
171,275
35,542
5,457
88,276
55,992
5,694
15,789
6,704
6,671
8,439
399,839 $
15,119 $
18,055
—
2,087
6,854
42,115
48,459
4,667
554
3,858
11,856
1,277
112,786
—
—
—
95
423,650
14,169
(150,861)
287,053
399,839 $
89,030
15,161
26,601
3,856
2,219
3,000
139,867
15,469
5,726
36,204
11,472
6,429
14,307
7,424
—
7,526
244,424
6,600
6,345
14,579
1,745
2,930
32,199
45,348
5,966
1,121
4,413
691
152
89,890
170
—
—
79
290,216
513
(136,444)
154,364
244,424
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(in thousands, except per share amounts)
Revenue, net
Cost of revenue
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Total operating expenses
Operating income (loss)
Interest and other expense (income), net
Income (loss) before income taxes and equity in losses of unconsolidated affiliates
Income tax expense (benefit):
Current income tax expense
Deferred income tax benefit
Total income tax expense (benefit)
Net (loss) income before equity in losses of unconsolidated affiliates
Equity in losses of unconsolidated affiliates
Net (loss) income after equity in losses of unconsolidated affiliates
Net loss attributable to redeemable non-controlling interest
Net (loss) income attributable to Heska Corporation
Basic (loss) earnings per share attributable to Heska Corporation
Diluted (loss) earnings per share attributable to Heska Corporation
Weighted average outstanding shares used to compute basic (loss) earnings per share attributable
to Heska Corporation
Weighted average outstanding shares used to compute diluted (loss) earnings per share attributable
to Heska Corporation
Year Ended December 31,
2019
2018
2020
$
197,323 $
116,033
81,290
122,661 $
68,212
54,449
127,446
70,808
56,638
38,468
8,772
42,242
89,482
(8,192)
5,601
(13,793)
1,780
(1,541)
239
(14,032)
(720)
(14,752)
(353)
(14,399) $
(1.66) $
(1.66) $
8,653
8,653
$
$
$
27,678
8,240
18,204
54,122
327
2,910
(2,583)
359
(1,805)
(1,446)
(1,137)
(594)
(1,731)
(266)
(1,465) $
(0.20) $
(0.20) $
7,446
7,446
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
See accompanying notes to consolidated financial statements.
-59-
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
Net (loss) income after equity in losses of unconsolidated affiliates
Other comprehensive (loss) income:
Minimum pension liability
Translation adjustments and gains (losses) from intra-entity transactions
Comprehensive (loss) income
Comprehensive loss attributable to redeemable non-controlling interest
Comprehensive (loss) income attributable to Heska Corporation
$
$
Year Ended December 31,
2019
2018
2020
(14,752) $
(1,731) $
5,850
(40)
13,696
(1,096)
73
163
(1,495)
(353)
(743) $
(266)
(1,229) $
70
(25)
5,895
—
5,895
See accompanying notes to consolidated financial statements.
-60-
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Balances, December 31, 2017
Adoption of accounting standards
Balances, January 1, 2018, as adjusted
Net income attributable to Heska
Corporation
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
Balances, December 31, 2018
Net loss attributable to Heska Corporation
Issuance of common stock, net of shares
withheld for employee taxes
Stock-based compensation
Convertible notes, equity
Other comprehensive income
Balances, December 31, 2019
Adoption of accounting standards
Balances, January 1, 2020
Net loss attributable to Heska Corporation
Issuance of common stock, net of shares
withheld for employee taxes
Issuance of preferred stock
Conversion to common stock
Stock-based compensation
Purchase of minority interest
Other comprehensive income
Balances, December 31, 2020
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
122
(122)
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
(1)
—
—
—
—
7,303
—
7,303
—
318
55
—
—
7,676
—
206
—
—
—
7,882
—
7,882
—
85
—
1,509
—
—
—
9,476
$
$
73
—
73
—
3
1
—
—
77
—
2
—
—
—
79
—
79
—
1
—
15
—
—
—
95
Additional
Paid-in
Capital
$
$
243,598
—
243,598
—
2,759
5,450
5,227
—
257,034
—
(1,620)
4,968
29,834
—
290,216
—
290,216
—
2,795
121,785
(14)
9,490
(622)
—
423,650
$
$
Accumulated
Other
Comprehensive
Income
232
—
232
—
—
—
—
45
277
—
—
—
—
236
513
—
513
—
—
—
—
—
—
13,656
14,169
$
Accumulated
Deficit
$
$
(143,463)
2,634
(140,829)
Total
Stockholders'
Equity
100,440
2,634
103,074
5,850
2,762
5,451
5,227
45
122,409
(1,465)
(1,618)
4,968
29,834
236
154,364
(18)
154,346
(14,399)
2,796
121,786
—
9,490
(622)
13,656
287,053
5,850
—
—
—
—
(134,979)
(1,465)
—
—
—
—
(136,444)
(18)
(136,462)
(14,399)
—
—
—
—
—
—
(150,861)
$
See accompanying notes to consolidated financial statements.
-61-
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income after equity in losses from unconsolidated affiliates
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:
Depreciation and amortization
Non-cash impact of operating leases
Deferred income tax benefit
Stock-based compensation
Equity in losses of unconsolidated affiliates
Accretion of discounts and issuance costs
Provision for credit losses
Other (gains) losses
Changes in operating assets and liabilities (net of effect of acquisitions):
Accounts receivable
Inventories
Other assets
Accounts payable
Due to related parties
Other liabilities
Net cash (used in) provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiary, net of cash acquired
Acquisition of CVM
Convertible note receivable issuance
Purchase of minority interest
Acquisition of scil, net of cash acquired
Acquisition of intangible asset
Investments in unconsolidated affiliates
Real estate asset acquisition
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
Payment of preferred stock issuance costs
Preferred Stock Proceeds
Distributions to non-controlling interest members
Convertible debt proceeds
Payments of related party debts
Borrowing on line of credit
Repayments of line of credit borrowings
Borrowings of other debts
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
-62-
Year Ended December 31,
2019
2018
2020
$
(14,752) $
(1,731) $
5,850
11,385
1,985
(1,541)
9,490
720
3,090
614
(91)
(5,755)
(5,409)
(271)
(280)
—
159
(656)
—
(14,420)
(6,650)
(450)
(104,401)
—
—
—
(686)
10
(126,597)
4,916
1,565
(1,805)
4,968
594
1,842
113
560
3,683
918
(3,580)
(1,686)
(226)
(6,835)
3,296
(622)
927
—
—
—
—
—
(1,184)
(1,044)
—
(1,923)
4,273
(1,477)
(214)
122,000
—
—
(1,140)
—
—
613
(291)
—
123,764
793
(2,696)
89,030
86,334 $
1,829
(3,447)
—
—
—
86,250
—
6,750
(12,750)
—
(1,191)
(3,177)
74,264
4
75,641
13,389
89,030 $
$
4,595
—
(2,255)
5,227
72
—
104
8
(1,180)
6,046
(4,590)
(2,020)
(1,477)
2,907
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
NON-CASH TRANSACTIONS:
Transfers of equipment between inventory and property and equipment, net
Non-cash conversion of preferred stock to common stock
Consideration payable for CVM Acquisition (See Note 3)
Common stock issued as partial consideration of Cuattro acquisition transactions (See Note 3)
$
$
$
$
4,437 $
122,000 $
— $
— $
827 $
— $
14,420 $
— $
1,449
—
—
5,450
See accompanying notes to consolidated financial statements.
-63-
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; digital cytology 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, 2020 and 2019, as well as the results of our
operations, statements of stockholders' equity and cash flows for the twelve months ended December 31, 2020, 2019 and 2018.
The audited Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("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 loss attributable to non-controlling interest" on our Consolidated
Statements of (Loss) 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").
Beginning in the first quarter of 2020, to limit the spread of COVID-19, governments took various actions including the issuance of stay-at-
home policies and social distancing procedures and guidelines, causing some businesses to adjust, reduce or suspend business and operating
activities. Veterinary care is widely recognized as an "essential" service for pet owners, and veterinarians continued to deliver essential
medical care for sick and injured pets. The stay-at-home policies deployed early in 2020 to combat the spread of COVID-19 resulted in a
decrease in companion animal clinical visits, including delay of elective procedures and wellness visits and as a result lowers demand for
diagnostic testing services. Beginning in the second quarter of 2020, certain local, state and federal governments began to ease the stay-at-
home policies and allowed more businesses and facilities to re-open, leading to a recovery in companion animal clinical visits and associated
demand for our diagnostic products. The extent to which the continuation, or a possible second-wave outbreak of COVID-19, or an outbreak
of other health epidemics could impact our business, results of operations and financial condition, including the potential for write-offs or
impairments of assets and suspension of capital investments, will depend on future developments. We are unable to predict with certainty the
effects of the COVID-19 pandemic on our customers, suppliers and vendors, as well as the actions of governments, and when and to what
extent normal economic and operating conditions can resume; these effects may differ from those assumed in our projected estimates. Even
after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic
impact that has occurred or may occur in the future.
Reclassification
To maintain consistency and comparability, certain amounts in the financial statements have been reclassified to conform to current year
presentation.
-64-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 and standalone selling prices of instruments under leasing arrangements; determining the allocation of
purchase price under purchase accounting; estimating the expense associated with the granting of stock; determining the need for, and the
amount of a valuation allowance on deferred tax assets; determining the fair value of our embedded derivative; and determining the fair value
of the liability component associated with the issuance of convertible debt. Our actual results may differ from these estimates and there may
be changes to those estimates in future periods.
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
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.
Covetrus represented 9% and 19% of our consolidated accounts receivable at December 31, 2020 and 2019, respectively. No other customer
accounted for more than 10% of our consolidated accounts receivable at December 31, 2020 or 2019.
We have established an allowance for credit losses based upon factors surrounding the credit risk of specific customers, historical trends and
other information.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recorded net of an allowance for credit losses. From time to time, our customers are unable to meet their payment
obligations. We continuously monitor our customers' credit worthiness and establish allowances for estimated credit losses related to our
accounts receivable, net investment in leases, contract assets, and promissory notes. Our allowances are established based on factors
surrounding the credit risk of specific customers, historical experience including collections and write-off history, and current economic
conditions. Account balances are considered past due if payments have not been received within agreed upon invoice and/or contract terms
and the Company may employ collection agencies and legal counsel to pursue recovery of defaulted amounts. Account balances are written
off against the allowance after all collection efforts have been exhausted and it is probable the receivable will not be recovered. The
Company also performs a qualitative assessment, on a quarterly basis, to monitor economic factors and other uncertainties that may require
additional adjustments for the expected credit loss allowance. 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. The Company will continue to actively monitor the impact of the COVID-19 pandemic
on expected credit losses. In 2020, the Company adopted Accounting
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326). See "Adoption of New Accounting Standards" below
for impacts of adoption.
Changes in the allowance for credit losses are summarized as follows (in thousands):
Years Ended December 31,
2019
2020
2018
Balances at beginning of period
Additions from acquisition
Additions - charged to expense
Deductions - write offs, net of recoveries
Balances at end of period
Cash and Cash Equivalents
$
$
186 $
90
614
(121)
769 $
245 $
—
113
(172)
186 $
215
—
104
(74)
245
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 Accumulated other comprehensive income in the Consolidated
Balance Sheets. The majority of our cash and cash equivalents are held in accounts not insured by governmental entities. The foreign cash
balances are summarized as follows (denominated in foreign currency, in thousands):
European Union Euros
Swiss Francs
Canadian Dollars
Australian Dollars
Malaysian Ringgit
Fair Value of Financial Instruments
As of December 31,
2020
2019
8,520
138
2,993
159
364
1,773
124
88
54
—
In accordance with ASC 820, Fair Value Measurements (“ASC 820”), the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on
assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. Fair value is
defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When considering market participant assumptions in fair value measurements, the following fair value
hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Quoted prices in active markets for similar assets and liabilities, quoted prices for identically similar assets or liabilities in
markets that are not active and models for which all significant inputs are observable either directly or indirectly.
Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs for inactive markets.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's financial instruments consist of cash and cash equivalents, short-term trade receivables and payables, a long-term note
receivable with an embedded derivative asset, and its 3.75% Convertible Senior Notes due 2026 (the "Notes"). 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 estimated fair value of the Notes disclosed at each reporting period is evaluated through Level 2 inputs with consideration of quoted
market prices in less active markets. For additional information regarding the Company's accounting treatment for the issuance of the Notes,
including the fair value measurement of the liability component, refer to Note 16. Convertible Notes.
The Company determined the redemption features of its convertible note receivable represents an embedded derivative. The estimated fair
value of the embedded derivative asset is evaluated through Level 3 inputs. The carrying amount of the derivative is recorded at fair value at
issuance and will be remeasured each reporting period, with the mark-to-market adjustments to be included in other expense (income). For
additional information regarding the Company's accounting treatment for the convertible note receivable, including the fair value
measurement of the embedded derivative, refer to Note 17. Convertible Note Receivable.
Property and Equipment
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 (Loss) 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 43 years
2 to 10 years
3 to 7 years
3 to 7 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 seven 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.
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. We write down the carrying value of inventory for estimated obsolescence by an amount equal to the
difference between the cost of inventory and the estimated market value when warranted based on assumptions of future demand, market
conditions, remaining shelf life, or product functionality.
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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 is recorded as a separate
line on the income statement. Both types of investments are 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 it is 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. Following the acquisition of scil in April 2020, we restructured our operating segments
based on how the Chief Operating Decision Maker (“CODM”) manages the business, allocates resources, makes operating decisions and
evaluates operating performance. As further discussed in Note 18, our new reporting segments are North America and International. As a
result of the change in operating segments, we also revised our reporting units to aggregate our legal entities based on similarities in
economic characteristics. Our new reporting units consist of the following: (1) Heska Corporation and Heska Canada, (2) Diamond Animal
Health, (3) scil animal care company GmbH, Optomed, CVM, and Heska Australia, and (4) Heska AG.
As a result of the recent global economic disruption and uncertainty due to the COVID-19 pandemic, the
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Company performed a qualitative assessment during the first quarter of 2020. Based on the interim assessment performed, we concluded that
there was no triggering event and additionally, no indications of impairment existed. We performed qualitative assessments in the fourth
quarters of 2020, 2019, and 2018 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 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, 2020, 2019, and
2018.
Revenue Recognition
We generate 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 consumables needed to conduct testing. Subscription placement is the
majority of our Point of Care laboratory transactions while outright sales to customers are the majority of both Point of Care imaging
diagnostic transactions and the sale of pharmaceuticals and vaccines.
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), 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 and as such the revenue
is recognized ratably based upon the period of time elapsed under the arrangement.
Our revenue under subscription agreements relates to operating-type lease ("OTL") arrangements or sales-type lease ("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
842, Leases. A STL would result in earlier recognition of instrument revenue as compared to an OTL, which is generally upon installation of
the instruments. Instrument lease revenue for our OTL subscription agreements is recognized on a straight-line basis over the life of the lease
and is included with the predominant non-lease components in consumables revenue. For instrument only OTL agreements, operating lease
income is
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
recognized on a straight-line basis over the term of the lease. The cash collected under both arrangements is over the term of the contract. The
OTLs and STLs are not cancellable until after an initial term. See below for additional information on our lease accounting policies.
For contracts with both lease and non-lease components, the Company allocates the contracts' transaction price for each component 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.
When available, the method used to estimate the standalone selling price is the price observed in standalone sales to customers. When prices
in standalone sales are not available, we use a cost-plus margin approach. Changes in these values can impact the amount of consideration
allocated to each component of the contract. 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.
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. For our subscription agreements with
variable consideration based on consumable usage over time, the variable consideration is allocated to the non-lease components upon
resolution of the uncertainty and is included in consumables revenue.
We generate OVP revenue through contract manufacturing agreements with customers. Revenue from these customer contracts is 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.
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. For contracts with multiple
performance obligations, we exercise judgment in allocating the transaction price for each performance obligation based on an estimated
standalone selling price for each distinct product or service. 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.
Leases
The Company acts as a lessee and a lessor. As a lessee, the Company leases buildings, office equipment, and vehicles. As a lessor, the
Company enters into sales-type and operating leases as part of its subscription agreements.
The Company determines if an arrangement is a lease at inception based on whether control of an identified asset is transferred. For leases
where the Company is the lessee, ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities
represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease
commencement date based
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit interest rate, the
Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of
lease payments. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease
when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line
basis over the lease term as an operating expense while the expense for finance leases is recognized as amortization expense and interest
expense. The Company has lease agreements which require payments for lease and non-lease components and has elected to account for
these as a single lease component for our building and office equipment leases, but as separate components for our vehicle leases.
As a lessor, our subscription agreements relate to both OTL arrangements and STL arrangements. For a STL, instrument revenue is generally
recorded upon installation of the instruments and the cost of the customer-leased instruments is removed from inventory and recognized in
the Consolidated Statements of (Loss) Income. There is no residual value taken into consideration as it does not meet our capitalization
requirements. For our OTL agreements that include both lease and non-lease components, revenue is recognized on a straight-line basis over
the term of the lease and is included with the predominant non-lease components in consumables revenue. For instrument only OTL
agreements, operating lease income is recognized on a straight-line basis over the term of the lease. For an OTL, 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
(Loss) Income.
For leases that commenced before the January 1, 2019 effective date of ASC 842, the Company elected the permitted practical expedients to
not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing
leases; and (iii) initial direct costs for any existing leases. The Company also elected to exclude leases with a term of 12 months or less from
the recognized ROU assets and lease liabilities.
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 requisite service 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 $0.4 million for the
year ended December 31, 2020, $0.3 million for the year ended December 31, 2019, and $0.2 million for the year ended December 31, 2018.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes
The Company records a current provision for income taxes based on estimated amounts payable or refundable on tax returns filed or to be
filed each year. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates, in each tax jurisdiction, expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. The overall change in deferred
tax assets and liabilities for the period measures the deferred tax expense or benefit for the period. Deferred tax assets are reduced by a
valuation allowance based on a judgmental assessment of available evidence if the Company is unable to conclude that it is more likely than
not that some or all of the deferred tax assets will be realized.
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 certain foreign subsidiaries is the local currency. Accordingly, assets and liabilities of these subsidiaries 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. Gains and losses arising from intercompany foreign currency
transactions that are of a long-term investment nature are reported as a component of Accumulated other comprehensive income in the
Consolidated Balance Sheets.
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 are sold to our customers and revenue is recognized over the term of the warranty agreement, as expected
costs are incurred.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Correction of an Immaterial Error
During the fourth fiscal quarter of 2020, the Company recorded an out-of-period adjustment that impacted the Consolidated Balance Sheets,
Consolidated Statements of (Loss) Income and Consolidated Statements of Comprehensive (Loss) Income. The adjustment related to an error
in the calculation of non-cash interest expense relating to the Company's Notes. This error resulted in an overstatement of non-cash interest
expense of $0.7 million in 2019, $0.6 million in each of the first and second fiscal quarters of 2020 and $0.5 million in the third fiscal quarter
of 2020. The error also resulted in an overstatement of Convertible Notes, net, and Deferred Tax Liability of $0.7 million and $0.2 million,
respectively as of December 31, 2019; $1.4 million and $0.3 million, respectively, as of March 31, 2020; $2.0 million and $0.4 million,
respectively, as of June 30, 2020; and $2.5 million and $0.6 million, respectively, as of September 30, 2020. The Company assessed the
materiality of these errors on the previously issued interim and annual financial statements in accordance with SEC Staff Accounting Bulletin
No. 99 and No. 108. The Company concluded that the errors were not material to any of the previously issued consolidated financial
statements and the impact of correcting these errors in the year ended December 31, 2020 is not material to the consolidated financial
statements.
The impact of this adjustment resulted in a fourth quarter period decrease in interest expense of $2.5 million and a decrease in income tax
benefit of $0.6 million. The Company also recorded a decrease in Convertible Notes, net, of $2.5 million, and a reduction in Deferred Tax
Liability of $0.6 million as of December 31, 2020.
Adoption of New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial
Instruments - Credit Losses (Topic 326), which requires 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. Subsequent to the issuance of ASU 2016-13, the FASB issued ASU 2018-19,
Codification Improvements to Topic 326, Financial Instruments - Credit Losses, in November 2018. This ASU clarifies that receivables from
operating leases are accounted for using the lease guidance and not as financial instruments. In April 2019, the FASB issued ASU 2019-04,
Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825,
Financial Instruments, which further clarifies and improves guidance related to accounting for credit losses. In May 2019, the FASB issued
ASU 2019-05, Financial Instruments - Credit Losses (Topic 326). This ASU provides relief to certain entities adopting ASU 2016-13. The
amendment provides entities with an option to irrevocably elect the fair value option for certain financial assets. The Company adopted ASU
2016-13 with a cumulative-effect adjustment in retained earnings as of January 1, 2020. The impact of the adoption was not material to the
Company's consolidated financial statements.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is
intended to simplify various aspects related to the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general
principles in Topic 740, and also clarifies and amends existing guidance to improve consistent application. This guidance will be effective for
interim and annual periods beginning after December 15, 2020, and early adoption is permitted. We evaluated the impact of the standard on
our consolidated financial statements and do not expect the standard to have a material impact on our consolidated financial statements and
disclosures.
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures
(Topic 323), and Derivatives and Hedging (Topic 815). The amendments in this ASU clarify the interaction between the accounting for
investments in equity securities, investment in equity method and certain derivatives instruments. The ASU is expected to reduce diversity in
practice and increase comparability of the accounting for these interactions. This guidance will be effective for fiscal years beginning after
December 15, 2020. We evaluated the impact of the standard on our consolidated financial statements and do not expect the standard to have
a material impact on our consolidated financial statements and disclosures.
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), which simplifies the accounting for certain convertible instruments. The
update reduces the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible debt will be
accounted for as a single liability measured at its amortized cost and convertible preferred stock will be accounted for as a single equity
instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. The update also
requires the if-converted method to be used for convertible instruments and the effect of potential share settlement be included in the diluted
earnings per share calculation when an instrument may be settled in cash or shares. The amendments in this update are effective for public
business entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The guidance may be early
adopted for fiscal years beginning after December 15, 2020,
and interim periods within those fiscal years.
The Company has elected to early adopt ASU 2020-06 as of January 1, 2021. The Notes are a convertible instrument with a cash-conversion
feature that is accounted for within the scope of ASC 470-20 and will be impacted by adopting ASU 2020-06. The Company has elected to
apply the modified retrospective method wherein the Company will recognize a cumulative-effect adjustment to the opening balance of
retained earnings (January 1, 2021). Further, the Company will not restate EPS in the prior periods. The Company calculated the cumulative-
effect adjustment as of January 1, 2021 by comparing (i) the historical amortization schedule for the Notes through December 31, 2020 and
(ii) an updated amortization schedule wherein the conversion feature within the Notes would not be separated as an equity component and
subsequently recognized as non-cash interest expense under ASC 835-30. As a result of ASU 2020-06, while cash interest expense is not
impacted, non-cash interest accretion is limited to the amortization of debt issuance costs under ASC 835-30. Therefore, the Company
prepared its transition journal entries by (i) reversing the conversion feature amount recorded in APIC and (ii) reversing the difference in
non-cash interest expense via retained earnings. The expected impact on retained earnings is $4.3 million.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which updates various codification topics by clarifying or
improving disclosure requirements to align with the SEC's regulations. This guidance will be effective for annual periods beginning after
December 15, 2020, for public entities. The Company will adopt as of the reporting period beginning January 1, 2021. We evaluated the
impact of the
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
standard on our consolidated financial statements and do not expect the standard to have a material impact on our consolidated financial
statements and disclosures.
2. REVENUE
We separate our goods and services among two reportable segments, North America and International. The two segments consist of revenue
originating from:
• North America: including the United States, Canada and Mexico
•
International: all geographies outside North America, currently consisting primarily of Australia, France, Germany, Italy, Malaysia,
Spain and Switzerland
Refer to Note 18 for further detail regarding the change in reportable segments which required recast of prior period presentation.
The following table summarizes our segment revenue (in thousands):
North America Revenue:
POC Lab Instruments & Other
POC Sales-type leases
POC Lab Consumables
POC Imaging
PVD
OVP
Total North America Revenue
International Revenue:
POC Lab Instruments & Other
POC Sales-type leases
POC Operating Leases
POC Lab Consumables
POC Imaging
PVD
Total International Revenue
Total Revenue
Remaining Performance Obligations
Year Ended December 31,
2019
2018
2020
$
$
$
$
$
8,433
5,230
59,247
20,651
19,810
17,695
131,066
6,383
387
1,012
32,354
22,537
3,584
66,257
197,323
$
$
$
$
$
6,556
6,890
53,267
21,655
10,965
16,090
115,423
96
—
—
323
3,998
2,821
7,238
122,661
$
$
$
$
$
6,375
5,888
45,111
22,832
25,663
18,522
124,391
—
—
—
—
—
3,055
3,055
127,446
Remaining performance obligations 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
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 customers with an original term of one year or less
from remaining performance obligations.
As of December 31, 2020, the aggregate amount of the transaction price allocated to remaining minimum performance obligations was
approximately $144.6 million. As of December 31, 2020, the Company expects to recognize revenue as follows (in thousands):
Year Ending December 31,
2021
2022
2023
2024
2025
Thereafter
Contract Balances
$
$
Revenue
32,976
30,089
26,992
22,668
16,713
15,129
144,567
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled contract assets, deferred
revenue, and customer deposits and billings in excess of revenue recognized. In addition, the Company defers certain costs incurred to obtain
contracts.
Contract Assets
Certain unbilled amounts related to long-term contracts for which we provide a free term to the customer are recorded in "Other current
assets" and "Other non-current assets" on the accompanying Consolidated Balance Sheets. The collection of these balances occurs over the
term of the underlying contract. The balances as of December 31, 2020 were $1.2 million and $4.1 million for current and non-current assets,
respectively, shown net of related unearned interest. The balances as of December 31, 2019 were $1.1 million and $3.7 million for current
and non-current assets, respectively, shown net of related unearned interest.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 2020 and 2019, contract liabilities were $8.9 million and $8.7 million, respectively, and
are included within "Deferred revenue, current, and other" and "Deferred revenue, non-current" in the accompanying Consolidated Balance
Sheets. The decrease in the contract liability balance during the year ended December 31, 2020 is approximately $4.2 million of revenue
recognized during the period, offset by approximately $3.8 million of additional deferred sales in 2020 and the acquisition of scil contract
liabilities of $0.6 million. The decrease in the contract liability balance during the year ended December 31, 2019 is $3.1 million of revenue
recognized during the period, offset by $2.2 million of additional deferred sales. Contract liabilities are reported on the accompanying
Consolidated Balance Sheets on a contract-by-contract basis.
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, 2020 and December 31, 2019 was $3.0
million and $2.7 million, respectively. Amortization expense for the year ended December 31, 2020 was approximately $1.0 million, offset
by approximately $1.2 million of additional contract cost capitalization and $0.1 million of the acquisition of scil contract costs. Amortization
expense for the year ended December 31, 2019 was approximately $0.9 million, offset by approximately $1.1 million of additional contract
costs capitalized. Contract costs are calculated and reported on a portfolio basis.
3. ACQUISITION AND RELATED PARTY ITEMS
scil Acquisition
On April 1, 2020, the Company completed the acquisition of scil animal care company GmbH (“scil”) from Covetrus, Inc. The Company
purchased 100% of the capital stock of scil for an aggregate purchase price of $110.3 million in cash. The acquisition represents a key
milestone in the Company's long-term strategic plan, creating a global veterinary diagnostics company with leadership positions in key
geographic markets. The purchase price exceeded the identifiable net assets, resulting in goodwill of $46.0 million, primarily attributable to
the synergies expected from the expanded market opportunities with our offerings and the experienced workforce acquired. Of the goodwill
acquired, $37.3 million is allocated to our International segment and $8.7 million is allocated to our North America segment. All of the
goodwill is tax deductible for purposes of calculating Controlled Foreign Corporation ("CFC") tested income, which may result in a decrease
to the Company's future U.S. federal tax liability.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, which
requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. As such,
the total purchase consideration was allocated to the assets acquired and liabilities assumed based on a preliminary estimate of their fair
values as of April 1, 2020.
The information below represents the preliminary purchase price allocation of scil (in thousands):
Total purchase consideration
Cash and cash equivalents
Accounts receivable
Inventories
Net investment in leases, current
Prepaid expenses
Other current assets
Property and equipment, net
Operating lease right-of-use assets
Other intangible assets, net
Net investment in leases, non-current
Investments in unconsolidated affiliates
Other non-current assets
Total assets acquired
Accounts payable
Accrued liabilities
Operating lease liabilities, current
Deferred revenue, current, and other
Deferred revenue, non-current
Operating lease liabilities, non-current
Deferred tax liability
Other liabilities
Net assets acquired
Goodwill
Total fair value of consideration transferred
$
$
April 1, 2020
110,290
5,889
10,707
11,278
311
1,692
1,338
19,320
877
44,517
1,027
55
291
97,302
8,221
7,067
356
3,220
94
529
13,249
276
64,290
46,000
110,290
The Company's preliminary estimates of fair values of the assets acquired and the liabilities assumed are based on the information currently
available, and the Company is continuing to evaluate the underlying inputs and assumptions used in its valuations. Accordingly, these
preliminary estimates are subject to change during the measurement period, which is up to one year from the date of the acquisition. A
decrease in the fair value of assets acquired or an increase in the fair value of liabilities assumed in the acquisition from those valuations
would result in a corresponding change in the amount of goodwill from the acquisition. During the fourth quarter, the Company made certain
valuation adjustments to provisional amounts previously recognized. These adjustments resulted in a net increase of $0.2 million in goodwill,
primarily due to changes in estimated taxes and an increase in accrued liabilities assumed.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Per the tax indemnification included in the purchase agreement of scil animal care company GmbH, the seller has indemnified the Company
for $1.1 million related to uncertain tax positions taken in prior years. The outcome of this arrangement will either be settled or expire due to
lapse of statute of limitations by 2027. As of December 31, 2020, approximately $0.8 million of the indemnification agreement remains
outstanding.
Intangible assets acquired, amortization method and estimated useful life as of April 1, 2020, was as follows (dollars in thousands):
Customer relationships
Internally developed software
Backlog
Non-compete agreements
Trade name subject to amortization
Trademarks and trade names not subject to amortization
Total intangible assets acquired
Useful Life
10 years
7 years
0.2 years
2 years
0.8 years
n/a
Amortization Method
Straight-line
Straight-line
Straight-line
Straight-line
Straight-line
Indefinite
$
$
Fair Value
36,272
353
210
60
66
7,556
44,517
scil generated net revenue of $61.3 million and a net loss of $1.1 million for the period from April 1, 2020 to December 31, 2020.
The Company incurred acquisition related costs of approximately $6.3 million and $0.7 million for the years ended December 31, 2020 and
2019, respectively, which are included within general and administrative expenses on our Consolidated Statements of (Loss) Income.
Unaudited Pro Forma Financial Information
The following tables present unaudited supplemental pro forma financial information as if the acquisition had occurred on January 1, 2019
(in thousands):
Revenue, net
Net (loss) income before equity in losses of unconsolidated affiliates
Net (loss) income attributable to Heska Corporation
$
$
$
215,874 $
(14,848) $
(15,215) $
201,700
(2,159)
(2,487)
Year Ended December 31,
2020
2019
The pro forma financial information presented above has been prepared by combining our historical results and the historical results of scil
and further reflects the effect of purchase accounting adjustments, including: (i) amortization of acquired intangible assets, (ii) the impact of
certain fair value adjustments such as depreciation on the acquired property, plant and equipment, and (iii) historical intercompany sales
between the Company and scil. The unaudited pro forma results are presented for informational purposes only and are not necessarily
indicative of what actual results of operations would have been if the acquisition had occurred as the beginning of the period presented, nor
are they indicative of future results of operations.
CVM
On December 5, 2019, Heska entered into a definitive agreement to purchase 100% of the outstanding shares of CVM Diagnostico Veternario
S.L. and CVM Ecografia S.L. (“CVM”, collectively), primarily to expand international operations in Europe. CVM is headquartered in
Tudela, outside of Madrid, Spain. CVM mainly
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
operates in Spain. The terms of the agreement transferred control of CVM upon signing, and the transfer of the purchase price of
approximately $14.4 million and shares occurred in January 2020. The purchase price exceeded the fair value of the identifiable net assets
and, accordingly, $9.0 million was allocated to goodwill within the International segment based on the purchase price allocation, all of which
is tax deductible for purposes of calculating CFC tested income.
The fair values allocated to CVM's assets and liabilities as of the acquisition date, as well as the purchase price, are reflected in the table
below (in thousands):
Purchase Price
Consideration paid to former owners
Cash and cash equivalents
Accounts receivable
Inventories
Other current assets
Property and equipment
Other intangible assets
Other non-current assets
Total assets acquired
Accounts payable
Accrued liabilities
Current portion of deferred revenue, and other
Deferred tax liability
Other long-term borrowings
Other liabilities
Net assets acqiured
Goodwill
Total fair value of consideration transferred
December 5, 2019
14,420
1,226
583
1,621
1,186
345
2,608
460
8,029
(94)
(471)
(54)
(683)
(1,109)
(157)
5,461
8,959
14,420
$
$
During the year ended December 31, 2020, the Company made certain valuation adjustments to provisional amounts previously recognized.
These measurement period adjustments resulted in a net $110 thousand increase of goodwill, primarily due to fair value adjustments resulting
in a decrease in net identifiable assets acquired. The Company finalized the accounting for the CVM acquisition in the fourth quarter of 2020.
Intangible assets acquired, amortization method and estimated useful life as of December 5, 2019, were as follows (dollars in thousands):
Customer relationships
Trade name
Developed technology
Useful Life
6 years
4 years
n/a
Amortization Method
Straight-line
Straight-line
Indefinite
Fair Value
2,440
111
57
2,608
$
$
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CVM generated net revenue of $0.8 million and net income of $0.1 million, for the period from December 6, 2019 to December 31, 2019.
The Company incurred acquisition related costs of approximately $0.6 million and $0.1 million for the years ended December 31, 2020 and
2019, respectively, which are included within general and administrative expenses on our Consolidated Statements of (Loss) Income.
Unaudited Pro Forma Financial Information
The following table presents unaudited supplemental pro forma financial information as if the CVM acquisition had occurred on January 1,
2018 (in thousands):
Revenue, net
Net (loss) income before equity in losses of unconsolidated affiliates
Net (loss) income attributable to Heska Corporation
Year Ended December 31,
2018
2019
$
$
$
130,434 $
(460) $
(788) $
135,344
6,042
5,970
The pro forma financial information presented above has been prepared by combining our historical results and the historical results of CVM
and further reflects the effect of purchase accounting adjustments. The unaudited pro forma results are presented for informational purposes
only and are not necessarily indicative of what actual results of operations would have been if the acquisition had occurred as the beginning
of the period presented, nor are they indicative of future results of operations.
Optomed
On February 22, 2019, Heska acquired 70% of the equity of Optomed, a French-based endoscopy company, in exchange for approximately
$0.2 million in cash and the assumption of approximately $0.4 million in debt. On October 5, 2020, the Company acquired the remaining
30% minority interest in Optomed for a purchase price of $0.5 million, allowing the Company to assume full control of the business
operations.
Purchase Agreement for Certain Assets
Cuattro, LLC ("Cuattro") is owned by Kevin S. Wilson, the CEO and President of the Company. On December 21, 2018, the Company
closed a transaction (the "Asset Acquisition") to acquire certain assets from Cuattro, all related to the North America segment. 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
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
acquisition. Accordingly, the $8.2 million purchase price of the purchased assets was allocated entirely to an identifiable intangible asset
amortizing on a straight-line basis over a 10-year useful life.
Related Party Activities
Cuattro charged the Company $0, $6 thousand and $4.6 million during 2020, 2019 and 2018, respectively, primarily related to digital
imaging products, pursuant to an underlying supply contract that contained minimum purchase obligations, software and services as well as
other operating expenses. Pursuant to the Asset Acquisition, Cuattro was obligated, without further compensation, to assist the Company with
the implementation of a third-party image hosting platform and necessary data migration. The implementation and migration were
completed, and as of December 31, 2020 there will be no further related party activities with Cuattro.
CVM management conducts related party activities with Practice Clinicas Veterinarias Moviles, S.L. ("CVM Practice"), which is owned by
CVM's management. During the year ended December 31, 2020, the Company fully paid the balance of a loan due to CVM Practice of
approximately $1.1 million, which is included in "Payments of related party debt" on the Consolidated Statements of Cash Flows. CVM also
leases two warehouses from CVM Practice. CVM Practice charged CVM $31 thousand and $0 during the year ended December 31, 2020 and
2019, respectively, all of which is related to lease payments. The right-of-use asset and lease liability amounts related to the warehouse leases
were approximately $0.2 million and $0 as of December 31, 2020 and 2019, respectively. The change from December 31, 2019 to
December 31, 2020 is due to a reorganization regarding CVM management and the control that they exercise subsequent to the scil
acquisition.
4. 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
Investment in Unconsolidated Affiliates
Equity Method Investment
December 31, 2020 December 31, 2019
4,406
$
3,018
7,424
3,686 $
3,018
6,704 $
$
On September 24, 2018, we invested approximately $5.1 million, including costs, to acquire an equity interest in a business as part of our
product development strategy. As of December 31, 2020, our ownership interest in the business was 29.1%. In connection with the
investment, the Company entered into a Manufacturing Supply Agreement that grants the Company global exclusivity to specified products
to be delivered under the agreement for a 15-year period that begins upon the Company's receipt and acceptance of an initial order under the
agreement. The Company accounts for this investment using the equity method of accounting. Under the equity method, the carrying value of
the investment is adjusted 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 before equity in losses of unconsolidated
affiliates within the Consolidated Statements of (Loss) Income.
Non-Marketable Equity Security Investment
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On August 8, 2018, the Company invested approximately $3.0 million, including costs, in exchange for preferred stock. The Company's
investment 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, which provides that the investee produce and
commercialize products that will enhance the Company's diagnostic portfolio. As part of this agreement, the Company made upfront payment
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 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 research and development work within the North America segment research and
development operating expenses. Expense is recognized ratably when incurred and in accordance with the development plan.
Our investments are evaluated for impairment if a triggering event occurs. The Company evaluated both its equity method investment and
non-marketable equity security investment for losses other than temporary as of December 31, 2020, and determined that no indications of an
impairment existed.
5. INCOME TAXES
The components of income before income taxes were as follows (in thousands):
Domestic
Foreign
Year Ended December 31,
2019
2018
2020
$
$
(9,441) $
(4,352)
(13,793) $
(1,872) $
(711)
(2,583) $
3,602
205
3,807
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Temporary differences that give rise to the components of net deferred tax assets (liabilities) are as follows (in thousands):
Inventory
Accrued compensation
Stock options
Research and development tax credit
Research and development expense
Deferred revenue
Property and equipment
Net operating loss carryforwards
Foreign tax credit carryforward
Sales-type leases
Convertible debt equity component
Foreign intangible
Other
Valuation allowance
Total net deferred tax assets (liabilities)
The components of the income tax expense (benefit) are as follows (in thousands):
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 expense (benefit)
-84-
December 31,
2020
2019
$
$
2,993 $
295
2,322
1,308
2,571
1,441
298
8,757
64
1,324
(8,691)
(11,311)
(1,124)
247
(6,409)
(6,162) $
2,005
122
1,858
990
1,417
2,052
3,469
11,676
64
(1,968)
(9,421)
(691)
(179)
11,394
(5,656)
5,738
Year Ended December 31,
2019
2020
2018
$
$
$
$
(24) $
339
1,465
1,780 $
369 $
289
(2,199)
(1,541)
239 $
— $
189
170
359 $
(1,610) $
(307)
112
(1,805)
(1,446) $
(115)
192
63
140
(1,877)
(378)
—
(2,255)
(2,115)
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:
Statutory federal tax rate
State income taxes, net of federal benefit
Non-controlling interest in Optomed
Foreign income inclusion
Non-temporary stock option benefit
Meals and entertainment permanent difference
GILTI permanent difference
Other permanent differences
Foreign tax rate differences
Change in tax rate
Change in valuation allowance
Other deferred differences
Transaction costs
Executive compensation limit
Research & development credit
Equity Investment
Change in uncertain tax benefits
Other
Effective income tax rate
Year Ended December 31,
2019
2020
2018
21 %
(4)%
1 %
(12) %
6 %
— %
— %
1 %
2 %
1 %
(4)%
(2)%
(6)%
(6)%
2 %
(4) %
3 %
(1)%
(2)%
21 %
9 %
(2) %
— %
48 %
(2)%
2 %
(1)%
6 %
(6)%
(17)%
(9)%
(6)%
(7)%
20 %
— %
— %
— %
56 %
21 %
(8)%
— %
— %
(50)%
1 %
1 %
1 %
— %
— %
— %
(21)%
— %
— %
— %
— %
— %
(1)%
(56)%
In 2020, we had total income tax expense of $0.2 million, including $0.6 million in domestic deferred income tax expense and $2.2 million in
foreign deferred income tax benefit, and $1.8 million in current income tax expense. In 2019, we had total income tax benefit of $1.4 million,
including approximately $1.9 million in domestic deferred income tax benefit and $0.1 million of foreign deferred income tax expense, a
non-cash benefit, and approximately $0.4 million in current income tax expense. 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. Income
tax expense increased in 2020 from 2019 due to foreign income inclusion, executive compensation limitations and acquisition related costs.
Income tax benefit decreased in 2019 from 2018 due to executive compensation limitations and lower excess tax benefits related to stock-
based compensation deductions.
Cash paid for income taxes for the years ended December 31, 2020, 2019 and 2018 was $993 thousand, $128 thousand and $36 thousand,
respectively.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 several of the Company's tax jurisdictions. In the U.S., the tax
years 2017 - 2019 remain open to examination by the Internal Revenue Service.
As of December 31, 2020, the Company had net operating loss carryforwards ("NOL") of approximately $35.0 million, a foreign tax credit of
$64 thousand and a domestic research and development tax credit carryforward of approximately $1.3 million. Our federal NOL is expected
to expire as follows if unused: $22 million in 2021 through 2022, $5.4 million in 2024 through 2025 and $0.5 million in 2027 and later. Our
foreign NOL of $7.1 million does not have an expiration date.
The Company considered multiple factors in assessing the need for an increase in the partial valuation allowance against the Company’s
deferred tax assets as of December 31, 2020. Significant factors such as employee stock compensation expenses from achievement of
Company performance metrics, executive compensation limitations and required capitalization of research and development expenses
beginning in 2022 have negatively impacted our future taxable income projections. These future projections indicate a larger portion of the
Company’s deferred tax assets will likely expire unrealized. As a result, the Company recorded an additional $0.8 million tax effected
increase to the current partial valuation allowance against the Company's worldwide net operating losses and tax credits for the year ended
December 31, 2020. As of December 31, 2020, the Company had a deferred tax asset of approximately $10.1 million from net operating
losses and tax credits and a net partial valuation allowance of approximately $6.4 million recorded against these deferred tax assets. The
Company will continue to closely monitor the need for an additional valuation allowance against its deferred tax assets in each subsequent
reporting period which can be impacted by actual operating results compared to the Company's forecast.
ASC Topic 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements in accordance with the other
provisions contained within this guidance. This topic prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a
tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as
the largest amount of benefit that is greater than 50% likely or being realized upon ultimate audit settlement. In the normal course of
business, the Company's tax returns are subject to examination by various taxing authorities. Such examination may result in future tax and
interest assessments by these taxing authorities for uncertain tax positions taken in respect to certain matters.
The following provides a reconciliation of unrecognized tax benefits which are included in Other liabilities within the Consolidated Balance
Sheets (in thousands):
Balance at beginning of period
Acquired additions based on prior year tax positions
Reductions from lapse in statutes of limitations
Currency Translation Adjustment
Balance at the end of period
Year Ended December 31,
2020
2019
$
$
$
—
(1,072)
358
(94)
(808)
$
$
—
—
—
—
—
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The total amount of unrecognized tax benefits, which are included in other liabilities within the combined balance sheets as of December 31,
2020 was approximately $0.8 million, which may impact the effective tax rate if recognized. These unrecognized tax benefits were
recognized as part of the acquisition of scil animal care company GmbH. Per the tax indemnification included in the purchase
agreement, the seller has indemnified the Company for these other liabilities, which would reduce the economic impact to the Company if
these positions were settled with tax authorities. It is expected that the amount of unrecognized tax benefits will change in the next 12
months; however, the Company does not expect the change to have a material impact on the combined financial statements. The Company
recognizes interest and penalties related to uncertain tax positions in income tax (benefit)/expense. Interest and penalties accrued as of
December 31, 2020 are $19.0 thousand.
As of December 31, 2020, the Company had accumulated undistributed earnings generated by foreign subsidiaries of approximately
$2.9 million, which would be subject to U.S. taxes and foreign withholding taxes of approximately $145 thousand if repatriated. The
Company had previously considered these earnings as a possible cash source through repatriation to the U.S. As of December 31, 2020, the
Company has changed its assertion on these earnings and now considers them to be indefinitely reinvested and expects the future U.S. cash
generation to be sufficient to meet future U.S. cash needs. If the Company decides to repatriate these foreign earnings, it would need to adjust
its income tax provision in the period it determined that the earnings would no longer be indefinitely invested outside the United States.
6. LEASES
Lessee Accounting
The Company leases buildings, office equipment, and vehicles. The following table summarizes the Company's operating and finance lease
balances (in thousands):
Leases
Assets
Operating
Finance
Total Leased Assets
Liabilities
Operating
Finance
Total Lease Liabilities
Balance Sheet Location
December 31, 2020
December 31, 2019
Operating lease right-of-use assets
Property and equipment, net
Operating lease liabilities, current
Operating lease liabilities, non-current
Deferred revenue, current, and other
Other liabilities
$
$
$
$
5,457 $
1,907
7,364 $
2,087 $
3,858
295
261
6,501 $
5,726
81
5,807
1,745
4,413
47
37
6,242
For the twelve months ended December 31, 2020, operating lease expense was approximately $2.8 million, including immaterial variable
lease costs. For the twelve months ended December 31, 2019, operating lease expense was approximately $2.4 million, including immaterial
variable lease costs. The Company had building and other rent expense of $1.9 million for the twelve months ended December 31, 2018
under ASC 840, Leases.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the years ended December 31, 2020 and 2019, finance lease amortization expense was $0.3 million and $44 thousand, respectively. For
the years ended December 31, 2020 and 2019, finance lease interest expense was $10 thousand and $3 thousand, respectively. The
Company's finance leases were not material as of December 31, 2018 and for the twelve month period then ended.
Supplemental cash flow information related to the Company's operating and finance leases for the years ended December 31, 2020 and 2019,
respectively, was as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows - operating leases
Operating cash outflows - finance leases
Financing cash outflows - finance leases
ROU assets obtained in exchange for new lease obligations:
Operating leases
Finance leases
Twelve Months Ended
December 31,
2020
2019
$
$
$
$
$
2,213 $
10 $
250 $
788 $
159 $
1,800
3
36
604
11
The following table presents the weighted average remaining lease term and weighted average discount rate related to the Company's leases:
Weighted average remaining lease term:
Operating
Finance
Weighted average discount rate:
Operating
Finance
December 31,
2020
2019
3.1 years
2.9 years
4.2 %
2.1 %
3.8 years
2.0 years
4.4 %
4.0 %
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents the maturity of the Company's lease liabilities as of December 31, 2020 (in thousands):
Year Ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: imputed interest
Total lease liabilities
Lessor Accounting
Operating Leases
Finance Leases
$
$
2,158 $
1,834
1,949
144
138
132
6,355
410
5,945 $
294
139
59
38
26
18
574
18
556
The Company enters into sales-type leases as part of our subscription agreements. The following table presents the maturity of the
Company's lease receivables as of December 31, 2020 (in thousands):
Year Ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total undiscounted future maturities
Less: interest
Total lease receivables
Sales-Type Leases
4,834
4,872
4,220
3,291
2,033
1,424
20,674
91
20,583
$
$
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the profit recognized on the commencement date for sales-type leases and lease income for equipment-only
operating leases (in thousands):
Sales-type lease revenue
Sales-type lease cost of revenue
Profit recognized at commencement for sales-type leases
Operating lease income
Twelve Months Ended
December 31,
2020
2019
5,617 $
3,951
1,666 $
1,012 $
6,890
5,099
1,791
—
$
$
$
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. 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
("EPS") for the years ended December 31, 2020, 2019 and 2018 (in thousands, except per share data):
Net (loss) income attributable to Heska Corporation
Basic weighted-average common shares outstanding
Assumed exercise of dilutive stock options and restricted shares
Diluted weighted-average common shares outstanding
Basic (loss) earnings per share attributable to Heska Corporation
Diluted (loss) earnings per share attributable to Heska Corporation
$
$
$
Years ended December 31,
2019
2018
2020
(14,399) $
(1,465) $
5,850
8,653
—
8,653
7,446
—
7,446
(1.66) $
(1.66) $
(0.20) $
(0.20) $
7,220
636
7,856
0.81
0.74
The following potentially outstanding common shares from convertible preferred stock, convertible senior notes, stock options and restricted
stock awards were excluded from the computation of diluted EPS because the effect would have been antidilutive (in thousands):
Convertible preferred stock
Convertible senior notes
Stock options and restricted shares
2020
Years ended December 31,
2019
2018
458
118
328
904
—
—
300
300
—
—
111
111
As more fully described in Note 16, our Notes are convertible under certain circumstances, as defined in the indenture, into a combination of
cash and shares of our common stock. The Company intends to settle the principal value of the Notes in cash and issue shares of our common
stock to settle the intrinsic value of the conversion feature. The Company will use the treasury stock method when calculating the potential
dilutive effect of the conversion feature on earnings per share, if any. Potential dilution upon conversion of the Notes occurs when the
average market price per share of our common stock is greater than the conversion price of the Notes of $86.63. For the periods presented, all
potentially dilutive shares relating to the Notes were not included in the computation of diluted EPS as the effect would have been
antidilutive.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As discussed in Note 12, the Company issued and sold an aggregate of 122,000 shares of its Preferred Stock to certain investors in a private
placement offering. The shares were converted into 1,508,964 shares of Public Common Stock, effective on April 21, 2020. The potential
dilutive effect of the convertible preferred stock was calculated using the if-converted method for the period the preferred shares were
outstanding. For the twelve months ended December 31, 2020, these shares were excluded from the computation of diluted EPS because the
effect would have been antidilutive.
8. GOODWILL AND OTHER INTANGIBLES
The following summarizes the changes in goodwill during the years ended December 31, 2020 and 2019 (in thousands):
North America
International
Total
Carrying amount, December 31, 2018
Goodwill attributable to acquisitions
Foreign currency adjustments
Carrying amount, December 31, 2019
Goodwill attributable to acquisitions (subject to change)
Measurement period adjustment to prior year acquisition
Foreign currency adjustments
Carrying amount, December 31, 2020
$
$
$
25,724 $
—
—
25,724 $
8,742
—
948
35,414 $
955 $
9,396
129
10,480 $
37,258
110
5,014
52,862 $
26,679
9,396
129
36,204
46,000
110
5,962
88,276
Other intangibles assets, net consisted of the following as of December 31, 2020 and 2019 (in thousands):
Gross Carrying
Amount
2020
Accumulated
Amortization
Net Carrying
Amount
Gross Carrying
Amount
2019
Accumulated
Amortization
Net Carrying
Amount
Intangible assets subject to
amortization:
Customer relationships and other $
Developed technology
Trade names
Intangible assets not subject to
amortization:
Trade names
Total intangible assets
$
46,989 $
8,669
197
8,374
64,229 $
(6,436) $
(1,696)
(105)
40,553 $
6,973
92
6,205 $
8,200
112
(2,226) $
(819)
—
3,979
7,381
112
—
(8,237) $
8,374
55,992 $
—
14,517 $
—
(3,045) $
—
11,472
Amortization expense relating to other intangibles is as follows (in thousands):
Amortization expense
2020
Years Ended December 31,
2019
2018
$
5,196 $
1,278 $
388
The remaining weighted-average amortization period for intangible assets is approximately 8.7 years.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Estimated amortization expense related to intangibles for each of the five years from 2021 through 2025 and thereafter is as follows (in
thousands):
Year Ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total amortization related to finite-lived intangible assets
Indefinite-lived intangible assets
Net intangible assets
9. PROPERTY AND EQUIPMENT, NET
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
Property and equipment, gross
Less accumulated depreciation
Total property and equipment, net
$
$
5,905
5,868
5,506
5,376
5,347
19,616
47,618
8,374
55,992
December 31,
2020
2019
2,590 $
12,737
40,411
2,047
4,773
10,728
4
73,290
(37,748)
35,542 $
694
3,845
28,777
1,345
3,408
10,558
671
49,298
(33,829)
15,469
$
$
The Company has subscription agreements whereby its instruments in inventory may be placed at a customer's location on a rental basis. For
instruments classified as operating leases, the cost of these instruments is transferred to machinery and equipment and depreciated, typically
over a 5 to 7 year period depending on the circumstance under which the instrument is placed with the customer. Our cost of instruments
under operating leases as of December 31, 2020 and 2019 was $13.6 million and $8.1 million, respectively, before accumulated depreciation
of $4.7 million and $4.6 million, respectively.
Depreciation expense for property and equipment was $6.2 million, $3.6 million and $4.2 million for the years ended December 31, 2020,
2019 and 2018, respectively.
-93-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. INVENTORIES
Inventories consisted of the following (in thousands):
Raw materials
Work in process
Finished goods
Total inventories
December 31,
2020
2019
$
$
14,454 $
4,262
21,321
40,037 $
Inventories are measured on a first-in, first-out basis and stated at lower of cost or net realizable value.
11. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
Accrued payroll and employee benefits
Accrued property taxes
Accrued purchase orders
Accrued taxes
Other
Total accrued liabilities
December 31,
2020
2019
$
$
7,949 $
659
1,549
3,731
4,167
18,055 $
14,597
2,730
9,274
26,601
1,175
681
739
586
3,164
6,345
Other accrued liabilities consist of items that are individually less than 5% of total current liabilities.
12. CAPITAL STOCK
Stock Plans
We have two stock option plans which authorize granting of stock options, restricted stock awards 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"), which
was later amended in December 2018 to be renamed the "Stock Incentive Plan." In May 2012, stockholders approved an amendment
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. The plan was further amended in May 2016, May
2018, and April 2020 to increase the number of shares authorized for issuance by 500,000, 250,000, and 300,000 shares, respectively. 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, 2020 was 151,605.
Stock Options
The stock options granted by the Board of Directors may be either incentive stock options ("ISOs") or non-qualified stock options ("NQs")
and may include time-based vesting terms and/or be tied to Company and market-related performance metrics. The exercise price for options
under all of the plans may be no less than
-94-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 the terms of the Stock Incentive Plan, in the event we are sold or merged, outstanding options
will either be assumed by the surviving corporation or vest immediately.
We use the Black-Scholes option-pricing model to estimate the fair value of time-vested and performance stock options granted, which
includes four key inputs: expected term, expected volatility, risk-free interest rate and expected dividends. Our expected term is estimated
based on historical exercise patterns. Our expected volatility input was estimated based on our historical stock price volatility. Our risk-free
interest rate input was determined based on the U.S. Treasury yield curve at the time of option issuance. Our expected dividends inputs were
zero in all periods as we did not anticipate paying dividends in the foreseeable future. For options tied to market performance, the fair value
used in our expense recognition method is measured based on the number of shares granted, and a Monte Carlo simulation model, which
incorporates the probability of the achievement of the market-related performance goals as part of the grant date fair value. We recognize
forfeitures as they occur.
Time Vesting Stock Options
The fair value of each time vesting option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:
Risk-free interest rate
Expected lives
Expected volatility
Expected dividend yield
A summary of our time vesting stock option activity is as follows:
2020
3.64%
5.3 years
46%
0%
2019
1.62%
4.7 years
40%
0%
2018
2.66%
4.9 years
40%
0%
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,
2020
Options
Weighted Average Exercise
Price
536,315 $
83,250 $
(42,307) $
(28,691) $
(84,335) $
464,232 $
291,334 $
54.86
69.27
76.24
69.25
40.64
57.18
46.53
The total estimated fair value of time vesting stock options granted was computed to be approximately $2.4 million, $2.6 million and $4.4
million during the years ended December 31, 2020, 2019 and 2018, 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 $28.66, $29.89 and $28.81
during the years ended December 31, 2020, 2019 and 2018, respectively. The total intrinsic value of options
-95-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
exercised was $5.0 million, $12.8 million and $10.5 million during the years ended December 31, 2020, 2019 and 2018, respectively. The
cash proceeds from options exercised were $3.4 million, $1.0 million and $3.2 million during the years ended December 31, 2020, 2019 and
2018, respectively.
The following table summarizes information about time vesting stock options outstanding and exercisable at December 31, 2020.
Options Outstanding
Options Exercisable
Number of
Options
Outstanding
at
December 31,
2020
Weighted
Average
Remaining
Contractual
Life in Years
Weighted
Average
Outstanding
Price
Number of
Options
Exercisable
at
December 31,
2020
Weighted
Average
Remaining
Contractual
Life in Years
Weighted
Average
Exercise
Price
86,166
63,197
65,000
120,666
129,203
464,232
2.20 $
4.57 $
9.29 $
7.59 $
7.82 $
6.48 $
7.59
30.11
60.94
70.21
89.45
57.18
86,166
63,197
—
71,334
70,637
291,334
2.20 $
4.57 $
0 $
7.47 $
6.89 $
5.14 $
7.59
30.11
—
70.03
84.98
46.53
Exercise Prices
$6.23 - $12.78
$12.79 - $39.76
$39.77 - $60.94
$60.95 - $71.84
$71.85 - $108.25
$6.23 - $108.25
As of December 31, 2020, there was approximately $3.6 million of total unrecognized compensation cost related to outstanding stock
options. That cost is expected to be recognized over a weighted-average period of 1.63 years with all cost to be recognized by the end of
August 2023, assuming all options vest according to the vesting schedules in place at December 31, 2020. As of December 31, 2020, the
aggregate intrinsic value of outstanding options was approximately $41.1 million and the aggregate intrinsic value of exercisable options was
approximately $28.9 million.
Performance Stock Options
On April 16, 2020, the Company granted a total of 240,000 performance-based stock options all with an exercise price of $60.94. Of the
options granted,10,000 are tied to market-related vesting conditions and 230,000 are tied to Company performance metrics, including future
product launches, future sales targets, operating performance, and EBITDA. Performance and market conditions must be achieved by
December 31, 2023 otherwise the stock options are forfeited. All vested but unexercised options will expire April 15, 2030.
During the year ended December 31, 2020, 20,000 of the performance-based stock options were forfeited, leaving a total of 220,000 options
outstanding as of December 31, 2020. The outstanding options had a weighted-average exercise price of $60.94, a weighted-average
remaining contractual term of 9.29 years, and an aggregate intrinsic value of approximately $18.6 million. No options were exercisable as of
December 31, 2020. For the year ended December 31, 2020, the weighted-average estimated fair value of the options granted was computed
to be approximately $25.04 and the total estimated fair value was approximately $6.0 million. As of December 31, 2020, there was
approximately $2.4 million of total unrecognized compensation cost that is expected to be recognized over a weighted average period of 1.80
years.
As of December 31, 2020, we reviewed each of the underlying corporate performance targets and determined that approximately 80,000
shares 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, 2020. The unrecognized compensation cost associated with the performance options not
deemed probable, based on grant date fair value, is approximately $2.0 million. Any change in the probability determination could accelerate
the recognition of this expense.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restricted Stock Awards
We have granted unvested restricted stock awards (“restricted stock”) to management and directors pursuant to the Stock Incentive 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 and are tied to future
sales targets, operating performance, and/or EBITDA. 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, 2020:
Non-vested as of December 31, 2019
Granted
Vested
Forfeited
Non-vested as of December 31, 2020
Restricted Stock
Weighted-Average
Grant Date Fair Value
Per Award
335,667 $
69,823 $
(46,140) $
(67,830) $
291,520 $
74.29
87.29
68.80
73.27
78.44
The weighted average grant date fair value of awards granted during the year was $87.29, $74.93, and $71.77 for the years ended December
31, 2020, 2019 and 2018, respectively. Fair value of restricted stock vested was $5.0 million, $0.3 million, and $4.4 million for the years
ended December 31, 2020, 2019 and 2018, respectively.
As of December 31, 2020, there was approximately $5.5 million of total unrecognized compensation cost related to restricted stock awards
with probable Company performance targets, as well as market and time vesting conditions. The Company expects to recognize this expense
over a weighted average period of 1.4 years. As of December 31, 2020, we reviewed each of the underlying corporate performance targets
and determined that approximately 129,000 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, 2020. The unrecognized
compensation cost associated with the restricted stock awards not deemed probable, based on grant date fair value, is approximately $10.6
million. Any change in the probability determination could accelerate the recognition of this expense.
Employee Stock Purchase Plan
Under the 2020 Employee Stock Purchase Plan (the "ESPP"), we are authorized to issue up to 200,000 shares of common stock to our
employees, of which 3,859 had been issued as of December 31, 2020. The ESPP provides for the issuance of shares of our common stock to
participating employees. At the end of each designated offering period, which occurs every six months on June 30 and December 31,
employees can elect to purchase shares of our common stock with contributions of up to 10% of their base pay, accumulated via payroll
deductions, at an amount equal to 85% of the lower of our stock price on (i) the first trading day of the offering period, or (ii) the last trading
day of the offering period.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
We issued 10,069, 10,698 and 10,078 shares under the ESPP for the years ended December 31, 2020, 2019 and 2018, respectively. The
weighted-average fair value of the purchase rights granted was $16.19, $18.10 and $18.14 per share for the years ended December 31, 2020,
2019 and 2018, respectively.
Series X Convertible Preferred Stock
On March 30, 2020, the Company completed a private placement offering in which the Company issued and sold an aggregate of 122,000
shares of its Series X Convertible Preferred Stock, par value $0.01 per share (the "Preferred Stock"). The shares of Preferred Stock issued
and sold were priced at $1,000 per share (the “Stated Value”), resulting in gross proceeds of $122.0 million, less issuance costs of
$0.2 million. The Company used approximately $111.0 million of the proceeds from the offering to fund the April 1, 2020 acquisition of scil
and plans to use the remaining proceeds for working capital and general corporate purposes.
The offering was made pursuant to the Securities Purchase Agreement (the “Securities Purchase Agreement”), dated as of January 12, 2020,
by and among the Company and certain investors, and subsequent amendment (the “Securities Purchase Agreement Amendment”) to the
Securities Purchase Agreement, entered into by the Company and each investor on March 30, 2020 (the Securities Purchase Agreement as
amended by the Securities Purchase Agreement Amendment, the “Amended Securities Purchase Agreement”).
The shares of Preferred Stock were convertible into shares of the Company’s Common Stock at an initial ratio of approximately 12.4 shares
of Common Stock for each share of Preferred Stock (equivalent to a conversion price of approximately $80.85 per share of common stock),
at the option of the holders of the Preferred Stock or the Company, subject to the Company possessing sufficient unissued and otherwise
unreserved shares of Common Stock under the Company’s Restated Certificate of Incorporation, as amended (the “Certificate of
Incorporation”). On April 14, 2020, the Company gave notice of its exercise of its right to convert the 122,000 shares of Preferred Stock into
1,508,964 shares of Public Common Stock (the "Conversion Shares") and the conversion was effective on April 21, 2020. The conversion
resulted in dilution of less than 20% of total shares of the Company’s Public Common Stock currently issued and outstanding. A registration
statement on Form S-3 (File No. 333-238005) registering the Conversion Shares for resale was filed by us with the SEC on May 5, 2020.
-98-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income (loss) consisted of the following (in thousands):
Balances at December 31, 2018
Other comprehensive income
Balances at December 31, 2019
Other comprehensive (loss) income
Balances at December 31, 2020
Pension
Adjustments
Foreign Currency
1
Translation
Foreign Currency
Gain on Intra-
Entity
2
Transactions
Total Accumulated
Other
Comprehensive
Income
$
$
(419) $
73
(346)
(40)
(386) $
696 $
163
859
5,013
5,872 $
—
—
—
8,683
8,683
$
$
277
236
513
13,656
14,169
1
Foreign currency gains and losses related to translation of foreign subsidiary financial statements.
2
The Company has intercompany loans of a long-term investment nature that are denominated in a foreign currency. These transactions are considered to
be of a long-term nature if settlement is not planned or anticipated in the foreseeable future.
14. COMMITMENTS AND CONTINGENCIES
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 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 $0.5 million and $0.3 million as of December 31, 2020 and 2019.
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 February 18, 2020, a former managing director of scil filed a claim disputing the effective date of the termination of his management
service agreement and the validity of the Company´s waiver of his two-year post-contractual non-compete obligation. The Company intends
to defend itself against the claim. Whether or not this will be successful depends on complex facts and circumstances. The Company is, based
on the advice of its legal counsel, confident that it will be successful in evidencing the effective date of the termination of the management
service agreement and as such, no accrual has been recorded for this ongoing litigation. Additionally, we are indemnified by the scil
acquisition agreement for this claim.
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 (the "Court") 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
"Fauley Complaint"). The settlement, which received the Court's approval on February 28, 2019 and was not
-99-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
subsequently appealed by a class member, required us to make available a total of $6.8 million to pay class members, as well as to pay
attorneys' fees and expenses to legal counsel to the class. The Company recorded the loss provision in the third quarter of 2018 in connection
with the settlement agreement and does not have insurance coverage for the Fauley Complaint. The payment in respect of the settlement was
made in full on April 3, 2019, and all activity related to the Fauley Complaint has ceased.
At December 31, 2020, 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.
Off-Balance Sheet Commitments
We have no off-balance sheet arrangements or variable interest entities.
Purchase Obligations
The Company has contractual obligations with suppliers for unconditional annual minimum inventory purchases in the amounts of
$25.0 million as of December 31, 2020.
15. INTEREST AND OTHER EXPENSE (INCOME), NET
Interest and other expense (income), net, consisted of the following (in thousands):
Interest income
1
Interest expense
Other (income) expense, net
Interest and other expense (income), net
2020
Year Ended December 31,
2019
2018
$
$
(607) $
6,374
(166)
5,601 $
(661) $
3,089
482
2,910 $
(261)
310
(62)
(13)
1
Refer to Note 1. Summary of Significant Accounting Policies relating to an immaterial out of period error correction of non-cash interest identified and
recorded during the fourth fiscal quarter of 2020.
Cash paid for interest was $3.2 million, $0.4 million and $0.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.
16. CONVERTIBLE NOTES
Convertible Notes
On September 17, 2019, the Company issued $86.25 million aggregate principal amount of 3.750% Convertible Senior Notes due 2026,
which included the exercise in full of an $11.25 million purchase option, to certain financial institutions as the initial purchasers of the Notes
(the "Initial Purchasers"). The Notes are senior unsecured obligations of the Company. The Notes were issued pursuant to an Indenture, dated
September 17, 2019 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee.
The net proceeds from the sale of the Notes were approximately $83.7 million after deducting the initial purchasers’ discounts and the
offering expenses payable by the Company. The Company used approximately $12.8 million of the net proceeds from the Notes to repay all
outstanding indebtedness on its
-100-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
existing Credit Facility with JPMorgan Chase Bank, N.A., and an additional $2.0 million to fully fund a cash collateralized, letter of credit
facility under a new Credit Facility. The Company subsequently terminated the Credit Facility with JPMorgan Chase Bank, N.A. on
December 31, 2019. The Company expects to use the remainder of the net proceeds from the sale of the Notes to fund our intended
expansion efforts, including through acquisitions of complementary businesses or technologies or other strategic transactions, and for
working capital and other general corporate purposes.
The Notes are senior unsecured obligations of the Company and will rank senior in right of payment to any of our indebtedness that is
expressly subordinated in right of payment to the Notes; equal in right of payment to any of our unsecured indebtedness that is not so
subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of assets securing such
indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
The Company pays interest on the Notes semiannually in arrears at a rate of 3.750% per annum on March 15 and September 15 of each year.
The Notes are convertible based upon an initial conversion rate of 11.5434 shares of the Company’s common stock per $1,000 principal
amount of Notes (equivalent to a conversion price of approximately $86.63 per share of common stock). The Notes would convert in full into
995,618 shares of common stock based on the initial conversion rate. The conversion rate will be subject to standard anti-dilution
adjustments upon the occurrence of certain events but will not be adjusted for accrued and unpaid interest. The interest rate on the Notes may
be increased by up to 0.50% upon the occurrence of certain events of default or non-timely filings until such matter has been cured.
The Indenture includes customary covenants, but no financial or operating covenants or restrictions on the payments of dividends, the
incurrence of indebtedness or the issuance or repurchase of securities, and sets forth certain events of default and certain types of bankruptcy
or insolvency events of default involving the Company after which the Notes become automatically due and payable. The Company can
settle any conversions of the Notes in cash, shares of the Company’s common stock or a combination thereof, with the form of consideration
determined at the Company’s election. The Company intends to settle the principal value of the Notes in cash and issue shares of the
Company’s common stock to settle the intrinsic value of the conversion feature. There can be no guarantee, however, that any settlement will
be affected by the Company as currently intended, and the timing and other factors of any settlement, many of which may be outside the
Company's control, could impact the actual amounts to be settled in either cash or common stock.
The Notes will mature on September 15, 2026, unless earlier repurchased, redeemed or converted. Prior to March 15, 2026, holders may
convert all or a portion of their Notes only under the following circumstances: (1) during any calendar quarter commencing after the calendar
quarter ending on December 31, 2019 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock
for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last
trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading
day; (2) during the 5 business day period after any 5 consecutive trading day period (the "Notes measurement period") in which the trading
price per $1,000 principal amount of Notes for each trading day of the Notes measurement period was less than 98% of the product of the last
reported sale price of the Company’s common stock and the conversion rate on each such trading day; (3) with respect to any Notes called for
redemption by the Company, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption
date; or (4) upon the occurrence of specified corporate events. On and after March 15, 2026 until the close of business on the scheduled trading
day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Holders
of Notes who convert their Notes in connection with a notice of a redemption or a make-whole fundamental change (each as defined in the
Indenture) may be entitled to a premium in the form of an increase in the conversion rate of the Notes.
-101-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company may not redeem the Notes prior to September 20, 2023. On or after September 20, 2023, the Company may redeem for cash
all or part of the Notes if the last reported sale price of the Company’s common stock equals or exceeds 130% of the conversion price then in
effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of
such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of the
redemption. The redemption price will be 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any.
No sinking fund is provided for the Notes.
Upon the occurrence of a fundamental change (as defined in the Indenture), holders may require the Company to repurchase all or a portion
of their Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased plus any accrued but unpaid interest
to, but excluding, the fundamental change repurchase date.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of
the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.
The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as
a derivative as it is indexed to the Company's own stock, was determined by deducting the fair value of the liability component from the par
value of the Notes. The difference between the principal amount of the Notes and the liability component represents the debt discount, which
is recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheet and amortized to interest expense using the
effective interest method over the term of the Notes. The effective interest rate of the Notes is 15.3% per annum. The equity component of
the Notes is approximately $39.5 million, net of allocated issuance costs of $1.5 million. This is included in additional paid-in capital in the
Consolidated Balance Sheet, net of deferred tax impacts of $9.7 million, and is not remeasured as long as it continues to meet the conditions
for equity classification. The Company allocated transaction costs related to the Notes using the same proportions as the proceeds from the
Notes. Transaction costs attributable to the liability component were recorded as a direct deduction from the related debt liability in the
Consolidated Balance Sheet and amortized to interest expense over the term of the Notes, and transaction costs attributable to the equity
component were netted with the equity component in shareholders’ equity.
In addition, the Company determined that the additional interest that could be due to the holders of the Notes upon an event of default or non-
timely filing represented an embedded derivative feature that should be bifurcated from the Notes. The Company concluded that the fair
value of this embedded derivative feature was de minimis upon the issuance of the Notes and at December 31, 2020.
During the years ended December 31, 2020 and 2019, no portion of the Notes was converted and the liability component was classified as
long-term debt on the Company's Consolidated Balance Sheet as of December 31, 2020.
The following table summarizes the net carrying amount of the Notes as of December 31, 2020 (in thousands):
Principal amount of the Notes
Unamortized debt discount
Net carrying amount
December 31, 2020
December 31, 2019
$
$
86,250 $
(37,791)
48,459 $
86,250
(40,902)
45,348
-102-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interest expense related to the Notes is comprised of the amortization of debt discount and debt issuance costs and the contractual coupon
interest as follows (in thousands):
Interest expense related to contractual coupon interest
1
Interest expense related to amortization of the debt discount
Total interest expense
Twelve Months Ended
December 31, 2020
Twelve Months Ended
December 31, 2019
$
$
3,234 $
3,111
6,345 $
925
1,744
2,669
1
Refer to Note 1. Summary of Significant Accounting Policies relating to an immaterial out of period error correction of non-cash interest identified and
recorded during the fourth fiscal quarter of 2020.
As of December 31, 2020, the remaining period over which the unamortized discount will be amortized is 68.5 months.
The estimated fair value of the Notes was $156.9 million as of December 31, 2020, determined through consideration of quoted market prices
in less active markets. The fair value measurement is classified as Level 2 in the fair value hierarchy, which is defined in ASC 820 as inputs
other than quoted prices in active markets that are either directly or indirectly observable. Based on our closing stock price
of $145.65 on December 31, 2020, the if-converted value exceeded the aggregate principal amount of the Notes by $58.8 million.
-103-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. CONVERTIBLE NOTE RECEIVABLE
The carrying value of the note receivable, included in Related party convertible note receivable, net on the Consolidated Balance Sheets, is as
follows (in thousands):
Principal amount
Unamortized discount
Net carrying amount
December 31, 2020
6,650
(977)
5,673
$
$
On December 9, 2020, our equity method investee (the “Investee”), issued a Convertible Promissory Note to the Company (the “Convertible
Promissory Note”) with a principal amount of $6.65 million and a stated interest rate of 3.0% per annum that is payable monthly. The
Convertible Promissory Note has a maturity date of December 9, 2023, or otherwise upon qualified redemption event or in the event of a
default. Refer to Note 4 for additional information on our equity method investment.
The conversion of the Convertible Promissory Note is contingent upon certain events. Due to the convertible debt features included in the
Convertible Promissory Note, it is not an equity security and is therefore not considered an additional investment in our equity method
investee. The Company accounted for the transaction as a note receivable, included in Related party convertible note receivable, net on the
Consolidated Balance Sheets. The note receivable will be measured at amortized cost, and evaluated for credit losses each reporting period.
The Company determined that the redemption features described above met the definition of an embedded derivative that requires bifurcation
from the note receivable host. The Company measured the redemption features at fair value, with the residual proceeds paid allocated to the
note receivable host, creating a discount to the note receivable. The discount will be amortized over the contractual term of the Promissory
Note using the effective interest method. The effective interest rate of the Convertible Promissory Note is 8.69%, and the amortization of the
discount will be included as interest income within Interest and other expense (income), net on the Consolidated Statements of Income.
The fair value of the embedded derivative was $1.0 million at issuance and as of December 31, 2020, and is included in Related party
convertible note receivable, net on our Consolidated Balance Sheets. The fair value of the derivative will be remeasured each reporting
period, with the mark-to-market adjustment to be included in other expense (income) on the Consolidated Statements of Income.
18. SEGMENT REPORTING
On April 1, 2020, Heska completed the acquisition of scil. Following this acquisition, the Company restructured its operating segments based
on how the Chief Operating Decision Maker (“CODM”) manages the business, allocates resources, makes operating decisions and evaluates
operating performance. The CODM changed how he assesses performance and allocates resources based on geographic regions in order to
better align with the global operations of the Company. Based on this change, the Company determined it has two reportable segments and
revised prior comparative periods to conform to the current period segment presentation. The Company’s two segments are North America
and International.
The North America segment is comprised of the Company's operations in the United States, Canada and Mexico and the International
segment is comprised of geographies outside of North America, which are the Company's operations primarily in Australia, France,
Germany, Italy, Malaysia, Spain and Switzerland. Certain expenses incurred at the Company’s headquarters located in the North America
segment are allocated to each segment in a manner consistent with where the benefits from the expenses are derived. However, there
-104-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
are certain corporate expenses included in the North America segment that we do not allocate. Such expenses include research and
development, certain selling, marketing, general, and administrative costs that support the global organization. Sales and transfers between
operating segments are accounted for at market-based transaction prices and are eliminated in consolidation. The Company's sales are
determined by the country of origin where the sale occurred. For a description of Heska's previous operating segments, refer to Note 17 to the
consolidated financial statements included in Part II. Item 8 of Heska's Annual Report on Form 10-K for the year ended December 31, 2019.
Our CODM continues to evaluate segment performance and allocate resources based on Revenue, Cost of Revenue, Gross Profit, Gross
Margin and Operating Income. The CODM does not evaluate operating segments using asset information; however, we have included total
asset information by segment below as there was a material change in total assets by segment as of December 31, 2020 due to the acquisition
of scil.
Summarized financial information concerning the Company's reportable segments is shown in the following tables (in thousands):
Year Ended December 31, 2020
Total revenue
Cost of revenue
Gross profit
Gross margin
Operating loss
Income (loss) before income taxes
Investments in unconsolidated affiliates
Total Assets
Net Assets
Capital Expenditures
Depreciation and Amortization
Year Ended December 31, 2019
Total revenue
Cost of revenue
Gross profit
Gross margin
Operating income (loss)
Income (loss) before income taxes
Investments in unconsolidated affiliates
Total Assets
Net Assets
Capital Expenditures
Depreciation and Amortization
North America
International
Total
131,066 $
70,163
60,903
46%
(4,977)
(7,871)
6,704
238,550
156,931
443
4,735
66,257 $
45,870
20,387
31%
(3,215)
(5,922)
—
161,289
130,122
243
6,650
197,323
116,033
81,290
41%
(8,192)
(13,793)
6,704
399,839
287,053
686
11,385
North America
International
Total
$
115,423
63,089
52,334
45%
1,426
(1,343)
7,424
219,402
133,835
1,005
4,788
$
7,238
5,123
2,115
29%
(1,099)
(1,240)
—
25,022
20,699
39
128
122,661
68,212
54,449
44%
327
(2,583)
7,424
244,424
154,534
1,044
4,916
$
$
-105-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Year Ended December 31, 2018
Total revenue
Cost of revenue
Gross profit
Gross margin
Operating income
Income before income taxes
Investments in unconsolidated affiliates
Total Assets
Net Assets
Capital Expenditures
Depreciation and Amortization
North America
International
Total
$
124,391 $
68,555
55,836
45%
3,622
3,717
8,018
152,663
118,770
1,329
4,586
$
3,055
2,253
802
26%
172
90
—
3,789
3,639
29
9
127,446
70,808
56,638
44%
3,794
3,807
8,018
156,452
122,409
1,358
4,595
The Company measures its geographic revenue information based on the country of origin where the sale occurred. The geographic
classification is independent of where the customer resides or where the customer is physically located while using the Company's product.
Total revenue by principal geographic area was as follows (in thousands):
United States
Canada
Germany
France
Spain
Italy
Switzerland
Other International
Total
2020
For the Year Ended December 31,
2019
2018
$
$
120,244 $
10,822
29,543
12,615
12,995
5,850
3,343
1,911
197,323 $
113,485 $
1,938
—
3,473
759
—
2,820
186
122,661 $
Total long-lived assets by principal geographic areas were as follows (in thousands):
United States
Canada
Germany
France
Spain
Italy
Switzerland
Other International
Total
2020
As of December 31,
2019
2018
$
$
11,805 $
643
14,630
4,205
1,209
1,944
46
1,060
35,542 $
14,712 $
—
—
152
391
—
33
181
15,469 $
-106-
123,965
425
—
—
—
—
3,056
—
127,446
15,933
11
—
—
—
—
37
—
15,981
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue from Covetrus represented approximately 6%, 14% and 15% of our consolidated revenue for the years ended December 31, 2020,
2019 and 2018, respectively. Consolidated revenue from Covetrus attributable to our North America segment represented approximately 5%,
14% and 15%, respectively, whereas revenue from Covetrus attributable to our International segment represented 1% for 2020. Revenue
from Merck entities, including Merck Animal Health, represented approximately 5%, 1% and 12% for the years ended December 31, 2020,
2019 and 2018, respectively, all included in our North America Segment. No other customer accounted for more than 10% of our
consolidated revenue for the years ended December 31, 2020, 2019 or 2018.
19. SUBSEQUENT EVENTS
Lacuna Diagnostics, Inc.
On February 1, 2021 the Company completed the acquisition of Lacuna Diagnostics, Inc. ("Lacuna"), a veterinary digital cytology company,
to broaden the Company's point of care diagnostic offering. In exchange for all the outstanding shares of Lacuna, the Company paid total
consideration of $4.3 million upon closing. The Company expects to account for this transaction as a business combination however, does not
have that accounting complete as of the date of this filing due to the limited time that has passed since the date of transaction.
As additional consideration for the shares, the Company agreed to a contingent earn-out of an additional $2 million based on the achievement
of certain performance metrics within a twelve month period ("Initial Earn Out Period"), reducing to $1 million if such metrics were met in a
twelve month period subsequent to the Initial Earn Out Period.
Note Receivable
On February 1, 2021, one of our equity investees ("Investee"), for which we account for as a nonmarketable equity security, issued a
Promissory Note to the Company (the “Promissory Note”) with a principal amount of $9.0 million and a stated interest rate of 10.0% per
annum that is payable monthly. The Promissory Note has a maturity date of December 1, 2024. The Promissory Note provides for interest
only payments through December 1, 2023. Beginning on January 1, 2024, the Promissory Note requires repayment of the principal and
interest over twelve consecutive monthly payments. Additionally, the Investee issued a warrant to the Company to acquire securities. The
warrant expires December 31, 2034. Refer to Note 4 for additional information on our equity investments.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of
our disclosure controls and procedures, as defined by Rule 13a-15 of the Exchange Act, as of December 31, 2020. Based on this evaluation,
our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective to
provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms and that such information is
accumulated and communicated to our management,
-107-
including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding disclosure.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-
15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over
financial reporting based on criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this evaluation, the Company's management has concluded that the
Company's internal control over financial reporting was effective as of December 31, 2020.
We acquired scil animal care company GmbH on April 1, 2020 as discussed in Note 3. Acquisition and Related Party Items in Item 8
"Financial Statements and Supplementary Data". The objectives of scil's established internal controls over financial reporting are consistent,
in all material respects, with Heska's objectives. Given the significance of the scil acquisition and the complexity of systems and business
processes, we have excluded certain acquired scil processes and internal controls from our evaluation of internal control over financial
reporting, in accordance with guidance issued by the staff of the US Securities and Exchange Commission. scil accounted for approximately
45% of Heska's total assets at December 31, 2020 and approximately 30% of total net revenue for the fiscal year ended December 31, 2020.
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 risks that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control will
provide only reasonable assurance that the objectives of the internal control system are met.
Grant Thornton, an independent registered public accounting firm, has audited our Consolidated Financial Statements included in this
Form 10-K, and as part of the audit, has issued a report, included herein, on the effectiveness of our internal control over financial reporting
as of December 31, 2020.
Changes in Internal Control over Financial Reporting
We evaluated our internal controls over financial reporting in relation to recurring performance, realigned business segments, and changes to
the control environment due to COVID-19. Based on the assessment, we determined there was no change in our internal control over
financial reporting that occurred during the fourth quarter of 2020 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information
None.
Certain information required by Part III is incorporated by reference to our definitive Proxy Statement to be filed with the SEC in connection
with the solicitation of proxies for our 2021 Annual Meeting of Stockholders.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers
The information required by this item with respect to executive officers is incorporated by reference to Item 1 of this report and can be found
under the caption "Information About Our Executive Officers."
Directors
The information required by this section with respect to our directors will be incorporated by reference to the information in the sections
entitled Proposal No. 1 "Election of Directors" in the Proxy Statement.
Code of Ethics
Our Board of Directors has adopted a code of conduct and ethics for our senior executive and financial officers (including our principal
executive officer, principal financial officer and principal accounting officer). The code of conduct and ethics is available on our website at
www.heska.com under the Corporate Governance section under the Company Information section under the "Investors" tab. We intend to
disclose any amendments to or waivers from the code of conduct and ethics at that location.
Audit Committee
The information required by this section with respect to our Audit Committee will be incorporated by reference to the information in the
section entitled "Board Structure and Committees" in the Proxy Statement.
Item 11.
Executive Compensation
The information required by this section will be incorporated by reference to the information in the sections entitled "Director
Compensation," "Executive Compensation," "Compensation Committee Report" in the Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The other information required by this section will be incorporated by reference to the information in the section entitled "Ownership of
Securities - Common Stock Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
-109-
Equity Compensation Plan Information
The following table sets forth information about our common stock that may be issued upon exercise of options and rights under all of our
equity compensation plans as of December 31, 2020, including the Stock Incentive Plan, as amended and restated, the 2003 Stock Incentive
Plan, as amended and the 2020 Employee Stock Purchase Plan. Our stockholders have approved all of these plans.
Plan Category
Equity Compensation Plans Approved
by Stockholders
Equity Compensation Plans Not
Approved
by Stockholders
Total
(a) Number of Securities to be Issued
Upon Exercise of Outstanding
Options and Rights
(b) Weighted-Average Exercise
Price of Outstanding Options
and Rights
(c) Number of Securities
Remaining Available for Future
Issuance Under Equity
Compensation Plans (excluding securities
reflected in column (a))
684,232
None
684,232
$58.39
None
$58.39
347,746
None
347,746
Item 13.
Certain Relationships and Related Transactions and Director Independence
The information required by this section will be incorporated by reference to the information in the sections entitled "Board Structure and
Committees" and "Significant Relationships and Transactions with Directors, Officers or Principal Stockholders" in the Proxy Statement.
Item 14.
Principal Accountant Fees and Services
The information required by this section will be incorporated by reference to the information in the section entitled "Auditor Fees and
Services" in the Proxy Statement.
The information required by Part III to the extent not set forth herein, will be incorporated herein by reference to our definitive Proxy
Statement for the 2021 Annual Meeting of Stockholders.
-110-
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a) The following documents are filed as a part of this Form 10-K.
(1) Financial Statements:
Reference is made to the Index to Consolidated Financial Statements under Item 8 in Part II of this Form 10-K.
(2) Financial Statement Schedules:
NOTE: All schedules have been omitted because they are either not required or the information is included in the financial
statements and notes thereto.
(3) Exhibits:
The exhibits listed below are required by Item 601 of Regulation S-K. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form 10-K has been identified.
Exhibit
Number
2.1#++
Notes
(20)
2.2#
3(i)
3(ii)
3(iii)
3(iv)
3(v)
3(vi)
3(vii)
3(viii)
3(ix)#
3(x)
4.1
4.2
(23)
(4)
(4)
(4)
(9)
(10)
(13)
(16)
(21)
(23)
(16)
(19)
Description of Document
Agreement regarding the sale and purchase of the sole share in scil animal care company GmbH among
Registrant, Heska GmbH, Covetrus Animal Health Holdings Limited and Covetrus, Inc. dated January 14,
2020.
Amendment Agreement dated April 1, 2020 regarding the agreement on the sale and purchase of the sole
share in scil animal care company GmbH.
Restated Certificate of Incorporation of the Registrant.
Certificate of Amendment to Restated Certificate of Incorporation of Registrant.
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
Certificate of Designation of Preferences, Rights and Limitations of Series X Convertible Preferred Stock.
Amended and Restated Bylaws of the Registrant, as amended.
Indenture, dated as of September 17, 2019, by and between Heska Corporation and U.S. National Bank
Association, as Trustee (including the form of the Notes).
Description of Securities
-111-
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.09*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
(21)
(18)
(18)
(18)
(18)
(18)
(18)
(3)
(9)
(9)
(9)
(9)
(9)
(21)
(20)
(2)
(12)
(5)
(7)
(11)
(12)
(14)
(17)
(1)
(2)
(22)
(14)
(15)
Heska Corporation Stock Incentive Plan, as amended and restated.
Stock Incentive Plan Restricted Stock Grant Agreement.
Stock Incentive Plan Restricted Stock Grant Agreement (Performance-based Award).
Stock Incentive Plan Restricted Stock Grant Agreement (Management Incentive Plan Award).
Stock Incentive Plan Restricted Stock Grant Agreement (Outside Director Award).
Stock Incentive Plan Employees and Consultants Option Agreement.
Stock Incentive Plan Outside Directors Option Agreement.
2003 Equity Incentive Plan, as amended and restated.
2003 Equity Incentive Plan Restricted Stock Grant Agreement (Performance-based Award).
2003 Equity Incentive Plan Restricted Stock Grant Agreement (Management Incentive Plan Award).
2003 Equity Incentive Plan Restricted Stock Grant Agreement (Outside Director Award).
2003 Equity Incentive Plan Employees and Consultants Option Agreement.
2003 Equity Incentive Plan Outside Directors Option Agreement.
2020 Employee Stock Purchase Plan of Registrant, as amended and restated.
Amended and Restated Management Incentive Plan Master Document.
Director Compensation Policy.
Form of Indemnification Agreement entered into between Registrant and its directors and certain officers.
Employment Agreement between Registrant and Kevin S. Wilson, effective as of March 7, 2018.
Restricted Stock Grant Agreement between Registrant and Kevin S. Wilson, effective as of March 26,
2014.
Restricted Stock Grant Agreement between Registrant and Kevin S. Wilson, effective as of May 6, 2014.
Restricted Stock Grant Agreement between Registrant and Kevin S. Wilson, effective as of December 1,
2017.
Restricted Stock Grant Agreement between Registrant and Kevin S. Wilson, effective as of March 7, 2018.
Restricted Stock Grant Agreement between Registrant and Kevin S. Wilson, effective as of May 3, 2018.
Employment Agreement between Registrant and Catherine I. Grassman, effective as of June 1, 2019
Employment Agreement between Registrant and Nancy Wisnewski, effective as of April 15, 2002.
Amendment to Employment Agreement between Registrant and Nancy Wisnewski, effective as of January
1, 2008.
Employment Agreement between Registrant and Steven M. Eyl, effective as of April 16, 2020.
Employment Agreement between Registrant and Jason D. Aroesty, effective as of April 23, 2018.
Restricted Stock Agreement and Notice of Stock Option Grant for grants issued to Jason D. Aroesty on July
25, 2018.
-112-
10.30
10.31*
10.32*
10.33*
10.34*
10.35+
10.36
10.37++
10.38+
10.39++
10.40+
10.41+
10.42#
21.1
23.1
23.2
24.1
31.1
31.2
32.1**
101.INS
101.SCH
101.CAL
101.DEF
101.PRE
(12)
(12)
(6)
(8)
(20)
(11)
(22)
(22)
(11)
(23)
Separation Agreement and Release between Registrant and Jason D. Aroesty, effective as of December 10,
2020.
Employment Agreement between Registrant and Christopher Sveen, effective as of April 15, 2020
Employment Agreement between Registrant and Eleanor Baker, effective as of April 9, 2020
Restricted Stock Grant Agreement form for grants issued on March 7, 2018 (for officers other than Kevin S.
Wilson).
Notice of Stock Option Grant for grants issued on March 7, 2018.
Clinical Chemistry Analyzer Agreement between Registrant and FUJIFILM Corporation, effective as of
January 30, 2007; and First Amendment to Clinical Chemistry Analyzer Agreement between Registrant and
FUJIFILM Corporation, effective as of April 1, 2014.
Second Amendment to Clinical Chemistry Analyzer Agreement between Registrant and FUJIFILM
Corporation, effective as of April 1, 2015.
Third Amendment to Clinical Chemistry Analyzer Agreement between Registrant and FUJIFILM
Corporation, effective as of August 27, 2019.
Exclusive Supply Agreement by and between Registrant and Shenzhen Mindray Bio-Medical Electronics
Co., Ltd., effective as of September 1, 2013; and Supplemental memo to September 1, 2013 Exclusive
Supply Agreement by and between Registrant and Shenzhen Mindray Bio-Medical Electronics Co., Ltd.,
effective as of March 1, 2015.
First Amendment to Exclusive Supply Agreement by and between Registrant and Shenzhen
Mindray Bio-Medical Electronics Co., Ltd., effective as of June 1, 2020.
Amended and Restated Supply Agreement by and between Registrant and Shenzhen Mindray Bio-Medical
Electronics Co., Ltd., effective as of June 1, 2020.
Master Supply Agreement between Registrant and Butler Animal Health Supply, LLC d/b/a Henry Schein
Animal Health effective as of October 17, 2014.
Registration Rights Agreement, dated as of March 30, 2020, by and among Heska Corporation and the
several purchaser signatory thereto.
Subsidiaries of the Company.
Consent of Grant Thornton LLP.
Consent of Plante & Moran, PLLC, Independent Registered Public Accounting Firm.
Power of Attorney (See Signature Page of this Form 10-K).
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended.
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended.
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase Document.
XBRL Taxonomy Extension Definition Linkbase Document.
XBRL Taxonomy Extension Presentation Linkbase Document.
-113-
101.LAB
104.0
XBRL Taxonomy Extension Label Linkbase Document.
Cover Page Interactive Data File (embedded within the Inline XBRL document contained in Exhibit 101)
Notes
*
+
++
#
**
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
Indicates management contract or compensatory plan or arrangement.
Portions of the exhibit have been omitted pursuant to a request for confidential treatment.
Certain confidential information contained in this exhibit has been omitted because it is both (i) not material and (ii) would be competitively harmful if
publicly disclosed.
Certain personally identifiable information has been omitted from this exhibit pursuant to Item 601(a)(6) under Regulation S-K.
Furnished herewith but not filed.
Filed with the Registrant's Form 10-K for the year ended December 31, 2006.
Filed with the Registrant's Form 10-K for the year ended December 31, 2007.
Filed with the Registrant's Form 10-K for the year ended December 31, 2008.
Filed with the Registrant's Form 10-K for the year ended December 31, 2012.
Filed with the Registrant's Form 10-K for the year ended December 31, 2013.
Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2014.
Filed with the Registrant's Form 10-K for the year ended December 31, 2014.
Filed with the Registrant's Form 10-Q for the quarter ended March 31, 2015.
Filed with the Registrant's Form 10-K for the year ended December 31, 2016.
Filed with the Registrant's Form 10-Q for the quarter ended March 31, 2017.
Filed with the Registrant's Form 10-K for the year ended December 31, 2017.
Filed with the Registrant's Form 10-Q for the quarter ended March 31, 2018.
Filed with the Registrant's Form 8-K on May 9, 2018.
Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2018.
Filed with the Registrant's Form 10-Q for the quarter ended September 30, 2018.
Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2019.
Filed with the Registrant's Form 8-K on June 1, 2019.
Filed with the Registrant's Form 10-K for the year ended December 31, 2018.
Filed with the Registrant's Form 8-K on September 17, 2019.
Filed with the Registrant's Form 10-K for the year ended December 31, 2019.
Filed with the Registrant’s Form 10-Q for the quarter ended March 31, 2020.
Filed with the Registrant’s Form 10-Q for the quarter ended June 30, 2020.
Filed with the Registrant’s Form 8-K on April 1, 2020.
-114-
Item 16. Form 10-K Summary
Registrants may voluntarily include a summary of information required by Form 10-K under this Item 16. The Registrant has elected not to
include such summary information.
-115-
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on February 26, 2021.
SIGNATURES
HESKA CORPORATION
By: /s/ KEVIN S. WILSON
Kevin S. Wilson
Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Catherine Grassman his or her true and lawful attorneys-in-fact, with full power of substitution, for him or her in any and all capacities, to
sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all of said attorney-in-fact or their substitute may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
Signature
/s/ KEVIN S. WILSON
Kevin S. Wilson
/s/ CATHERINE GRASSMAN
Catherine Grassman
/s/ SCOTT HUMPHREY
Scott Humphrey
/s/ ROBERT L. ANTIN
Robert L. Antin
/s/ STEPHEN L. DAVIS
Stephen L. Davis
/s/ MARK F. FURLONG
Mark F. Furlong
/s/ JOACHIM HASENMAIER
Joachim Hasenmaier
/s/ SHARON J. LARSON
Sharon J. Larson
/s/ DAVID E. SVEEN
David E. Sveen, Ph.D.
/s/ BONNIE J. TROWBRIDGE
Bonnie J. Trowbridge
Title
Chief Executive Officer, President and Director (Principal Executive
Officer)
Executive Vice President, Chief Financial Officer (Principal
Financial and Accounting Officer)
Chair
Director
Director
Director
Director
Director
Director
Director
-116-
Date
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
HESKA CORPORATION
DESCRIPTION OF SECURITIES
Exhibit 4.2
DESCRIPTION OF COMMON STOCK
General
The following description summarizes important terms of our common stock. Because it is only a summary, it does not
contain all the information that may be important to you. For a complete description of the matters set forth herein, you should
refer to our Certificate of Incorporation and our bylaws, both of which are filed as exhibits to our Annual Report on Form 10-K,
and to the applicable provisions of Delaware law.
On May 4, 2010, our stockholders approved an amendment to our Certificate of Incorporation (the “NOL Protective
Amendment”). The NOL Protective Amendment places restrictions on the transfer of our common stock that could adversely
affect our ability to use our domestic Federal Net Operating Loss carryforward (“NOL”). The NOL Protective Amendment
reclassified our capital stock into shares of Traditional common stock and common stock, which together we refer to as our
“common stock.” These restrictions on transfer prohibit certain future transfers our capital stock that could adversely affect our
ability to utilize our NOL and certain income tax credits to reduce our federal income taxes, which we refer to as the “Tax
Benefits.” Pursuant to the NOL Protective Amendment, each share of Traditional common stock was automatically reclassified
into one share of common stock.
After giving effect to the amendments to our Certificate of Incorporation adopted subsequent to the NOL Protective
Amendment, our authorized capital stock consists of 29,000,000 shares of capital stock, par value $0.01 per share, of which:
•
•
•
13,250,000 shares of original common stock are designated as Traditional common stock;
13,250,000 shares of NOL restricted common stock are designated as Public common stock; and
2,500,000 shares are designated as preferred stock.
All outstanding shares of common stock are validly issued, fully paid, and nonassessable.
Voting rights
Each holder of common stock is entitled to one vote for each share of common stock held of record on the applicable
record date on all matters submitted to a vote of stockholders. There are no cumulative voting rights for the election of directors
in our Certificate of Incorporation. The directors elected at each annual meeting of stockholders shall be elected for a term of
office expiring at the next annual meeting of stockholders.
Dividend rights; rights upon liquidation
The holders of common stock are entitled to receive dividends out of assets legally available for dividends at times and in
amounts as our board of directors may determine. These dividend rights are subject to any preferential dividend rights that may
be granted to holders of outstanding preferred stock.
In the event of our liquidation, dissolution or winding up, each share of common stock is entitled to share pro rata in any
distribution of our assets after payment or providing for the payment of liabilities and the liquidation preference of any then
outstanding preferred stock.
Preemptive and other rights
Other than as set forth under the caption “Conversion” below, holders of common stock have no preemptive or other
rights to purchase, subscribe for or otherwise acquire any unissued or treasury shares or other of our securities. There are no
redemption or sinking fund provisions applicable to the common stock securities.
Conversion
Each share of Public common stock will automatically be converted into the equivalent number of shares of Traditional
common stock on the earliest of January 1, 2026, the date our board of directors determines that the transfer restrictions described
below are no longer necessary or advisable to preserve the Tax Benefits due to changes in tax laws, or the date our board of
directors determines in good faith that it is in the best interests of the Company and our stockholders to terminate the transfer
restrictions.
NOL transfer restrictions
As a result of the NOL Protective Amendment, the shares of common stock are subject to transfer restrictions such that
holders of common stock are restricted from attempting to transfer (which includes any direct or indirect acquisition, sale,
transfer, assignment, conveyance, pledge or other disposition) any of the shares of common stock (or options, warrants or other
rights to acquire common stock, or securities convertible or exchangeable into common stock), to the extent that such transfer
would (i) create or result in an individual or entity becoming a five-percent stockholder of the common stock for purposes of
Section 382 of the Internal Revenue Code of 1986, as amended, and the related Treasury Regulations, which individual or entity
is referred to as a “five-percent stockholder,” or (ii) increase the stock ownership percentage of any existing five-percent
stockholder.
Transfers that violate the provisions of the NOL Protective Amendment shall be null and void ab initio and shall not be
effective to transfer any record, legal, beneficial or any other ownership of the number of shares which result in the violation of
the NOL Protective Amendment, which shares are referred to as “Excess Securities.” The purported transferee shall not be
entitled to any rights as a Company stockholder with respect to the Excess Securities. Instead, the purported transferee would be
required, upon demand by us, to transfer the Excess
2
Securities to an agent designated by us for the limited purpose of consummating an orderly arm’s-length sale of such Excess
Securities. The net proceeds of the sale will be distributed first to reimburse the agent for any costs associated with the sale,
second to the purported transferee to the extent of the price it paid, and finally to the purported transferor to the extent there is
any additional amount, or, if the purported transferor cannot readily be identified to us, to cover the costs incurred by us as a
result of such prohibited transfer, with the remainder, if any, to be donated to a charity designated by our board of directors.
With respect to any transfer that does not involve a transfer of our “securities” within the meaning of Delaware law but
which would cause any five-percent stockholder to violate the transfer restrictions, the following procedure would apply in lieu
of those described above. In such case, no such five-percent stockholder would be required to dispose of any interest that is not a
security of the Company, but such five-percent stockholder and/or any person whose ownership of our securities is attributed to
such five-percent stockholder, would be deemed to have disposed of (and would be required to dispose of) sufficient securities
(which securities shall be disposed of in the inverse order in which they were acquired), simultaneously with the transfer, to cause
such five-percent stockholder not to be in violation of the transfer restrictions, and such securities would be treated as Excess
Securities to be disposed of through the agent under the provisions summarized above, with the maximum amount payable to
such five-percent stockholder or such other person that was the direct holder of such Excess Securities from the proceeds of sale
by the agent being the fair market value of such Excess Securities at the time of the prohibited transfer.
The NOL Protective Amendment also provides us with various remedies to prevent or respond to a purported transfer that
violates its provisions, including that any person who knowingly violates it, together with any persons in the same control group
with such person, are jointly and severally liable to us for such amounts as will put us in the same financial position as it would
have been in had such violation not occurred.
The foregoing transfer restriction provisions may only be amended or repealed by the affirmative vote of the holders of at
least two-thirds of the shares entitled to vote thereon. This summary description of the NOL Protective Amendment does not
purport to be complete and is qualified in its entirety by reference to the full text of the NOL Protective Amendment.
Anti-takeover provisions in Delaware law and our certificate of incorporation
The NOL Protective Amendment may have an “anti-takeover” effect because, among other things, the common stock
restricts the ability of a person, entity or group to accumulate more than five percent of the common stock and the ability of
persons, entities or groups now owning more than five percent of the outstanding shares of common stock from acquiring
additional shares of common stock without the approval of our board of directors.
We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, the statute
prohibits a publicly held Delaware corporation from engaging in a business combination with an “interested stockholder” for a
period of three years after the date of the transaction in which the person became an interested stockholder, unless the
3
business combination is approved in a prescribed manner. A “business combination” includes a merger, asset sale or other
transaction resulting in financial benefit to the stockholder. An “interested stockholder” is a person who, together with affiliates
and associates, owns (or within three years prior, did own) 15% or more of the corporation’s voting stock.
The Certificate of Incorporation provides that special meetings of stockholders may be called only at the request of our
chairman of the board of directors, our chief executive officer or president, or by a resolution adopted by a majority of our board
of directors.
The provisions described above, together with the ability of our board of directors to issue preferred stock without
stockholder approval, could have the effect of delaying, deferring or preventing a change in control, delaying, deferring or
preventing the removal of existing management, deterring potential acquirers from making an offer to our stockholders, and
limiting any opportunity of our stockholders to realize premiums over prevailing market prices of our common stock in
connection with offers by potential acquirers.
The above-described effects could occur even if a majority of our stockholders might benefit from such a change in
control or offer.
Listing
Our common stock is listed on The Nasdaq Capital Market under the symbol “HSKA”.
4
Heska Corporation
Management Incentive Plan Master Document
Amended and Restated as of February 17, 2021
Exhibit 10.15
This Management Incentive Plan Master Document (“MIP”) is intended to provide incentives to the senior management
of Heska Corporation (“Heska” or the “Company”) for the achievement of goals and objectives that are essential to the growth
and continued success of the Company. This MIP is to act as a master document for future plans and replaces in its entirety any
and all previous management incentive plans of the Company. All employees of the Company and its affiliates are eligible for
participation in the MIP.
ction i.“CEO” means the Chief Executive Officer of the Company.
Article I.
DEFINITIONS
tion ii.“Committee” means the Compensation Committee of the Board of Directors of the Company or such other committee
designated by the Board of Directors of the Company to administer the MIP. Any actions permitted under the MIP by the CEO
may at any time in the Committee’s discretion instead be taken by the Committee.
ion iii.“Incentive Target” means the designated percentage of the Participant’s base salary or base wages (but excluding
commissions, bonuses, relocation payments or other forms of compensation not considered part of the Participants’ base pay)
earned during the Plan Year, as determined by the Committee or, for non-executive officer employees, the CEO. For individuals
becoming Participants after the beginning of the applicable Plan Year, the Incentive Target shall be based on the amount of base
salary or base wages earned while a Participant and excludes any earnings prior to becoming a Participant.
ion iv.“MIP Payout” means all payments made under the MIP.
tion v.“Participant” means any employee of the Company or its affiliates that is designated by the Committee or the CEO as
eligible to receive a MIP Payout.
ion vi.“Performance Measures” means the corporate, business unit, individual, or other designated performance measures, as
determined by the Committee.
on vii.“Plan Year” means the applicable period of time during which a MIP Payout may be earned, as determined by the
Committee.
104385268.3
Article II.
MIP AWARD OPPORTUNITIES
ction i.Establishment of MIP Award Opportunities. The Committee or, for non-executive officer employees, the CEO shall
designate the Participants, each Participant’s Incentive Target, if applicable, and the applicable Performance Measures for each
Plan Year under the MIP. The Committee or the CEO, as applicable, may establish any threshold or maximum opportunities for
MIP Payouts with respect to each Plan Year.
tion ii.Award Determination. The Committee has the sole discretion in determining whether and to the extent to which the
Performance Measures established for the Plan Year have been achieved.
Article III.
PAYMENTS
ction i.Payment to Individual Participants. The Committee will determine any MIP Payout to the CEO. Any individual MIP
Payouts to other executive officers will generally be recommended to the Committee by the CEO, although the Committee will
make the final determination of any individual MIP Payouts to executive officers of the Company other than the CEO. Any
individual MIP Payouts to other non-executive officer Participants will be determined by the CEO.
tion ii.Medium of Payment. In the sole and absolute discretion of the Committee, the MIP Payout may be made in cash, in stock of
the Company, in unsecured notes, or in any other alternative forms of compensation.
ion iii.Time of Payment. Unless otherwise determined by the Committee, all MIP Payouts earned shall be paid only after the
Committee has reviewed management’s calculations of the achievement of the Performance Measures for the Plan Year and the
resulting MIP Payouts. MIP Payouts shall be made by no later than March 15th of the year following the end of any Plan Year.
ion iv.Employment Required. Except in the case of the Participant’s death or as otherwise determined by the Committee or the
CEO, as applicable, Participants must remain active employees of Heska or one of its affiliates in a position which qualifies for
MIP participation through the end of a given Plan Year in order to be eligible to earn any MIP Payouts.
tion v.Change in Control. If the Company experiences a Change in Control (as defined in the Heska Corporation Stock Incentive
Plan or such successor plan as in effect from time to time) during any Plan Year, unless otherwise determined by the Committee,
each Participant will receive a MIP Payout equal to such Participant’s Incentive Target, prorated from the beginning of the Plan
Year until the date of such Change in Control. Unless otherwise determined by the Committee, MIP Payouts will occur at a time
as close as commercially reasonably practicable to the date of the closing of such Change in Control and in all events within 60
days thereafter.
ion vi.Disability. Employees who are on short-term disability will continue to be treated as active employees for purposes of MIP
participation. Employees who are on long-term disability will not be treated as active employees for purposes of MIP
participation and will not be eligible
2
for a MIP Payout unless otherwise determined by the Committee. The participation of employees on other personal leave will be
considered by the Committee or its designee on a case by case basis.
on vii.Death. Upon the death of a Participant, a prorated portion of any earned MIP Payout will be made to the Participant’s
designated beneficiary (or estate, in the absence of a proper designated beneficiary) at the normal payment time of the MIP
Payouts for such Plan Year.
on viii.Partial Payments or Exceptions. The Committee must approve partial payments or exceptions to any major provision of this
MIP.
Article IV.
MISCELLANEOUS
ction i.Parachute Payments. To the extent that any of the payments and benefits provided for under the MIP or any other agreement
or arrangement between the Company and a Participant (collectively, the “Payments”) (i) constitute a “parachute payment”
within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”) and (ii) but for this
paragraph would be subject to the excise tax imposed by Section 4999 of the Code, then the Payments shall be payable either (i)
in full or (ii) as to such lesser amount which would result in no portion of such Payments being subject to excise tax under
Section 4999 of the Code (determined in accordance with the reduction of payments and benefits in the paragraph set forth
below); whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the
excise tax imposed by Section 4999, results in the Participant’s receipt on an after-tax basis of the greatest amount of the
Payments, notwithstanding that all or some portion of such Payments may be taxable under Section 4999 of the Code. Except to
the extent, if any, otherwise agreed in writing between a Participant and the Company, any determination required under this
provision will be made by accountants selected by the Company, whose determination shall be conclusive and binding upon the
Participant and the Company for all purposes.
tion ii.No Right to Employment. Nothing in this document is to be construed as a contract of employment of a defined period of
time or otherwise altering the status of employee as an at-will employee of the Company. Either party may elect to terminate the
employment relationship at any time, without cause or advance notice.
a.
Amendment; Termination. The Committee reserves the right to interpret, modify, suspend or terminate this MIP at
any time as determined in its sole discretion.
b.
Unfunded Plan. No amounts awarded or accrued under this MIP will be funded, set aside or otherwise segregated
prior to payment. The obligation to pay the bonuses awarded hereunder will at all times be an unfunded and unsecured obligation
of Heska. Participants shall have the status of general creditors and shall look solely to the general assets of Heska for the
payment of their bonus awards.
3
c.
No Assignment. No Participant will have the right to alienate, assign, encumber, hypothecate or pledge his or her
interest in any award under the MIP, voluntarily or involuntarily, and any attempt to so dispose of any such interest will be void.
During the lifetime of any Participant, payment of a bonus award under the MIP will only be made to such Participant.
d.
Governing Law. This MIP shall be construed in accordance with and governed by the laws of the State of
Delaware, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of
this MIP to the substantive law of another jurisdiction.
4
This Separation and Release Agreement (the "Agreement") is made between (i) Jason Aroesty ("Employee") and (ii) Heska
Corporation (the "Company"). Employee and the Company are referred to collectively as the "Parties" and individually as a "Party."
SEPARATION AND RELEASE AGREEMENT
Exhibit 10.30
RECITALS
WHEREAS, Employee was employed at the Company's Loveland facility;
,
WHEREAS, Employee's employment with the Company terminated effective December 4
th
2020 (the "Termination Date");
WHEREAS, Employee's termination is without "Cause" under Section 6(a), entitling Employee to certain payments and
benefits under Section 6(a)(i) of the Employment Agreement;
WHEREAS, Employee resigns all board seats, observation rights and actual, titles and appointments that are conditioned upon
continued employment with the Company;
WHEREAS, the Parties wish to resolve fully and finally any potential disputes regarding Employee's employment with the
Company and any other potential disputes between the Parties, and
WHEREAS, in order to accomplish this end, the Parties are willing to enter into this Agreement.
NOW THEREFORE, in consideration of the mutual promises and undertakings contained herein, the sufficiency of which is
acknowledged by the Parties, the Parties to this Agreement agree as follows:
TERMS
1.
Effective Date. This Agreement shall become effective on the eighth day after Employee signs this Agreement (the "Effective
Date"), so long as Employee does not revoke this Agreement pursuant to Paragraph 10 below. Employee's Termination Date will
not change regardless of whether this Agreement becomes effective on the "Effective Date."
2.
Consideration for Release and Payment Terms.
a. Pursuant to this Agreement, the Company shall, as consideration for Employee's release and promises set forth in this
Agreement, pay Employee additional compensation that Employee would not be entitled to otherwise.
b. After the Effective Date and on the express condition that Employee has not revoked this Agreement, the Company will pay
Employee a severance payment in the total sum of three hundred thousand dollars ($300,000.00), less applicable deductions and
withholdings , to be paid within three business days of the Effective Date, so long as Employee does not revoke this
Agreement pursuant to Paragraph 10 below. This payment is inclusive of the severance pay described under Section 6(a)(i) of
the Employment Agreement and this Agreement supersedes the Company's obligations under the Employment Agreement.
Notwithstanding the Employment Agreement, under this Agreement, Employee agrees to receive the entire twelve months'
payment in one lump sum, to be paid in accordance with the terms herein. Payment will be mailed to Employee's residence
address payable to "Jason Aroesty" or directly deposited to the Employee's financial institution as soon as is administratively
feasible.
c. Medical and Dental Benefits. From the Termination Date through the earlier of (i) the twelve month anniversary of the
Termination Date or (ii) the date on which Employee is provided or obtains medical or dental insurance coverage from another
employer or entity, the Company shall reimburse Employee for the difference between the cost of any COBRA premiums paid
by Employee for continued medical and dental coverage under the Company's group health plans for himself and his
dependents and the active employee rates for coverage under such plans. The foregoing is subject to Employee's timely
enrollment in COBRA and payment of applicable premiums.
d. Reporting and Withholding. Reporting of and withholding on any payment under this Agreement for tax purposes shall be at
the discretion of the Company in conformance with applicable tax laws. If a claim is made against the Company for any
additional tax or withholding in connection with or arising out of any payment pursuant to this Agreement, Employee shall
pay any such claim within thirty (30) days of being notified by the Company and agrees to indemnify the Company and hold it
harmless against such claims, including, but not limited to, any taxes, attorneys' fees, penalties, and/or interest, which are or
become due from the Company.
3.
General Release.
a.
Employee, for Employee, and for Employee's affiliates, successors, heirs, subrogees, assigns, principals, agents,
partners, employees, associates, attorneys, and representatives, voluntarily, knowingly, unequivocally, unconditionally and
intentionally releases and discharges (i) the Company and its predecessors, successors, parents, subsidiaries, affiliates, and
assigns, and (ii) each of their respective officers, directors, principals, shareholders, agents, attorneys, board members, and
employees (the "Released Parties") from any and all claims, actions, liabilities, demands, rights, damages, costs, expenses,
and attorneys' fees (including, but not limited to, any claim of entitlement for attorneys' fees under any contract, statute, or
rule of law allowing a prevailing party or plaintiff to recover attorneys' fees), of every kind and description from the
beginning of time through the Effective Date (the "Released Claims").
b. The Released Claims include, but are not limited to, those which arise out of, relate to, or are based upon: (i) Employee's
employment with the Company or the termination thereof; (ii) statements, acts, or omissions by the Released Parties
whether in their individual or representative capacities; (iii) express or implied agreements between the Parties and claims
under any severance plan (except as provided herein); (iv) any stock or
- 2 -
stock option grant, agreement, or plan, except as set forth below; (v) all federal, state, and municipal statutes, ordinances,
and regulations, including, but not limited to, claims of discrimination based on race, color, national origin, age, sex,
sexual orientation, religion, disability, veteran status, whistleblower status, public policy, or any other characteristic of
Employee under the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Americans
with Disabilities Act, the Equal Pay Act, Title VII of the Civil Rights Act of 1964 (as amended), the Employee Retirement
Income Security Act of 1974, the Rehabilitation Act of 1973, the Family and Medical Leave Act, the Worker Adjustment
and Retraining Notification Act, the Colorado Anti-Discrimination in Employment Act, or any other federal, state, or
municipal law prohibiting discrimination or termination for any reason; (vi) state and federal common law; (vii) the failure
of this Agreement, or of any other employment, severance, profit sharing, bonus, equity incentive or other compensatory
plan to which Employee and the Company are or were parties, to comply with, or to be operated in compliance with,
Section 409A of the Internal Revenue Code of 1986, as amended ("Section 409A"), or any similar provision of state or
local income tax law; and (viii) any claim which was or could have been raised by Employee. Released Claims do not
include claims with respect to any vested equity awards, which shall continue to be governed by the terms of the
applicable
Company stock plan and award agreements.
a. Employee understands that nothing contained in this Agreement limits Employee's ability to file a charge or complaint
with any federal, state or local governmental agency or commission (each a "Government Agency"). Employee further
understands that this Release does not limit Employee's ability to communicate with any Government Agency or
otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including
providing documents or other information, without notice to the Company. However, to the maximum extent permitted by
law, Employee agrees that if such a charge or complaint is made, Employee shall not be entitled to recover any individual
monetary relief or other individual remedies. This Release does not limit or prohibit Employee's right to receive an award
for information provided to any Government Agency to the extent that such limitation or prohibition is a violation of law.
b. The General Release in this Agreement does not apply to claims under federal, state, or local law (statutory, regulatory, or
otherwise) that may not be lawfully waived and released, including but not limited to vested retirement benefits (if any),
COBRA rights, unemployment compensation, and workers' compensation.
1. Confidential Information.
a.
For the purposes of this Agreement, "Confidential Information" shall include, without limitation, any non-public
information relating to or pertaining to the Company, such as the whole or any portion or phase of (i) any proprietary
information or Trade Secrets (defined below); (ii) any scientific, technical, business, or financial information; (iii) any
marketing information, business development information, prospect information, or marketing analysis or plans; (iv) any
customer information, lists, contacts, or needs; (v) any contracts, agreements, or leases; (vi) any discoveries, inventions,
products, designs, methods, know-how, techniques, systems, processes, software programs, works of authorship, projects,
or plans; (vii) any proposals, strategies, concepts, analyses, surveys,
- 3 -
a.
b.
ideas, research, data, databases, reports, manuals, manuscripts, articles, or records; and
(viii) any other business or corporate documents related to Company Business. The Company' s "Trade Secrets" include,
without limitation, the Company's non-public marketing strategies, financial information, customer and client information,
projects, plans, proposals, business strategies (including potential new business opportunities and divisions). All
Confidential Information identified above shall be treated as Confidential Information regardless of whether it pertains to
the Company, its affiliates, subsidiaries, or parents, or their customers. The list set forth above is not intended by the
Company to be a comprehensive list of Confidential Information.
Employee acknowledges the success of the Company depends in large part on the protection of the Company's
Confidential Information. Employee further acknowledges that, in the course of Employee's employment with the
Company, Employee became familiar with the Company's Confidential Information. Employee recognizes and
acknowledges that the Company's Confidential Information is a valuable, special, and unique asset of the Company's
business, access to and knowledge of which were essential to the performance of Employee's duties. Employee
acknowledges use or disclosure of the Confidential Information outside the performance of Employee's job duties for the
Company would cause harm and/or damage to the Company.
· Employee agrees that Employee will not, directly or indirectly, disclose any Confidential Information to any person,
firm, business, company, corporation, association, or any other entity for any reason or purpose whatsoever except as
otherwise required by law. Employee also agrees that Employee has not and will not use, directly or indirectly, any
Confidential Information for Employee's own purposes or for the benefit of any person, firm, business, company,
corporation, or any other entity (except the Company) under any circumstances. Employee has considered and treated and
shall consider and treat as confidential all Confidential Information in any way relating to the Company's business and
affairs, whether created by Employee or otherwise coming into Employee's possession before, during, or after the
Termination Date. Employee shall not use or attempt to use any Confidential Information in any manner which has the
possibility of injuring or causing loss, whether directly or indirectly, to the Company, its affiliates, subsidiaries, parents, or
customers. Employee agrees all such Confidential Information shall be and remain the sole and exclusive property of the
Company.
1.
Remedies.
Injunctive Relief. Employee acknowledges that any breach of Paragraph 4 or the surviving provisions of the Employment
Agreement referenced in Paragraphs 6, 8, 12 and 13 below will cause the Company to suffer immediate and irreparable
harm and damage for which money alone cannot fully compensate the Company. Employee agrees that upon breach or
threat of imminent breach of any obligation under Paragraphs 4, 6, 8, 12, and/or 13 of this Agreement, the Company shall
be entitled to a temporary restraining order, preliminary injunction, permanent injunction, or other injunctive relief without
posting any bond or other security, and that Employee shall not oppose entry of any of these measures. This Paragraph
shall not be construed as an election of any remedy, or as a waiver of any right available to the Company under this
Agreement or the Colorado law governing this Agreement, including the right to seek damages from Employee.
Attorneys' Fees. In the event of any controversy, claim, or dispute between the parties affecting or relating to Paragraphs 4,
6, 8, 12, and/or 13 of this Agreement, if the Company is required to defend its actions or seek enforcement of the
Agreement, the Company shall be entitled to
a.
b.
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2.
3.
4.
recover all of its attorneys' fees and costs if the Company is successful in its defense or enforcement action.
c.
Separate Provisions. Employee agrees the provisions of Paragraphs 4, 6, 8, 12, and 13 of this Agreement are separate from
and independent of the remainder of this Agreement and that these provisions are specifically enforceable by the Company
notwithstanding any claim by Employee that the Company has violated or breached this Agreement.
Return of Company Property. Employee represents and warrants that Employee returned all Company property to the designated
Company representative on or before Employee's Termination Date, unless otherwise agreed upon. This property includes, but is
not limited to, Company documents and files (in any recorded media, such as papers, computer disks, copies, transparencies, and
microfiche), materials, keys, credit cards, laptops, cellular phone(s), computer disks, and badges. Employee agrees that, to the
extent that Employee possesses any files, data, or information relating in any way to the Company or the Company's business on
any personal computer, Employee will delete the data, files, or information (and will retain no copies in any form).
Unknown Facts. The releases in this Agreement include, but are not limited to, claims of every nature and kind, known or
unknown, suspected or unsuspected. Employee hereby acknowledges that Employee may hereafter discover facts different from, or
in addition to, those which Employee now knows to be or believes to be true with respect to this Agreement, and Employee agrees
that this Agreement and the releases contained herein shall be and remain effective in all respects, notwithstanding such different
or additional facts or the discovery thereof.
Confidentiality of Agreement. Employee agrees to keep this Agreement confidential and will not disclose the existence or the
terms of this Agreement to anyone except to Employee's immediate family, accountants, legal or financial advisors, as part of an
investigation or proceeding conducted by any Government Agency, or as otherwise appropriate or necessary as required by law or
court order. To the extent that Employee discloses the existence or terms of this Agreement to Employee's immediate family,
accountants, or legal or financial advisors, Employee must advise them that they must not disclose the existence or terms of this
Agreement to any person or entity. However, nothing contained herein precludes any individual from communicating with any
Government Agency. If compulsory disclosure is required by a Government Agency, Employee shall provide the Company
immediate notice of the compulsory process and affording the Company the opportunity to obtain any necessary or appropriate
protective orders. Otherwise, in response to inquiries about Employee's employment and this matter, Employee shall state, "My
employment with the Company has ended" and nothing more. The Company agrees to keep this Agreement confidential and will
not disclose the existence or the terms of this Agreement to anyone except the Company's Human Resources Department, Legal
Department, Executive Management Team and Board of Directors, or as otherwise appropriate or necessary as required by law or
court order. To the extent that Company chooses to disclose the existence or terms of this Agreement to the Company's Human
Resources Department, Legal Department, Executive Management Team and Board of Directors, the Company must advise them
that they must not disclose the existence or terms of this Agreement to any person or entity. However, nothing contained herein
precludes any individual from communicating with any Government Agency. If compulsory disclosure is required by a
Government Agency, Company shall provide the Employee immediate notice of the compulsory process and affording the
Employee the opportunity to obtain any necessary or appropriate protective orders.
5.
No Admission of Liability. The Parties agree that nothing contained herein, and no action taken by any Party hereto with regard to
this Agreement, shall be construed as an admission by any Party of liability or of any fact that might give rise to liability for any
purpose whatsoever.
6.
ADEA and Older Workers Benefit Protection Act Release
- 9 -
In addition to the General Release contained in Section 3, Employee knowingly, voluntarily, and irrevocably discharges and
releases Releasees from any claims arising under the Age Discrimination in Employment Act (ADEA). Employee acknowledges
that Employee has been informed pursuant to the federal Older Workers Benefit Protection Act of 1990 as follows:
You are advised to consult with an attorney before signing this Agreement.
You do not waive rights or claims under the federal Age Discrimination in Employment Act that may arise after the date this
Agreement is executed.
You have twenty-one (21) days from the date of receipt of this Agreement to consider this Agreement. You acknowledge that if
you sign this Agreement before the end of the twenty-one (21)-day period, it will be your personal, voluntary decision to do so and
that you have not been pressured to make a decision sooner.
You have seven (7) days after signing this Agreement to revoke the Agreement, and the Agreement will not be effective until that
revocation period has expired. If mailed, the rescission must be postmarked within the seven-day period, properly addressed to:
Heska Corporation
Attn: Human Resources Department 3760 Rocky Mountain Avenue
Loveland, CO 80538
This agreement shall not be effective or enforceable, and no payments or benefits under this Agreement shall be provided to you,
until after the seven (7) day revocation period has expired. You understand that you will not receive any settlement payment if you
void your signature or revoke this Agreement.
7.
Representations and Warranties. Employee represents and warrants as follows:
Employee has read this Agreement and agrees to the conditions and obligations set forth in it;
Employee voluntarily executes this Agreement (i) after having been advised to consult with legal counsel, (ii) after having
had opportunity to consult with legal counsel, and (iii) without being pressured or influenced by any statement or
representation or omission of any person acting on behalf of the Company including, without limitation, the officers,
directors, board members, committee members, employees, agents, and attorneys for the Company;
Employee has no knowledge of the existence of any lawsuit, charge, or proceeding against the Company or any of its
officers, directors, board members, committee members, employees, or agents arising out of or otherwise connected with
any of the matters herein released. In the event that any such lawsuit, charge, or proceeding has been filed, Employee
immediately will take all actions necessary to withdraw or terminate that lawsuit, charge, or proceeding;
Employee has not previously disclosed any information which would be a violation of the confidentiality provisions set
forth herein if such disclosure were to be made after the execution of this Agreement;
Employee has full and complete legal capacity to enter into this Agreement;
a.
b.
c.
d.
e.
- 9 -
f.
g.
Employee admits, acknowledges, and agrees that Employee is not otherwise entitled to the amounts and other
consideration set forth in Paragraph 2, which are good and valuable consideration for this Agreement; and
Employee further admits, acknowledges, and agrees that Employee has been fully and finally paid all wages,
compensation, vacation, bonuses, stock, stock options, or other benefits from the Company which are or could be due to
Employee under the terms of Employee's employment with the Company or otherwise.
Non-Disparagement. Employee agrees not to make to any person any statement that disparages the Company or reflects
negatively upon the Company, including, without limitation, statements regarding the Company's financial condition, business
practices, employment practices, or its predecessors, successors, parents, subsidiaries, officers, directors, employees, affiliates,
agents, or representatives. Company agrees not to make to any person any statement that disparages Employee or reflects
negatively upon the Employee.
Cooperation. Employee agrees to cooperate with and assist the Company with any investigation, lawsuit, arbitration, or other
proceeding to which the Company is subjected. Employee will beavailable for preparation for, and attendance of, hearings,
proceedings, or trial, including pretrial discovery and trial preparation. Employee further agrees to perform all acts and execute
any documents that may be necessary to carry out the provisions of this Paragraph.
Section 409A. This Agreement is intended to comply with Section 409A of the Internal Revenue Code and shall be construed
accordingly. It is the intention of the Parties that payments or benefits payable under this Agreement not be subject to the
additional tax or interest imposed pursuant to Section 409A. To the extent such potential payments or benefits are or could
become subject to Section 409A, the Parties shall cooperate to amend this Agreement with the goal of giving Employee the
economic benefits described herein in a manner that does not result in such tax or interest being imposed. Employee shall, at the
request of the Company, take any reasonable action (or refrain from taking any action), required to comply with any correction
procedure promulgated pursuant to Section 409A.
Severability. If any provision of this Agreement is held illegal, invalid, or unenforceable, such holding shall not affect any other
provisions hereof. In the event any provision is held illegal, invalid or unenforceable, such provision shall be limited so as to
effect the intent of the parties to the fullest extent permitted by applicable law. Any claim by Employee against the Company shall
not constitute a defense to enforcement by the Company of this Agreement.
Enforcement. The Release contained herein does not release any claims for enforcement of the terms, conditions, or warranties
contained in this Agreement. The Parties shall be free to pursue any remedies available to them to enforce this Agreement.
Entire Agreement. This Agreement constitutes the entire agreement between the Parties and supersedes and modifies any and all
prior agreements. This Agreement cannot be modified except in a writing signed by all Parties.
Venue. Applicable Law. and Submission to Jurisdiction. This Agreement shall be interpreted and construed in accordance with the
laws of the State of Colorado, without regard to its conflicts of law provisions. Venue and jurisdiction will be in the Colorado state
or federal courts.
Interpretation. The determination of the terms, and the drafting, of this Agreement has been by mutual agreement after negotiation,
with consideration by and participation of all Parties. Accordingly, the
8.
9.
10.
11.
12.
13.
14.
15.
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Parties agree that rules relating to the interpretation of contracts against the drafter of any particular clause shall not apply in the
case of this Agreement. The term "Paragraph" shall refer to the enumerated paragraphs of this Agreement. The headings contained
in this Agreement are for convenience of reference only and are not intended to limit the scope or affect the interpretation of any
provision of this Agreement.
16.
Assignment. The. Company may assign its rights under this Agreement. Employee cannot assign Employee's rights under this
Agreement without the written consent of the Company. No other assignment is permitted except by written permission of the
Parties
17.
Counterparts. This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the Parties have executed this Separation and Release Agreement on the dates written below.
Employee has carefully read the above and executes it voluntarily, fully understanding and accepting the provisions of this Agreement in
its entirety and without reservation after having had sufficient time and opportunity to consult with legal advisors prior to executing this
Agreement. Employee has been advised to consult with an attorney prior to executing this Agreement. In agreeing to sign this Agreement,
Employee has not relied on any statements or explanation made by the Company. Employee has had at least twenty-one (21) days to
consider this Agreement. Employee understands that if he does not return this Agreement signed by him to the Company upon the
expiration of the twenty-one-day consideration period, this offer will expire. Employee understands that he may revoke and cancel the
Agreement within seven (7) days after signing it by serving written notice upon Company as set forth in Paragraph 10 above.
EMPLOYEE HESKA CORPORATION
/s/ Jason Aroesty /s/ Christopher Sveen
Jason Aroesty Christopher Sveen
General Counsel
December 2, 2020 December 3, 2020
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Date
Date
- 9 -
EMPLOYMENT AGREEMENT
Exhibit 10.31
This Employment Agreement (the "Agreement") is made effective on April 15 , 2020
th
(the "Effective Date") between Heska Corporation, a Delaware corporation ("Heska"),
and Christopher Sveen ("Executive"). Heska and Executive collectively are referred to as the
"Parties" and individually as a "Party."
RECITALS
WHEREFORE, Executive is currently the Executive Vice President, General Counsel and Chief Administrative
Officer, Heska and President, Diamond Animal Health, a wholly- owned subsidiary of Heska.
WHEREFORE, Executive and Heska now wish to enter into this Agreement regarding
the terms of Executive's employment, which shall become effective upon execution.
NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants, and agreements
contained herein, the legal sufficiency of which is acknowledged by the Parties, and intending to be legally bound, the Parties
agree as follows:
1.
Duties and Scope of Employment.
TERMS
th
a. Position and Duties. As of April 15 , 2020, Executive will serve as Executive Vice President, General Counsel
and Chief Administrative Officer, Heska and President, Diamond Animal Health. Executive will render such
business and professional services in the performance of Executive's duties, consistent with Executive's position
within Heska and/or its subsidiaries, as will reasonably be assigned to
Executive by Heska's Board of Directors, Chief Executive Officer, or Executive's supervisor. Executive's duties
will be subject to review and adjustments will be made at the discretion of the Executive's supervisor and
superiors.
b. Obligations. During the Term of Agreement (as defined below), Executive will devote Executive's full attention,
skills, time and business efforts to Heska and/or its subsidiaries. For the duration of the Term of Agreement,
Executive agrees not to actively engage in any other employment, occupation, or consulting activity, for any direct
or indirect remuneration, without the prior approval of the Board or the Corporate Governance Committee of the
Board; provided, however, that Executive may, without the approval of the Board or the Corporate Governance
Committee of the Board, serve in any capacity with any civic, educational, or charitable organization, provided
such services do not interfere with Executive's obligations to Heska.
2.
Term of Agreement.
a. The period of Executive's employment under this Agreement is referred to herein as the "Term of Agreement."
Subject to the provisions for earlier termination of employment in Section 6 below, this Agreement will have an
initial term of twelve
(12) months commencing on the Effective Date. On the 1 anniversary of the Effective Date, and on each annual
anniversary of the Effective Date thereafter, this Agreement automatically will renew for an additional twelve-
month term unless Heska provides Executive with notice of non-renewal at least 120 days prior to the date of
automatic renewal; provided, however, that either Heska or Executive may
terminate Executive's employment immediately at any time subject to the provisions
in Section 6 below.
st
b. Executive may be entitled to severance benefits pursuant to Section 6 below, depending upon the circumstances of
Executive's termination of employment. Upon the termination of Executive's employment for any reason,
Executive will be entitled to payment of all expense reimbursements, and other benefits due to Executive through
Executive's termination date under any Heska-provided or paid plans, policies, and arrangements. Executive
agrees to resign from all positions that Executive holds with Heska and its subsidiaries, without limitation,
immediately following the termination of Executive's employment if the Board so requests.
1.
Compensation.
a. Base Salary. Heska will pay Executive an annual salary of $300,000.00 as compensation for Executive's services
(the "Base Salary"). The Base Salary will be paid periodically in accordance with Heska's normal payroll practices
and will be subject to the usual, required withholdings and deductions. Executive's salary will be subject to review,
and adjustments will be made at the sole discretion of the Compensation Committee of the Board (the
"Committee") and based upon Heska's standard practices.
b. Annual Bonus. During the Term of Agreement, Executive will be eligible to
participate in the Management Incentive Plan ("MIP"), a compensation plan intended to reward near term
performance (i.e. no longer than the coming year) which may be available from time to time at the discretion of the
Committee. MIP Payouts, if any, will accrue and become payable in accordance with the Committee's standard
practices for paying executive incentive compensation, provided, however, that any bonus payable under this
subsection will be payable within two-and-one-half (2-1/2) months after the end of the taxable year to which it
relates or such longer period as may be permitted or required by Treasury regulations in order to avoid application
of Section 409A of the Internal Revenue Code of 1986, as amended (the "Code") to such MIP Payouts. Any MIP
Payouts paid pursuant to this Section will be subject to applicable withholdings and deductions.
2.
Expenses.
a.
In addition to the foregoing, Heska will reimburse Executive for Executive's reasonable out-of-pocket travel,
entertainment, and other expenses, in accordance with Heska's expense reimbursement policies and practices in
effect at the time of the reimbursement request. Executive shall submit such requests within forty-five (45) days of
incurring such expenses.
1.
Employee Benefits.
a. During the Term of Agreement, Executive will be eligible to participate in the benefits offered to other
executives of Heska, in accordance with benefit plans, policies, and arrangements that may exist from time to
time.
2.
Termination and Severance.
a. Termination without Cause or for Good Reason other than In Connection with a Change of Control. If, at any
time, Executive's employment is terminated by Heska without Cause (as defined below), by Executive for Good
Reason (as defined below), or due to Executive's death or Disability (as defined below) or pursuant to Heska's
delivery of notice of non-renewal pursuant to Section 2(a) above, and the termination is not In Connection with a
Change of Control (as defined below), Executive will receive the following, subject to conditions and limitations set
forth in Section 7:
i.
ii.
A payment of an amount equal to six (6) months of Executive's Base Salary, payable in accordance with
Heska's standard payroll practices over the shorter of the following periods (A) in equal installments over
the period beginning on the date of such termination and ending on the one-year anniversary thereof, or (B)
in equal installments on a monthly basis corresponding to the amount Executive would normally receive as
salary each month if Executive were still employed with Heska, with a lump sum of any remaining balance
of the amount specified above on March 15 of the year following the year of termination.
Provided that, within thirty (30) days of termination date, Executive elects continuation coverage under
the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"), Heska shall pay the COBRA premium for coverage for
Executive and Executive's eligible dependents under Heska's Benefit Plans (as defined below) for six (6)
months, or if earlier, until Executive becomes employed by another employer and
eligible for coverage under such other employer's welfare benefit plans (e.g., payments for medical COBRA
premiums will cease when Executive becomes eligible for another employer's medical plan.) For the balance
of the period during which Executive and Executive's eligible dependents are entitled to coverage under
COBRA, Executive shall be entitled to maintain coverage for Executive and Executive's eligible dependents
at Executive's sole expense.
Executive shall notify Heska immediately upon Executive's acceptance of
employment with another employer.
a. Termination without Cause or for Good Reason In Connection with a Change of Control. If, at any time,
Executive's employment is terminated by Heska without Cause or by Executive for Good Reason or pursuant to
Heska's delivery of notice of non-renewal pursuant to Section 2(a) above, and the termination is In Connection with
a Change of Control (as defined below), then, subject to the limitations set forth in this Section 7, Executive will
receive:
i.
ii.
A payment of an amount equal to twelve (12) months of Executive's Base Salary, payable in equal
installments in accordance with the standard payroll schedule over the shorter of the following periods (A)
the period beginning on the date of such termination and ending on the one-year anniversary thereof, or (B)
the period beginning on the date of such termination and ending on March 15 of the year following the year
of termination.
Provided that, within thirty (30) days of termination date, Executive elects continuation coverage under
COBRA, Heska shall pay the COBRA premium for coverage for Executive and Executive's eligible
dependents under Heska's Benefit Plans (as defined below) for twelve (12) months, or if earlier, until
Executive becomes employed by another employer and eligible for coverage under such other employer's
welfare benefit plans (e.g., payments for medical COBRA premiums will cease when Executive becomes
eligible for another employer's medical plan). For the balance of the period during which
Executive and Executive's eligible dependents are entitled to coverage under COBRA, Executive shall be
entitled to maintain coverage for Executive and Executive's eligible dependents at Executive's sole
expense. Executive shall notify Heska immediately upon Executive's acceptance of employment with
another employer.
b. Termination without Good Reason; Termination for Cause. If, at any time, Executive's employment with
Heska terminates voluntarily by Executive without Good Reason or is terminated for Cause by Heska, then (i)
all further vesting of
Executive's outstanding equity awards will terminate immediately, (ii) all payments of compensation by Heska to
Executive hereunder will terminate immediately (except as to amounts already earned), but Executive will be paid
all expense
reimbursements, and other benefits due to Executive through Executive's termination date under any Company-
provided or paid plans, policies, and arrangements, and (iii) Executive will not be entitled to any severance.
c. Excise Tax. In the event that any benefits payable to Executive pursuant to Section 6 of this Agreement
("Termination Benefits") (i) constitute "parachute payments" within the meaning of Section 280G of the Code, or
any comparable successor provisions, and (ii) but for this Section 6(d), would be subject to the excise tax
imposed by Section 4999 of the Code, or any comparable successor provisions (the "Excise Tax"), then Executive's
Termination Benefits hereunder shall be either (A) provided to Executive in full, or (B) provided to Executive as to
such lesser extent which would result in no portion of such benefits being subject to the Excise Tax, whichever of
the foregoing amounts, when taking into account applicable federal, state, local, and foreign income and
employment taxes, the Excise Tax, and any other applicable taxes, results in the receipt by Executive, on an after-
tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be
taxable under the Excise Tax. Unless Heska and Executive otherwise agree in writing, any determination required
under this Section 6(d) shall be made in
writing in good faith by Heska's independent accountants. In the event of a reduction of benefits hereunder,
Executive shall be given the choice of which benefits to reduce. If Executive does not provide written identification
to Heska of which benefits Executive chooses to reduce within ten (10) days after written notice of the accountants'
determination, and Executive has not disputed the accountants' determination, then Heska shall select the benefits
to be reduced. For purposes of making the calculations required by this Section 6(d), the accountants may make
reasonable assumptions and approximations concerning the applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of the Code and other applicable legal authority. Heska and Executive
shall furnish to the accountants such information and documents as the accountants may reasonably request in order
to make a determination under this Section 6(d). Heska shall bear all costs the accountants may reasonably incur in
connection with any calculations contemplated by this Section 6(d).
1.
Conditions to Receipt of Severance; No Duty to Mitigate; Covenants.
a. Separation Agreement and Release of Claims. The receipt of any severance pursuant to Section 6 will be subject
to Executive signing and not revoking a confidential separation agreement and release of claims in a form
reasonably acceptable to Heska. Such agreement will provide (among other things) that Executive will not
disparage Heska, its affiliates, parents, subsidiaries, directors, executive officers, employees, agents, or
representatives. No severance will be paid or provided until the confidential separation agreement and release
agreement becomes effective. No severance will be paid or provided if the Executive's confidential separation
agreement and release agreement is not signed and irrevocable within forty-five (45) days after the Executive's
termination date. If Executive's date of termination and the last day of any applicable statutory revocation period
could fall in two separate taxable years, regardless of when Executive actually executes and delivers the release,
payments will not commence until the later taxable year.
b. Non-Competition. In the event of a termination of Executive's employment that would entitle Executive to the
receipt of severance pursuant to Sections 6(a) or 6(b), or a termination for Cause by Heska, Executive agrees not to
engage in Competition (as defined below) for six (6) months following the termination date. The geographic
scope of this Section 7(b) is the United States of America and Europe. If Executive engages in Competition
within such period, all continuing payments and benefits to which Executive otherwise may be entitled pursuant
to Section 6 will cease immediately.
a. Non-Solicitation. In the event of a termination of Executive's employment that would entitle Executive to the
receipt of severance pursuant to Sections 6(a) or 6(b), or a termination for Cause by Heska, Executive agrees that,
for twelve (12) months following the termination date, Executive, directly or indirectly, whether as employee,
owner, sole proprietor, partner, director, member, consultant, agent, founder, co-venturer, or otherwise, (i) will not
solicit, induce, or influence any person to modify his or her employment or consulting relationship with Heska (the
"No-
Inducement"), and (ii) not intentionally divert business away from Heska by soliciting business from any of
Heska's customers and users who would otherwise
have placed the solicited order with Heska (the "No Solicit"). The geographic scope of this Section 7(c) is the
United States of America and Europe. If Executive breaches the No-Inducement or No Solicit, all continuing
payments and benefits to which Executive otherwise may be entitled pursuant to Section 6 will cease immediately.
b. Remedies. In the event of Executive's breach of Sections 7(b) or 7(c), Heska shall have any and all remedies
available to it in law or in equity, including without limitation the right to seek recovery of any amounts paid under
Section 6 of this Agreement and injunctive relief, specific performance, or any other equitable relief to prevent a
breach and to secure the enforcement of this Section. Injunctive relief may be granted immediately upon the
commencement of any such action, and Heska need not post a bond to obtain temporary or permanent injunctive
relief.
c. No Duty to Mitigate. Executive is under no duty or requirement to mitigate the amount of any payment
contemplated by this Agreement, nor will any earnings that Executive may receive from any other source reduce
any such payment.
1.
Definitions.
a. Benefit Plans. For purposes of this Agreement, "Benefit Plans" means plans,
policies, or arrangements that Heska sponsors (or participates in) and that
immediately prior to Executive's termination of employment provide Executive and Executive's eligible
dependents with medical, dental, or vision benefits. Benefit Plans do not include any other type of benefit
(including, but not limited to, financial counseling, disability, life insurance, or retirement benefits). A requirement
that Heska provide Executive and Executive's eligible dependents with coverage under the Benefit Plans will not
be satisfied unless the coverage is no less favorable than
that provided to Executive and Executive's eligible dependents immediately prior to Executive's termination of
employment.
a. Cause. For purposes of this Agreement, "Cause" shall mean the occurrence of one or more of the following: (i)
conviction of, or an entry of a plea of nolo contendere to, any crime (including one involving moral turpitude),
whether a felony or misdemeanor, or any crime which reflects so negatively on Heska to be detrimental to Heska's
image or interests, or any act of fraud or dishonesty that has such negative reflection upon Heska; (ii) the repeated
commitment of insubordination or refusal to comply with any reasonable request of Heska's Board of Directors,
Chief Executive Officer, or Executive's supervisor related to the scope or performance of Executive's duties; (iii)
possession of any illegal drug on Heska premises or being under the influence of illegal drugs or abusing
prescription drugs or alcohol while on Heska business, attending Heska-sponsored functions, or on Heska premises;
(iv) the gross misconduct or gross negligence in the performance of Executive's responsibilities which, based upon
good faith and reasonable factual investigation of the Board,
demonstrates Executive's unfitness to serve; (v) material breach of Executive's obligations under this Agreement;
or (vi) material breach of any fiduciary duty of Executive to Heska or its subsidiaries,; provided, however, that if
any occurrence under subsections (ii), (iv), (v), and (vi) is reasonably capable of being cured, Heska will provide
notice to Executive describing the nature of such event and Executive will thereafter have thirty (30) days to cure
such event, and if such event is cured within that 30-day period, then grounds will no longer exist for terminating
Executive's employment for Cause; and provided, further, that such cure period will not apply to any subsequent
occurrence of the same event.
b. Change of Control. For purposes of this Agreement, "Change of Control" means
(i) a sale of all or substantially all of Heska's assets, (ii) any merger, consolidation, or other business combination
transaction of Heska with or into another corporation, entity, or person, other than a transaction in which the holders
of at least a majority of the shares of voting capital stock of Heska outstanding immediately prior to such transaction
continue to hold (either by such shares remaining outstanding or by their being converted into shares of voting
capital stock of the surviving entity) a majority of the total voting power represented by the shares of voting capital
stock of Heska (or the surviving entity) outstanding immediately after such transaction, (iii) the direct or indirect
acquisition (including by way of a tender or exchange offer) by any person, or persons acting as a group, of
beneficial ownership or a right to acquire beneficial ownership of shares representing a majority of the voting power
of the then outstanding shares of capital stock of Heska, (iv) a contested election of Directors, as a result of which or
in connection with which the persons who were Directors before such election or their nominees cease to constitute
a majority of the Board, or (v) a dissolution or liquidation of Heska.
c. Competition. For purposes of this Agreement, Executive will be deemed to have engaged in "Competition" if
Executive, without the written consent of the Board or
an authorized officer of any successor company to Heska, directly or indirectly (1) provides services or assistance in
any form to any individual, entity, or company providing veterinary products for the companion animal health
industry or imaging products or services for the veterinary market (a "Restricted Company"), whether such services
or assistance is provided as an employee, consultant, agent, corporate officer, director, or otherwise or (2)
participates in the financing, operation, management, or control of, a Restricted Company. A Restricted Company
includes, without limitation, Zoetis, Inc. Abaxis, Inc. (currently a wholly-owned subsidiary of Zoetis, Inc.), IDEXX
Laboratories, Inc., Sound Technologies, Inc. (currently a unit of Mars, Incorporated), and Zoetis, Inc.
Notwithstanding the foregoing, nothing contained in this Section 8(d) or in Section 7(b) above shall prohibit
Executive from being employed or engaged in a corporate function or senior management position (and holding
commensurate equity interests) in a division of a Restricted Company, so long as such division is not in any way
engaged in providing veterinary products for the companion animal health industry or imaging products or services
for the veterinary market and Executive does not directly or indirectly provide services or assistance to any division
that does provide veterinary products for the companion animal health industry or imaging products or services for
the veterinary market.
a. Disability. For purposes of this Agreement, "Disability" shall mean that, by reason of any medically determinable
physical or mental impairment that can be expected to result in death or can be expected to last for a continuous
period of not less than twelve (12) months, the Executive either (i) is unable to engage in any gainful activity, or
(ii) is receiving income replacement benefits for a period of not less than three (3) months under an accident and
health plan covering Heska employees.
b. Good Reason.
i.
For purposes of this Agreement, "Good Reason" means the occurrence of any of the following without
Executive's express written consent:
1.Executive's officer level with Heska is, or Executive's duties or responsibilities are, materially
diminished relative to Executive's officer level, duties, and responsibilities as in effect immediately
prior to such change;
2.a material diminution in Executive's Base Salary as in effect immediately prior to such diminution;
provided, that an across-the- board reduction in the base compensation and benefits of all other
executive officers of Heska by the same percentage amount (or under the same terms and
conditions) as part of a general base compensation reduction and/or benefit reduction shall not
constitute such a qualifying material diminution;
1.a material change in the geographic location of Executive's principal place of employment such
that the new location is greater than fifty (50) road miles each way from Executive's place of
employment on the Effective Date;
2.any material breach by Heska of any provision of this Agreement; and
3.any acquiring company fails to assume or be bound by the terms of this Agreement in Connection
with a Change of Control;
i.
The aforementioned occurrences shall not be deemed Good Reason unless Executive gives Heska written
notice of the existence of the condition which Executive believes constitutes Good Reason (which notice
must be given within ninety (90) days of the initial existence of the condition) and such condition remains
uncured for a period of thirty (30) days after the date of such notice. An event of Good Reason shall occur
automatically at the expiration of such 30-day period if the relevant condition remains uncured at such
time.
a. In Connection with a Change of Control. For purposes of this Agreement, a
termination of Executive's employment with Heska is "In Connection with a Change of Control" if Executive's
employment is terminated without Cause or for Good Reason during the period beginning three (3) months prior
to a Change of Control and ending eighteen (18) months following a Change of Control.
1.
Confidential Information.
a. Executive acknowledges that Executive has executed Heska's standard employee Confidential Information and
Invention Agreement (the "Confidentiality Agreement"). During the Term of Agreement, and for twenty-four (24)
months after termination of Executive's employment, Executive agrees, if requested by Heska, to execute any
updated versions of Heska's form of employee confidential information agreement as may be required of
substantially all of Heska's executive officers.
2.
Executive's Representations and Warranties.
a. Executive represents and warrants that Executive is not a party to any other employment, non-competition, or other
agreement or restriction which could interfere with the Executive's employment with Heska or Executive's or
Heska's rights and obligations hereunder and that Executive's acceptance of employment with Heska and the
performance of Executive's duties hereunder will not breach the provisions of any contract, agreement, or
understanding to which the Executive is party or any duty owed by the Executive to any other person.
1.
Notices.
a. All notices, requests, demands, and other communications called for hereunder will be in writing and will be
deemed given:
i.
ii.
iii.
iv.
on the date of delivery if delivered personally,
one (1) day after being delivered through a nationally recognized overnight courier service, or
five (5) business days after the date of mailing if sent certified or registered mail.
Notice to Heska shall be sent to its principal place of business with a copy provided by facsimile or
electronic communication to the Chair of the Board of Directors, and notice to Executive will be delivered
personally or sent to Executive's last known address provided to Heska.
2.
Successors and Assigns.
a.
This Agreement will be binding upon and inure to the benefit of (a) the heirs,
executors, and legal representatives of Executive upon Executive's death and
(b) any successor of Heska. Any such Successor (as defined below) of Heska will be deemed substituted for Heska
under the terms of this Agreement for all purposes. For purposes of this Section, "Successor" means any person,
firm, corporation, or other business entity which at any time, whether by purchase, merger, or otherwise, directly or
indirectly, acquires all or substantially all of the assets or business of Heska. None of the rights of Executive to
receive any form of compensation payable pursuant to this Agreement may be assigned or transferred except by will
or the laws of descent and distribution. Any other attempted assignment, transfer, conveyance, or other disposition
of Executive's right to compensation or other benefits will be null and void.
3.
Integration.
a. This Agreement, together with the Confidentiality Agreement, Heska's stock plans, and Executive's stock option
and restricted stock agreements, represents the entire agreement and understanding between the Parties as to the
subject matter herein and supersedes all prior or contemporaneous agreements whether written or oral, including
the Prior Agreement. No waiver, alteration, or modification of any of the provisions of this Agreement will be
binding unless in writing that specifically references this Section and is signed by duly authorized representatives
of the Parties hereto.
4.
Interpretation.
a. Article titles and section headings contained herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this Agreement. The determination of the
terms of, and the drafting of, this Agreement has been by mutual agreement after negotiation, with
consideration by and participation of all Parties. Accordingly, the Parties agree that rules relating to the interpretation
of contracts against the drafter of any particular clause shall not apply in the case of this Agreement.
1.
Waivers.
a. Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the
Party or Parties entitled to the benefit thereof. Any such waiver shall be validly and sufficiently authorized for the
purposes of this Agreement if, as to any Party, it is authorized in writing by an authorized representative of such
Party. The failure of any Party hereto to enforce at any time any provision of this Agreement shall not be
construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part
hereof or the right of any Party thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to constitute a waiver of any other or subsequent breach.
2.
Severability.
a.
If any provision of this Agreement is held illegal, invalid, or unenforceable, such holding shall not affect any
other provisions hereof. In the event any provision is held illegal, invalid, or unenforceable, such provision shall
be limited so as to give effect to the intent of the Parties to the fullest extent permitted by applicable law. Any
claim by Executive against Heska shall not constitute a defense to enforcement by Heska.
3.
Tax Matters.
a. Except as provided in Section 6(d) above, Executive agrees that Executive is responsible for any applicable taxes
of any nature (including any penalties or interest that may apply to such taxes) that are reasonably determined to
apply to any payment made to Executive hereunder (or any arrangement contemplated hereunder), that
Executive's receipt of any benefit hereunder is conditioned on Executive's satisfaction of any applicable
withholding or similar obligations that apply to such benefit, and that any cash payment owed to Executive
hereunder will be reduced to satisfy any such withholding or similar obligations that may apply thereto.
b. Executive acknowledges that no representative or agent of Heska has provided Executive with any tax advice
of any nature, and Executive has consulted with Executive's own legal, tax, and financial advisor(s) as to tax
and related matters concerning the compensation to be received under this Agreement.
4.
Section 409A.
a. This Agreement is intended to comply with Section 409A of the Code, as amended
("Section 409A") and shall be construed accordingly. It is the intention of the parties
that payments or benefits payable under this Agreement not be subject to the additional tax or interest imposed
pursuant to Section 409A. To the extent such potential payments or benefits are or could become subject to Section
409A, the parties shall cooperate to amend this Agreement with the goal of giving Executive the economic benefits
described herein in a manner that does not result in such tax or interest being imposed; provided, however, that no
such amendment shall materially increase the cost to, or impose any liability on Heska with respect to any benefits
contemplated or provided hereunder. Executive shall, at the request of Heska, take any reasonable action (or refrain
from taking any action), required to comply with any correction procedure promulgated pursuant to Section 409A.
a.
If a payment that could be made under this Agreement would be subject to additional taxes and interest under
Section 409A, Heska in its sole discretion may accelerate some or all of a payment otherwise payable under the
Agreement to the time at which such amount is includible in the income of Executive, provided that such
acceleration shall only be permitted to the extent permitted under Treasury Regulation § 1.409A- 3(j)(4)(vii) and the
amount of such acceleration does not exceed the amount permitted under Treasury Regulation § 1.409A-3(j)(vii).
b. No payment to be made under this Agreement shall be made at a time earlier than that provided for in this
Agreement unless such payment is (i) an acceleration of payment permitted to be made under Treasury Regulation §
1.409A-3(j)(4) or (ii) a payment that would otherwise not be subject to additional taxes and interest under Section
409A.
c. The right to each payment described in this Agreement shall be treated as a right to a series of separate payments
and a separately identifiable payment for purposes of Section 409A.
d. For purposes of Section 6 of this Agreement, "termination" (or any similar term) when used in reference to
Executive's employment shall mean "separation from service" with Heska within the meaning of Section 409A(a)
(2)(A)(i) of the Code and applicable administrative guidance issued thereunder, and Executive shall be considered
to have terminated employment with Heska when, and only when,
Executive incurs a "separation from service" with Heska within the meaning of Section 409A(a)(2)(A)(i) of the
Code and applicable administrative guidance issued thereunder.
e.
If Executive qualifies as a "specified employee" within the meaning of Section
409A(a)(2)(B)(i) of the Code and would receive any payment sooner than six
(6) months after Executive's separation from service that, absent the application of this Section 19(f), would be
subject to additional tax imposed pursuant to Section 409A as a result of such status as a specified employee, then
such payment shall instead be payable on the date that is the earliest of (i) six (6) months after
Executive's separation from service, (ii) Executive's death, or (iii) such other date as will not result in such payment
being subject to such additional tax.
1.
Governing Law; Waiver of Jury Trial.
a. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Colorado
without regard to conflict of law principles. The Parties hereto each waive their respective rights to a jury trial of
any and all such claims and causes of action.
2.
Counterparts.
a. This Agreement may be executed in counterparts, and each counterpart will have the same force and effect as an
original and will constitute an effective, binding agreement on the part of each of the undersigned.
[signature page follows]
IN WITNESS WHEREOF, Heska has caused this Employment Agreement to be duly executed by an officer
thereunto duly authorized, and Executive has hereunto set Executive's hand, all as of the day and year first above written.
EXECUTIVE:
/s/ Christopher Sveen
Christopher Sveen
Executive Vice President, General Counsel and Chief Administrative Officer, Heska and President, Diamond Animal Health
HESKA CORPORATION:
/s/ Kevin Wilson
Kevin Wilson
Chief Executive Officer and President
EMPLOYMENT AGREEMENT
Exhibit 10.32
This Employment Agreement (the “Agreement”) is made effective on April 9 , 2020 (the “Effective Date”) between
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Heska Corporation, a Delaware corporation (“Heska”), and Eleanor Baker (“Executive”). Heska and Executive collectively are
referred to as the “Parties” and individually as a “Party.”
RECITALS
WHEREFORE, Executive is currently the Executive Vice President, Managing Director and Chief Operating Officer, scil
animal care company, a wholly-owned subsidiary of Heska.
WHEREFORE, Executive and Heska now wish to enter into this Agreement regarding the terms of Executive’s
employment, which shall become effective upon execution.
NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants, and agreements contained
herein, the legal sufficiency of which is acknowledged by the Parties, and intending to be legally bound, the Parties agree as
follows:
1.
Duties and Scope of Employment.
TERMS
a. Position and Duties. As of April 9 , 2020, Executive will serve as Executive Vice President, Managing Director and
th
Chief Operating Officer, scil animal care company. Executive will render such business and professional services in
the performance of Executive’s duties, consistent with Executive’s position within Heska and/or its subsidiaries, as
will reasonably be assigned to Executive by Heska’s Board of Directors, Chief Executive Officer, or Executive’s
supervisor. Executive’s duties will be subject to review and adjustments will be made at the discretion of the
Executive’s supervisor and superiors.
b. Obligations. During the Term of Agreement (as defined below), Executive will devote Executive’s full attention,
skills, time and business efforts to Heska and/or its subsidiaries. For the duration of the Term of Agreement,
Executive agrees not to actively engage in any other employment, occupation, or consulting activity, for any direct or
indirect remuneration, without the prior approval of the Board or the Corporate Governance Committee of the Board;
provided, however, that Executive may, without the approval of the Board or the Corporate Governance Committee of
the Board, serve in any capacity with any civic, educational, or charitable organization, provided such services do not
interfere with Executive’s obligations to Heska.
2. Term of Agreement.
a. The period of Executive’s employment under this Agreement is referred to herein as the “Term of Agreement.”
Subject to the provisions for earlier termination of employment in Section 6 below, this Agreement will have an initial
term of twelve (12) months commencing on the Effective Date. On the 1 anniversary of the Effective Date, and on
each annual anniversary of the Effective Date thereafter, this Agreement automatically will renew for an additional
twelve-month term unless Heska provides Executive with notice of non-renewal at least 120 days prior to the date of
automatic renewal; provided, however, that either Heska or Executive may terminate Executive’s employment
immediately at any time subject to the provisions in Section 6 below.
st
b. Executive may be entitled to severance benefits pursuant to Section 6 below, depending upon the circumstances of
Executive’s termination of employment. Upon the termination of Executive’s employment for any reason, Executive
will be entitled to payment of all expense reimbursements, and other benefits due to Executive through Executive’s
termination date under any Heska-provided or paid plans, policies, and arrangements. Executive agrees to resign from
all positions that Executive holds with Heska and its subsidiaries, without limitation, immediately following the
termination of Executive’s employment if the Board so requests.
3. Compensation.
a. Base Salary. Heska will pay Executive an annual salary of $300,000.00 as compensation for Executive’s services
(the “Base Salary”). The Base Salary will be paid periodically in accordance with Heska’s normal payroll practices
and will be subject to the usual, required withholdings and deductions. Executive’s salary will be subject to review,
and adjustments will be made at the sole discretion of the Compensation Committee of the Board (the “Committee”)
and based upon Heska’s standard practices.
b. Annual Bonus. During the Term of Agreement, Executive will be eligible to participate in the Management Incentive
Plan (“MIP”), a compensation plan intended to reward near term performance (i.e. no longer than the coming year)
which may be available from time to time at the discretion of the Committee. MIP Payouts, if any, will accrue and
become payable in accordance with the Committee’s standard practices for paying executive incentive compensation,
provided, however, that any bonus payable under this subsection will be payable within two-and-one-half (2-1/2)
months after the end of the taxable year to which it relates or such longer period as may be permitted or required by
Treasury regulations in order to avoid application of Section 409A of the Internal Revenue Code of 1986, as amended
(the “Code”) to such MIP Payouts. Any MIP Payouts paid pursuant to this Section will be subject to applicable
withholdings and deductions.
4. Expenses.
a.
In addition to the foregoing, Heska will reimburse Executive for Executive’s reasonable out-of-pocket travel,
entertainment, and other expenses, in accordance with Heska’s expense reimbursement policies and practices in effect
at the time of the reimbursement request. Executive shall submit such requests within forty-five (45) days of incurring
such expenses.
5. Employee Benefits.
a. During the Term of Agreement, Executive will be eligible to participate in the benefits offered to other executives of
Heska, in accordance with benefit plans, policies, and arrangements that may exist from time to time.
6. Termination and Severance.
a. Termination without Cause or for Good Reason other than In Connection with a Change of Control. If, at any
time, Executive’s employment is terminated by Heska without Cause (as defined below), by Executive for Good
Reason (as defined below), due to Executive’s death or Disability (as defined below) or pursuant to Heska’s delivery
of notice of non-renewal pursuant to Section 2(a) above, and the termination is not In Connection with a Change of
Control (as defined below), Executive will receive the following, subject to conditions and limitations set forth in
Section 7:
i.
ii.
A payment of an amount equal to six (6) months of Executive’s Base Salary, payable in accordance with
Heska’s standard payroll practices over the shorter of the following periods (A) in equal installments over the
period beginning on the date of such termination and ending on the one-year anniversary thereof, or (B) in
equal installments on a monthly basis corresponding to the amount Executive would normally receive as salary
each month if Executive were still employed with Heska, with a lump sum of any remaining balance of the
amount specified above on March 15 of the year following the year of termination.
Provided that, within thirty (30) days of termination date, Executive elects continuation coverage under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), Heska shall pay the
COBRA premium for coverage for Executive and Executive’s eligible dependents under Heska’s Benefit Plans
(as defined below) for six (6) months, or if earlier, until Executive becomes employed by another employer
and eligible for coverage under such other employer’s welfare benefit plans (e.g., payments for medical
COBRA premiums will cease when Executive becomes eligible for another employer’s medical plan.) For the
balance of the period during which Executive and Executive’s eligible dependents are entitled to coverage
under COBRA, Executive shall be entitled to maintain coverage for Executive and Executive’s eligible
dependents at Executive’s sole expense.
Executive shall notify Heska immediately upon Executive’s acceptance of employment with another employer.
iii.
If Executive’s principal place of employment is outside the United States on the termination date, Heska will
pay or reimburse the reasonable out-of-pocket costs of Executive’s relocation to the United States, if Executive
so elects within thirty (30) days of the termination date.
b. Termination without Cause or for Good Reason In Connection with a Change of Control. If, at any time,
Executive’s employment is terminated by Heska without Cause or by Executive for Good Reason, or pursuant to
Heska’s delivery of notice of non-renewal pursuant to Section 2(a) above, and the termination is In Connection with a
Change of Control (as defined below), then, subject to the limitations set forth in this Section 7, Executive will
receive:
i.
ii.
A payment of an amount equal to twelve (12) months of Executive’s Base Salary, payable in equal installments
in accordance with the standard payroll schedule over the shorter of the following periods (A) the period
beginning on the date of such termination and ending on the one-year anniversary thereof, or (B) the period
beginning on the date of such termination and ending on March 15 of the year following the year of
termination.
Provided that, within thirty (30) days of termination date, Executive elects continuation coverage under
COBRA, Heska shall pay the COBRA premium for coverage for Executive and Executive’s eligible
dependents under Heska’s Benefit Plans (as defined below) for twelve (12) months, or if earlier, until
Executive becomes employed by another employer and eligible for coverage under such other employer’s
welfare benefit plans (e.g., payments for medical COBRA premiums will cease when Executive becomes
eligible for another employer’s medical plan). For the balance of the period during which Executive and
Executive’s eligible dependents are entitled to coverage under COBRA, Executive shall be entitled to maintain
coverage for Executive and Executive’s eligible dependents at Executive’s sole expense. Executive shall notify
Heska immediately upon Executive’s acceptance of employment with another employer.
iii.
If Executive’s principal place of employment is outside the United States on the termination date, Heska will
pay or reimburse the reasonable out-of-pocket costs of Executive’s relocation to the United States, if Executive
so elects within thirty (30) days of the termination date.
c. Termination without Good Reason; Termination for Cause. If, at any time, Executive’s employment with Heska
terminates voluntarily by Executive without Good Reason or is terminated for Cause by Heska, then (i) all further
vesting of Executive’s outstanding equity awards will terminate immediately, (ii) all payments
of compensation by Heska to Executive hereunder will terminate immediately (except as to amounts already earned),
but Executive will be paid all expense reimbursements, and other benefits due to Executive through Executive’s
termination date under any Company-provided or paid plans, policies, and arrangements, and (iii) Executive will not
be entitled to any severance.
d. Excise Tax. In the event that any benefits payable to Executive pursuant to Section 6 of this Agreement
(“Termination Benefits”) (i) constitute “parachute payments” within the meaning of Section 280G of the Code, or
any comparable successor provisions, and (ii) but for this Section 6(d), would be subject to the excise tax imposed by
Section 4999 of the Code, or any comparable successor provisions (the “Excise Tax”), then Executive’s Termination
Benefits hereunder shall be either (A) provided to Executive in full, or (B) provided to Executive as to such lesser
extent which would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing
amounts, when taking into account applicable federal, state, local, and foreign income and employment taxes, the
Excise Tax, and any other applicable taxes, results in the receipt by Executive, on an after-tax basis, of the greatest
amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under the Excise Tax.
Unless Heska and Executive otherwise agree in writing, any determination required under this Section 6(d) shall be
made in writing in good faith by Heska’s independent accountants. In the event of a reduction of benefits hereunder,
Executive shall be given the choice of which benefits to reduce. If Executive does not provide written identification to
Heska of which benefits Executive chooses to reduce within ten (10) days after written notice of the accountants’
determination, and Executive has not disputed the accountants’ determination, then Heska shall select the benefits to
be reduced. For purposes of making the calculations required by this Section 6(d), the accountants may make
reasonable assumptions and approximations concerning the applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of the Code and other applicable legal authority. Heska and Executive shall
furnish to the accountants such information and documents as the accountants may reasonably request in order to
make a determination under this Section 6(d). Heska shall bear all costs the accountants may reasonably incur in
connection with any calculations contemplated by this Section 6(d).
7.
Conditions to Receipt of Severance; No Duty to Mitigate; Covenants.
a. Separation Agreement and Release of Claims. The receipt of any severance pursuant to Section 6 will be subject to
Executive signing and not revoking a confidential separation agreement and release of claims in a form reasonably
acceptable to Heska. Such agreement will provide (among other things) that Executive will not disparage Heska, its
affiliates, parents, subsidiaries, directors, executive officers, employees, agents, or representatives. No severance will
be paid or provided until the confidential separation agreement and release agreement
becomes effective. No severance will be paid or provided if the Executive’s confidential separation agreement and
release agreement is not signed and irrevocable within forty-five (45) days after the Executive’s termination date. If
Executive's date of termination and the last day of any applicable statutory revocation period could fall in two separate
taxable years, regardless of when Executive actually executes and delivers the release, payments will not commence
until the later taxable year.
b. Non-Competition. In the event of a termination of Executive’s employment that would entitle Executive to the
receipt of severance pursuant to Sections 6(a) or 6(b), or a termination for Cause by Heska, Executive agrees not to
engage in Competition (as defined below) for six (6) months following the termination date. The geographic scope of
this Section 7(b) is the United States of America and Europe. If Executive engages in Competition within such period,
all continuing payments and benefits to which Executive otherwise may be entitled pursuant to Section 6 will cease
immediately.
c. Non-Solicitation. In the event of a termination of Executive’s employment that would entitle Executive to the receipt
of severance pursuant to Sections 6(a) or 6(b), or a termination for Cause by Heska, Executive agrees that, for twelve
(12) months following the termination date, Executive, directly or indirectly, whether as employee, owner, sole
proprietor, partner, director, member, consultant, agent, founder, co-venturer, or otherwise, (i) will not solicit, induce,
or influence any person to modify his or her employment or consulting relationship with Heska (the “No-
Inducement”), and (ii) not intentionally divert business away from Heska by soliciting business from any of Heska’s
customers and users who would otherwise have placed the solicited order with Heska (the “No Solicit”). The
geographic scope of this Section 7(c) is the United States of America and Europe. If Executive breaches the No-
Inducement or No Solicit, all continuing payments and benefits to which Executive otherwise may be entitled
pursuant to Section 6 will cease immediately.
d. Remedies. In the event of Executive’s breach of Sections 7(b) or 7(c), Heska shall have any and all remedies
available to it in law or in equity, including without limitation the right to seek recovery of any amounts paid under
Section 6 of this Agreement and injunctive relief, specific performance, or any other equitable relief to prevent a
breach and to secure the enforcement of this Section. Injunctive relief may be granted immediately upon the
commencement of any such action, and Heska need not post a bond to obtain temporary or permanent injunctive
relief.
e. No Duty to Mitigate. Executive is under no duty or requirement to mitigate the amount of any payment contemplated
by this Agreement, nor will any earnings that Executive may receive from any other source reduce any such payment.
8. Definitions.
a. Benefit Plans. For purposes of this Agreement, “Benefit Plans” means plans, policies, or arrangements that Heska
sponsors (or participates in) and that immediately prior to Executive’s termination of employment provide Executive
and Executive’s eligible dependents with medical, dental, or vision benefits. Benefit Plans do not include any other
type of benefit (including, but not limited to, financial counseling, disability, life insurance, or retirement benefits). A
requirement that Heska provide Executive and Executive’s eligible dependents with coverage under the Benefit Plans
will not be satisfied unless the coverage is no less favorable than that provided to Executive and Executive’s eligible
dependents immediately prior to Executive’s termination of employment.
b. Cause. For purposes of this Agreement, “Cause” shall mean the occurrence of one or more of the following: (i)
conviction of, or an entry of a plea of nolo contendere to, any crime (including one involving moral turpitude),
whether a felony or misdemeanor, or any crime which reflects so negatively on Heska to be detrimental to Heska’s
image or interests, or any act of fraud or dishonesty that has such negative reflection upon Heska; (ii) the repeated
commitment of insubordination or refusal to comply with any reasonable request of Heska’s Board of Directors, Chief
Executive Officer, or Executive’s supervisor related to the scope or performance of Executive’s duties; (iii) possession
of any illegal drug on Heska premises or being under the influence of illegal drugs or abusing prescription drugs or
alcohol while on Heska business, attending Heska-sponsored functions, or on Heska premises; (iv) the gross
misconduct or gross negligence in the performance of Executive’s responsibilities which, based upon good faith and
reasonable factual investigation of the Board, demonstrates Executive’s unfitness to serve; (v) material breach of
Executive’s obligations under this Agreement; or (vi) material breach of any fiduciary duty of Executive to Heska or
its subsidiaries,; provided, however, that if any occurrence under subsections (ii), (iv), (v), and (vi) is reasonably
capable of being cured, Heska will provide notice to Executive describing the nature of such event and Executive will
thereafter have thirty (30) days to cure such event, and if such event is cured within that 30-day period, then grounds
will no longer exist for terminating Executive’s employment for Cause; and provided, further, that such cure period
will not apply to any subsequent occurrence of the same event.
c. Change of Control. For purposes of this Agreement, “Change of Control” means (i) a sale of all or substantially all
of Heska’s assets, (ii) any merger, consolidation, or other business combination transaction of Heska with or into
another corporation, entity, or person, other than a transaction in which the holders of at least a majority of the shares
of voting capital stock of Heska outstanding immediately prior to such transaction continue to hold (either by such
shares remaining outstanding or by their being converted into shares of voting capital stock of the surviving entity) a
majority of the total voting power represented by the shares of voting capital stock of Heska (or the surviving entity)
outstanding immediately after such transaction, (iii) the direct or indirect acquisition (including by way of a tender or
exchange offer) by any
person, or persons acting as a group, of beneficial ownership or a right to acquire beneficial ownership of shares
representing a majority of the voting power of the then outstanding shares of capital stock of Heska, (iv) a contested
election of Directors, as a result of which or in connection with which the persons who were Directors before such
election or their nominees cease to constitute a majority of the Board, or (v) a dissolution or liquidation of Heska.
d. Competition. For purposes of this Agreement, Executive will be deemed to have engaged in “Competition” if
Executive, without the written consent of the Board or an authorized officer of any successor company to Heska,
directly or indirectly (1) provides services or assistance in any form to any individual, entity, or company providing
veterinary products for the companion animal health industry or imaging products or services for the veterinary
market (a “Restricted Company”), whether such services or assistance is provided as an employee, consultant, agent,
corporate officer, director, or otherwise or (2) participates in the financing, operation, management, or control of, a
Restricted Company. A Restricted Company includes, without limitation, Zoetis, Inc. Abaxis, Inc. (currently a wholly-
owned subsidiary of Zoetis, Inc.), IDEXX Laboratories, Inc., Sound Technologies, Inc. (currently a unit of Mars,
Incorporated), and Zoetis, Inc. Notwithstanding the foregoing, nothing contained in this Section 8(d) or in Section
7(b) above shall prohibit Executive from being employed or engaged in a corporate function or senior management
position (and holding commensurate equity interests) in a division of a Restricted Company, so long as such division
is not in any way engaged in providing veterinary products for the companion animal health industry or imaging
products or services for the veterinary market and Executive does not directly or indirectly provide services or
assistance to any division that does provide veterinary products for the companion animal health industry or imaging
products or services for the veterinary market.
e. Disability. For purposes of this Agreement, “Disability” shall mean that, by reason of any medically determinable
physical or mental impairment that can be expected to result in death or can be expected to last for a continuous
period of not less than twelve (12) months, the Executive either (i) is unable to engage in any gainful activity, or (ii) is
receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan
covering Heska employees.
f. Good Reason.
i.
For purposes of this Agreement, “Good Reason” means the occurrence of any of the following without
Executive’s express written consent:
1.Executive’s officer level with Heska is, or Executive’s duties or responsibilities are, materially
diminished relative to Executive’s officer level, duties, and responsibilities as in effect immediately
prior to such change;
2.a material diminution in Executive’s Base Salary as in effect immediately prior to such diminution;
provided, that an across-the-board reduction in the base compensation and benefits of all other
executive officers of Heska by the same percentage amount (or under the same terms and conditions)
as part of a general base compensation reduction and/or benefit reduction shall not constitute such a
qualifying material diminution;
3.a material change in the geographic location of Executive's principal place of employment such that the
new location is greater than fifty (50) road miles each way from Executive's place of employment on
the Effective Date;
4.any material breach by Heska of any provision of this Agreement; and
5.any acquiring company fails to assume or be bound by the terms of this Agreement In Connection with
a Change of Control;
ii.
The aforementioned occurrences shall not be deemed Good Reason unless Executive gives Heska written
notice of the existence of the condition which Executive believes constitutes Good Reason (which notice must
be given within ninety (90) days of the initial existence of the condition) and such condition remains uncured
for a period of thirty (30) days after the date of such notice. An event of Good Reason shall occur
automatically at the expiration of such 30-day period if the relevant condition remains uncured at such time.
g. In Connection with a Change of Control. For purposes of this Agreement, a termination of Executive’s employment
with Heska is “In Connection with a Change of Control” if Executive’s employment is terminated without Cause or
for Good Reason during the period beginning three (3) months prior to a Change of Control and ending eighteen (18)
months following a Change of Control.
9. Confidential Information.
a. Executive acknowledges that Executive has executed Heska’s standard employee Confidential Information and
Invention Agreement (the “Confidentiality Agreement”). During the Term of Agreement, and for twenty-four (24)
months after termination of Executive’s employment, Executive agrees, if requested by Heska, to execute any updated
versions of Heska’s form of employee confidential information agreement as may be required of substantially all of
Heska’s executive officers.
10. Executive’s Representations and Warranties.
a. Executive represents and warrants that Executive is not a party to any other employment, non-competition, or other
agreement or restriction which could interfere with the Executive’s employment with Heska or Executive’s or Heska’s
rights and
obligations hereunder and that Executive’s acceptance of employment with Heska and the performance of Executive’s
duties hereunder will not breach the provisions of any contract, agreement, or understanding to which the Executive is
party or any duty owed by the Executive to any other person.
11. Notices.
a. All notices, requests, demands, and other communications called for hereunder will be in writing and will be deemed
given:
i.
ii.
iii.
iv.
on the date of delivery if delivered personally,
one (1) day after being delivered through a nationally recognized overnight courier service, or
five (5) business days after the date of mailing if sent certified or registered mail.
Notice to Heska shall be sent to its principal place of business with a copy provided by facsimile or electronic
communication to the Chair of the Board of Directors, and notice to Executive will be delivered personally or
sent to Executive’s last known address provided to Heska.
12. Successors and Assigns.
a. This Agreement will be binding upon and inure to the benefit of (a) the heirs, executors, and legal representatives of
Executive upon Executive’s death and
(b) any successor of Heska. Any such Successor (as defined below) of Heska will be deemed substituted for Heska under the
terms of this Agreement for all purposes. For purposes of this Section, “Successor” means any person, firm, corporation, or other
business entity which at any time, whether by purchase, merger, or otherwise, directly or indirectly, acquires all or substantially
all of the assets or business of Heska. None of the rights of Executive to receive any form of compensation payable pursuant to
this Agreement may be assigned or transferred except by will or the laws of descent and distribution. Any other attempted
assignment, transfer, conveyance, or other disposition of Executive’s right to compensation or other benefits will be null and
void.
13. Integration.
a. This Agreement, together with the Confidentiality Agreement, Heska’s stock plans, and Executive’s stock option and
restricted stock agreements, represents the entire agreement and understanding between the Parties as to the subject
matter herein and supersedes all prior or contemporaneous agreements whether written or oral, including the Prior
Agreement. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in
writing that specifically references this Section and is signed by duly authorized representatives of the Parties hereto.
14. Interpretation.
a. Article titles and section headings contained herein are inserted for convenience of reference only and are not intended
to be a part of or to affect the meaning or interpretation of this Agreement. The determination of the terms of, and the
drafting of, this Agreement has been by mutual agreement after negotiation, with
consideration by and participation of all Parties. Accordingly, the Parties agree that rules relating to the interpretation
of contracts against the drafter of any particular clause shall not apply in the case of this Agreement.
15. Waivers.
a. Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the
Party or Parties entitled to the benefit thereof. Any such waiver shall be validly and sufficiently authorized for the
purposes of this Agreement if, as to any Party, it is authorized in writing by an authorized representative of such Party.
The failure of any Party hereto to enforce at any time any provision of this Agreement shall not be construed to be a
waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of any
Party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to
constitute a waiver of any other or subsequent breach.
16. Severability.
a.
If any provision of this Agreement is held illegal, invalid, or unenforceable, such holding shall not affect any other
provisions hereof. In the event any provision is held illegal, invalid, or unenforceable, such provision shall be limited
so as to give effect to the intent of the Parties to the fullest extent permitted by applicable law. Any claim by Executive
against Heska shall not constitute a defense to enforcement by Heska.
17. Tax Matters.
a. Except as provided in Section 6(d) above, Executive agrees that Executive is responsible for any applicable taxes of
any nature (including any penalties or interest that may apply to such taxes) that are reasonably determined to apply to
any payment made to Executive hereunder (or any arrangement contemplated hereunder), that Executive’s receipt of
any benefit hereunder is conditioned on Executive’s satisfaction of any applicable withholding or similar obligations
that apply to such benefit, and that any cash payment owed to Executive hereunder will be reduced to satisfy any such
withholding or similar obligations that may apply thereto.
b. Executive acknowledges that no representative or agent of Heska has provided Executive with any tax advice of any
nature, and Executive has consulted with Executive’s own legal, tax, and financial advisor(s) as to tax and related
matters concerning the compensation to be received under this Agreement.
18. Section 409A.
a. This Agreement is intended to comply with Section 409A of the Code, as amended (“Section 409A”) and shall be
construed accordingly. It is the intention of the parties that payments or benefits payable under this Agreement not be
subject to the additional tax or interest imposed pursuant to Section 409A. To the extent such potential payments or
benefits are or could become subject to Section 409A, the
parties shall cooperate to amend this Agreement with the goal of giving Executive the economic benefits described
herein in a manner that does not result in such tax or interest being imposed; provided, however, that no such
amendment shall materially increase the cost to, or impose any liability on Heska with respect to any benefits
contemplated or provided hereunder. Executive shall, at the request of Heska, take any reasonable action (or refrain
from taking any action), required to comply with any correction procedure promulgated pursuant to Section 409A.
b.
If a payment that could be made under this Agreement would be subject to additional taxes and interest under Section
409A, Heska in its sole discretion may accelerate some or all of a payment otherwise payable under the Agreement to
the time at which such amount is includible in the income of Executive, provided that such acceleration shall only be
permitted to the extent permitted under Treasury Regulation § 1.409A-3(j)(4)(vii) and the amount of such acceleration
does not exceed the amount permitted under Treasury Regulation § 1.409A-3(j)(vii).
c. No payment to be made under this Agreement shall be made at a time earlier than that provided for in this Agreement
unless such payment is (i) an acceleration of payment permitted to be made under Treasury Regulation § 1.409A-3(j)
(4) or (ii) a payment that would otherwise not be subject to additional taxes and interest under Section 409A.
d. The right to each payment described in this Agreement shall be treated as a right to a series of separate payments and
a separately identifiable payment for purposes of Section 409A.
e. For purposes of Section 6 of this Agreement, “termination” (or any similar term) when used in reference to
Executive’s employment shall mean “separation from service” with Heska within the meaning of Section 409A(a)(2)
(A)(i) of the Code and applicable administrative guidance issued thereunder, and Executive shall be considered to
have terminated employment with Heska when, and only when, Executive incurs a “separation from service” with
Heska within the meaning of Section 409A(a)(2)(A)(i) of the Code and applicable administrative guidance issued
thereunder.
f.
If Executive qualifies as a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code and
would receive any payment sooner than six (6) months after Executive’s separation from service that, absent the
application of this Section 19(f), would be subject to additional tax imposed pursuant to Section 409A as a result of
such status as a specified employee, then such payment shall instead be payable on the date that is the earliest of
(i) six (6) months after Executive’s separation from service, (ii) Executive’s death, or (iii) such other date as will not
result in such payment being subject to such additional tax.
19. Governing Law; Waiver of Jury Trial.
a. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Colorado
without regard to conflict of law principles. The Parties hereto each waive their respective rights to a jury trial of any
and all such claims and causes of action.
20. Counterparts.
a. This Agreement may be executed in counterparts, and each counterpart will have the same force and effect as an
original and will constitute an effective, binding agreement on the part of each of the undersigned.
[signature page follows]
IN WITNESS WHEREOF, Heska has caused this Employment Agreement to be duly executed by an officer thereunto
duly authorized, and Executive has hereunto set Executive’s hand, all as of the day and year first above written.
EXECUTIVE:
/s/ Eleanor Baker
Eleanor Baker
Executive Vice President, Managing Director and Chief Operating Officer, scil animal care company
HESKA CORPORATION:
/s/ Kevin Wilson
Kevin Wilson
Chief Executive Officer and President
Exhibit 21.1
SUBSIDIARIES OF COMPANY
Diamond Animal Health, Inc., an Iowa corporation
Heska AG, a corporation incorporated under the laws of Switzerland
Heska Canada, Limited, a limited company organized under the laws of British Columbia, Canada
Heska Australia Pty Ltd, a proprietary company organized under the laws of Australia and registered in Victoria
Optomed SAS, a corporation incorporated under the laws of France
CVM Diagnostico Veterinario, S.L., a corporation incorporated under the laws of Spain
CVM Ecografia, S.L., a corporation incorporated under the laws of Spain
SCI A. Duchene Immo, a real estate company formed under the laws of France
Heska GmbH, a corporation incorporated under the laws of Germany
scil animal care company GmbH, a corporation incorporated under the laws of Germany
scil animal care company France sarl, a limited liability company organized under the laws of France
scil animal care company SL., a limited liability company organized under the laws of Spain
scil animal care company Ltd., a limited company organized under the laws of the United Kingdom
scil animal care company Srl, a limited liability company organized under the laws of Italy
scil Diagnostics Sdn Bhd, a public limited company organized under the laws of Malaysia
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated February 26, 2021, with respect to the consolidated financial statements and internal control over financial
reporting included in the Annual Report of Heska Corporation and subsidiaries on Form 10-K for the year ended December 31, 2020. We
consent to the incorporation by reference of said reports in the Registration Statements of Heska Corporation on Forms S-8 (File Nos.
333‑30951, 333-34111, 333-47129, 333-72155, 333-38138, 333-39448, 333-55112, 333-82096, 333-89738, 333-102871, 333-106679, 333-
112701, 333-115995, 333-123196, 333-132916, 333-141737, 333-194120, 333-194122, 333-195734, 333-204036, 333-211567, 333-225112,
333-238006, 333-238008) and on Form S-3 (File No. 333-238005).
/s/ Grant Thornton LLP
Denver, Colorado
February 26, 2021
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Heska Corporation’s Registration Statements on Form S-8 (File Nos. 333-30951, 333-34111,
333-47129, 333-72155, 333-38138, 333-39448, 333-55112, 333-82096, 333-89738, 333-102871, 333-106679, 333-112701, 333-115995,
333-123196, 333-132916, 333-141737, 333-194120, 333-194122, 333-195734, 333-204036, 333-211567, 333-225112, 333-238006, and
333-238008) and Form S-3 (File No. 333-238005) of our report dated February 28, 2020, except for the effects of the change in segments
described in Notes 2 and 18, as to which the date is February 26, 2021, relating to accompanying balance sheet as of December 31, 2019 and
the related statements of income, comprehensive income, stockholders' equity, and cash flows for the years ended December 31, 2019 and
2018, the related notes (collectively referred to as the “financial statements”) of Heska Corporation, which appears in this Annual Report on
Form 10-K.
/s/ Plante & Moran, PLLC
Denver, Colorado
February 26, 2021
Exhibit 31.1
I, Kevin S. Wilson, certify that:
CERTIFICATION
I have reviewed this annual report on Form 10-K of Heska Corporation;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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; and
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: February 26, 2021
/s/ Kevin S. Wilson
KEVIN S. WILSON
Chief Executive Officer and President
(Principal Executive Officer)
I, Catherine Grassman, certify that:
CERTIFICATION
Exhibit 31.2
I have reviewed this annual report on Form 10-K of Heska Corporation;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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; and
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: February 26, 2021
/s/ Catherine Grassman
CATHERINE GRASSMAN
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Kevin S. Wilson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
the Annual Report of Heska Corporation on Form 10-K for the year ended December 31, 2020 fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all
material respects the financial condition and results of operations of Heska Corporation, to the best of my knowledge.
Dated: February 26, 2021
By:
Name:
Title:
/s/ Kevin S. Wilson
KEVIN S. WILSON
Chief Executive Officer and President
I, Catherine Grassman, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that the Annual Report of Heska Corporation on Form 10-K for the year ended December 31, 2020 fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all
material respects the financial condition and results of operations of Heska Corporation, to the best of my knowledge.
Dated: February 26, 2021
By:
Name:
Title:
/s/ Catherine Grassman
CATHERINE GRASSMAN
Executive Vice President, Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Heska Corporation and will be retained by Heska
Corporation and furnished to the Securities and Exchange Commission or its staff upon request.