UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
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
77-0192527
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
3760 Rocky Mountain Avenue Loveland,
80538
Colorado
(Address of principal executive offices)
(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
Trading Symbol
Name of each exchange on which registered
Common stock, $0.01 par value
HSKA
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 ☒
Accelerated filer ☐
Non-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.
☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the
correction of an error to previously issued financial statements.
☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2022, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of voting common
stock held by non-affiliates of the registrant was approximately $930,762,767 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.
10,876,018 shares of the Registrant's Public Common Stock, $.01 par value, were outstanding at February 16, 2023.
___________________________________
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 2023 Annual Meeting of Stockholders to be held on or about May 3, 2023.
TABLE OF CONTENTS
Page
PART I
1
Item 1.
Business
2
Item 1A.
Risk Factors
12
Item 1B.
Unresolved Staff Comments
30
Item 2.
Properties
30
Item 3.
Legal Proceedings
31
Item 4.
Mine Safety Disclosures
31
PART II
32
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity
32
Securities
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
50
Item 8.
Financial Statements and Supplementary Data
51
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
112
Item 9A.
Controls and Procedures
112
Item 9B.
Other Information
113
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
113
PART III
114
Item 10.
Directors, Executive Officers and Corporate Governance
114
Item 11.
Executive Compensation
114
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
114
Item 13.
Certain Relationships and Related Transactions, and Director Independence
115
Item 14.
Principal Accountant Fees and Services
115
PART IV
116
Item 15.
Exhibits and Financial Statement Schedules
116
Item 16.
Form 10-K Summary
120
Signatures
121
HESKA, scil, ALLERCEPT, HemaTrue, Solo Step, Element DC, Element HT5, Element POC, Element i, Element i+, Element COAG,
Element COAG+, Element DC5X and Element RC, Element RCX, Element RC3X, Element AIM, 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, which is a
unit of Merck & Co., Inc., in the United States and is a registered trademark of Heska Corporation in other countries. Nu.Q is a registered
trademark of Belgian Volition SPRL. This Annual Report on Form 10-K also refers to trademarks and trade names of other organizations.
-i-
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.
-ii-
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:
•
our business is subject to risk based on global economic conditions, including inflationary pressures and lingering
economic effects of the COVID-19 pandemic;
•
the success of third parties in marketing our products;
•
our reliance on third party suppliers and collaborative partners;
•
our dependence on key personnel and increased human capital costs;
•
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 2023 proxy statement on Schedule 14A, as of the date of the Schedule 14A.
-1-
PART I
Item 1.
Business
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.
Overview
We sell, manufacture, market and support diagnostic and specialty products and solutions for veterinary practitioners. Our portfolio includes
point-of-care (“POC”) diagnostic laboratory instruments and consumables including rapid assay diagnostic products and digital cytology
services; POC digital imaging diagnostic products; local and cloud-based data services; practice information management software (“PIMS”)
and related software and support; reference laboratory testing; allergy testing and immunotherapy; heartworm preventive products; and
vaccines. Our primary focus is on supporting companion animal veterinarians in providing care to their patients.
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 Germany, Italy,
Spain, France, Switzerland, Australia and Malaysia. The Company's strategic focus on POC diagnostic laboratory and imaging products is
included in both segments. The North America segment also includes the contract manufacturing of vaccines and pharmaceutical products
and a small veterinary laboratory, and the International segment includes our PIMS business and veterinary laboratories.
For the year ended December 31, 2022, our North America and International segments represent approximately 60% and
40% of our total revenue, respectively.
Acquisitions have been, and we expect that they will continue to be, meaningful to our organization’s growth and results of
operations. In 2020, we completed the acquisition of scil animal care company GmbH ("scil"). Like Heska, scil focuses on
POC diagnostic solutions for companion animal veterinarians, primarily in Europe. The scil acquisition represented a key
milestone in the Company's history, creating an international veterinary diagnostics company with leadership positions in key
geographic markets including Germany, France, Italy, Spain, Canada, and Malaysia.
We believe that companion animal veterinarians look to us and other diagnostic providers to provide a portfolio of solutions
for their varied diagnostic needs. The scil acquisition significantly expanded the geographies that we serve and our customer
base with regard to our core offerings: POC laboratory and imaging diagnostic solutions. In addition, we have deployed
capital to invest in other elements of our diagnostic portfolio further described under products and services and as follows:
•
In 2021, we:
◦
acquired BiEsse A-Laboratorio die Analisi Veterinarie S.r.l. (“BSA”), based in Milan, Italy, which expanded
our reference laboratory capabilities;
◦
acquired 65% of the equity of Biotech Laboratories U.S.A. LLC ("Biotech"), a developer of rapid assay
diagnostic testing. In 2022, we incrementally increased our ownership to 75.50%; and
◦
acquired Lacuna Diagnostics, Inc. ("Lacuna”) to expand our diagnostic offering to include digital cytology services.
-2-
•
On January 3, 2022, we acquired Veterinärmedizinisches Dienstleistungszentrum (VetZ) GmbH (“VetZ”). VetZ is a
European leader in veterinary PIMS.
•
On March 28, 2022, we entered into a Master License and Product Supply Agreement with Belgian Volition SRL to develop and
commercialize a POC cancer screening and monitoring solution for dogs and cats under an exclusive arrangement.
•
On January 3, 2023, the Company completed the acquisition of MBio Diagnostics, Inc., d/b/a LightDeck Diagnostics
("LightDeck"). The LightDeck acquisition represents a meaningful increase in our intellectual property portfolio as well
as our manufacturing and research and development capabilities.
Major Products and Services
We offer a portfolio of veterinary POC (stationary and portable) laboratory diagnostic instruments for testing blood and other
biological substances, for diagnostic imaging and for other uses, including those described below. We also market and sell
consumable supplies and services for these instruments. Our portfolio of veterinary instruments includes the following:
POC Laboratory
Blood Chemistry. Element DC® Veterinary Chemistry Analyzer (the "Element DC") uses consumable, dry slide technology for blood
chemistry and electrolyte analysis. 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 DCXTM Veterinary
Chemistry Analyzer (the "Element DCX"), launched during 2021, is a chemistry analyzer that is positioned between the economical Element
DC and the higher-capacity Element DC5x. The Element DC, Element DCX, and Element DC5x utilize the same consumable test slides. We
are supplied with the Element DC, Element DCX, and Element DC5x, as well as the affiliated test slides and supplies under a contractual
agreement with a single third-party supplier. These products are sold in the North America segment and Australia.
We also market and distribute the Element RC®, Element RCXTM, and Element RC3XTM compact chemistry systems that utilize load-and-
go rotors (consumables) for blood chemistry and electrolyte analysis. Rotors of various test menus are available, providing results in some
cases for up to 21 tests. We also market and distribute the scil Element DC®, compact chemistry system that utilizes load-and-go
consumables for blood chemistry. We are supplied with the Element RC, the Element RCX, the Element RC3X, and the scil Element DC
under contractual agreements with third-party suppliers. These products are sold and marketed in the International segment.
Hematology. The Element HT5® Hematology Analyzer (the "HT5") is a five-part hematology analyzer that measures key parameters such
as white blood cell count, red blood cell count, platelet count and hemoglobin levels in animals, and it is sold in both the North America and
International segments. We also market the scil Vet abc Plus +TM, a four-part hematology analyzer, in the International segment.
Blood Gases and Electrolytes. The Element POC® Blood Gas & Electrolyte Analyzer is a handheld, wireless analyzer which
delivers rapid blood gas, electrolyte, metabolite and basic blood chemistry testing utilizing consumable test cards. We market this
in the North America segment. In our International segment, mainly Europe, we market and sell Edan blood gas products.
-3-
Immunodiagnostics. The Element i+® Immunodiagnostic Analyzer (the "Element i+"), which launched during 2020, and as of
January 3, 2023 is part of our proprietary product offering, utilizes patented fluorescence waveguide immunoassay technology with
laser evanescent illumination for in-clinic detection of Total T4, Cortisol, Progesterone, cCRP and cTSH. The Element i+ analyzer
system has capability to run multiplexed assays in a consumable microfluidic cartridge, offering potential future menu expansions
in endocrine, inflammatory, infectious disease, and other diagnostic target areas. We anticipate launching our proprietary cancer
screen on the Element i+ platform. We market this in both the North America and International segments. The Cube-VetTM is a
compact benchtop analyzer used for the determination of various immunodiagnostic parameters sold throughout Europe.
Coagulation. The Element COAG® Veterinary Analyzer (the "Element COAG") is a compact cartridge-based system used for
coagulation and specialty testing. We currently offer five consumable test cartridges on the Element COAG. The Element
COAG+® Veterinary Analyzer is a lightweight, handheld, battery-powered, wifi-capable cartridge-based system used for
coagulation testing. We market this in both the North America and International segments.
Urine and Fecal Diagnostics. The Element AIM® Veterinary Analyzer (the "Element AIM") is a novel, proprietary automated fecal and
urine combination POC laboratory analyzer launched in 2021. The Element AIM analyzes images using artificial intelligence that can
be presented for rapid viewing during the patient visit, eliminating manual sample processing and time-consuming microscopic slide
review. Cloud image capture and continuous machine learning software capabilities allow identification, classification, and
quantitation improvements. We market this in both the North America and International segments.
Digital Cytology. The HeskaView™ Telecytology service provides in-clinic automated microscopic slide scanning and computing
equipment that is seamlessly integrated with an online, on-demand network of board-certified clinical pathologists available 24 hours
a day, 7 days a week, 365 days a year in North America. Patient samples can be evaluated, and a comprehensive pathology report
returned to the veterinarian quickly, expediting patient diagnosis and treatment and elevating overall patient care.
Rapid Assay Diagnostics. We sell rapid POC tests to detect antigens and antibodies associated with infectious and parasitic diseases of
animals. The trūRapid™ line of lateral flow tests are single-use consumables that are fast, accurate, and convenient for veterinarians.
There are over 20 different tests available for use, but only marketed in countries with respective regulatory approval, to detect antigens
and antibodies for a variety of infectious and parasitic diseases. Both individual and multiplex tests are available to give clinics flexibility in
testing options. trūRapids™ can be used on a variety of samples, including feces, whole blood, serum, or plasma.
POC Imaging and Informatics
Digital Radiography. We sell equipment, including digital radiography detectors and related accessories for use in digital
radiography imaging diagnostics in both of our segments. With this hardware, we also provide licensed embedded software,
support, data hosting, warranty and other services. CloudDRTM solutions bring digital radiography detectors, acquisition
workstations and acquisition software together to produce, review, archive and share radiographic image studies for our
veterinary customers. We also sell mobile digital radiography products, primarily for equine use, such as the Cuattro Hub, a
mobile digital radiography acquisition console that is capable of operating as a general wireless x-ray imager and as the
control and display for DentiPodTM, an intraoral dental sensor, and SonoPodTM, a wireless ultrasound.
Ultrasound Systems. We sell ultrasound products, including affiliated probes and peripherals, with varying features and
corresponding price points from various suppliers in both of our segments.
-4-
Other Imaging Systems. We sell CT (computed tomography) and MRI (magnetic resonance imaging) products with
varying features and corresponding price points in our International segment.
Diagnostic Data and Support. CloudbankTM is an automatic, secure, web-based image storage solution designed to interface with the
imaging products we sell. HeskaView+TM is a Picture Archival and Communications Systems (PACS) for web or local viewing, reporting,
planning and email sharing of studies on Internet-enabled devices, including personal computers, tablet devices and smartphones.
SupportCloudTM is a support package including call center voice and remote diagnostics, recovery and other services, such as the provision
of warranty-related loaner units. Access and operation between our imaging devices, CloudbankTM and SupportCloudTM is supported by the
acquisition software used in the equipment we sell. The aforementioned solutions are available in both of our segments.
HeskaView and Heska’s Data Capture Utility (DCU) are PIMS applications for POC 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 PIMS platforms used throughout North America.
scil vIP® is software that enables connectivity for POC devices in our International segment. The software can be used as
independent practice information software or as middleware to connect POC equipment to PIMS throughout Europe. It
further provides a web interface allowing users to access the software easily.
VetZ is the name of our PIMS business. VetZ’s signature software offering is the “easyVET” product which is sold via license to veterinary practices and
combines practice management, image management, communication and other functionality. VetZ also provides recurring support service (including
updates, upgrades, and helpdesk) after sale. In addition, VetZ provides “easyIMAGE”, a PACS software package as part of easyVET as well as on a stand-
alone basis, digital radiography systems (sourced from Heska), “vetsXL” which is connectivity software between veterinary practices and laboratory,
insurance management and other providers to veterinary clinics, and “petsXL” which facilitates communication between veterinary clinics and pet owners.
These software packages are offered primarily in Europe.
Heartworm Preventive Products
We have an agreement with Merck Animal Health granting Merck Animal Health the non-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.
Allergy Products and Services
Allergies are common in companion animals. Clinical symptoms of allergies are variable, but often manifest as persistent and
serious skin disease in dogs and cats. Management of allergic disease is clinically problematic, as there are a large number of
allergens that may give rise to these conditions. ALLERCEPT® Definitive Allergen Panels are used to determine the specific
allergens to which an animal, such as a dog, cat or horse, is reacting. The test results often serve as the basis for prescription
ALLERCEPT® Therapy Shots and ALLERCEPT® Therapy Drops. Our veterinary laboratories in Loveland, Colorado and
Fribourg, Switzerland both offer blood testing using our ALLERCEPT® Definitive Allergen Panels.
-5-
Other Vaccines and Pharmaceuticals ("OVP")
We manufacture biological and pharmaceutical products for a number of other animal health companies in our facility in Des
Moines, Iowa. We manufacture products for livestock and companion animals. Our offerings range from providing a portfolio
of 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.
We developed a line of bovine vaccines that are regulated by the U.S. Department of Agriculture ("USDA"). In January
2015, we signed a long-term Master Supply Agreement related to these vaccines with Elanco Animal Health, Inc.
("Elanco"), which terminates on June 17, 2023.
Marketing, Sales and Customer Support
The acceptance of our products and solutions by veterinarians is critical to our success. In both of our segments, we sell and market
our core products and solutions to veterinarians through our internal marketing organization, our field sales organization, a telephone
sales force and independent third-party distributors. In our North America segment, our OVP products are marketed and sold by third
parties under third-party labels. We market and sell outside our key countries through third-party veterinary diagnostic laboratories
and independent third-party distributors. As of December 31, 2022, our customer facing sales, installed base support and utilization
organization consisted of 156 and 187 individuals in our North America and International segments, respectively.
Manufacturing
The majority of our revenue is derived from sales of products manufactured by third parties. Third parties manufacture our veterinary
instruments, including affiliated consumables and supplies. Our acquisition of LightDeck represented an investment in our manufacturing
capabilities. Following our acquisition of LightDeck, we own the manufacturing rights to the Element i+ analyzer and related consumables.
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. We currently manufacture our canine heartworm prevention product,
our allergy treatment products and 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, third-party collaboration arrangements 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 and solutions. We believe that our active
-6-
participation in scientific networks and our reputation for investing in research enhance our ability to develop and acquire new
products and solutions. Our acquisition of LightDeck expanded our internal research and development capabilities.
Intellectual Property
We rely upon various forms of intellectual property, including trade secrets, patents, trademarks, copyrights, know-how,
continuing technological innovations, and licenses and other proprietary rights to develop and maintain our competitive
position. Our various agreements with third party manufacturers for POC products provide obligations to protect our
intellectual property, as well as intellectual property associated with our products. The proprietary technologies of our OVP
products are primarily protected through trade secret protection of, for example, our manufacturing processes in this area.
We actively seek patent protection both in the U.S. and abroad. Our issued patent portfolios primarily relate to allergy and
diagnostic technologies. As of December 31, 2022, we owned, co-owned or had rights to one issued U.S. patent expiring in
April 2024 and had one pending U.S. patent application. Our corresponding foreign patent portfolio as of December 31, 2022
included one issued patent in Canada expiring in August 2024.
We also have obtained exclusive and non-exclusive licenses for numerous other patents held by academic
institutions and for-profit companies. Our material licenses include our exclusive license to develop and
commercialize the Nu.Q® POC cancer screening and monitoring solution for dogs and cats.
Seasonality
We do not experience significant seasonal fluctuations in our sales throughout the year.
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, FDA and the EPA 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:
•
USDA. Vaccines and certain single use, POC diagnostics are considered veterinary biologics and are therefore
regulated by the Center for Veterinary Biologics, or CVB, of the USDA. 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.
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•
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.
•
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 may
need to 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, EPA 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 Conformité Européene (CE) Marking for certain POC laboratory instruments and 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.
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The heartworm and allergy products previously discussed which have received regulatory approval in the U.S. and/or
elsewhere are summarized below:
Products
Country
Regulated
Agency
Status
ALLERCEPT Allergy Treatment Sets
U.S.
Yes
USDA
Licensed
Canada
Yes
CCVB
Licensed
SOLO STEP CH
U.S.
Yes
USDA
Licensed
EU
No-in most countries
CCVB
Licensed
Canada
Yes
SOLO STEP FH
U.S.
Yes
USDA
Licensed
Canada
Yes
CCVB
Licensed
TRI-HEART Plus Heartworm Preventive
U.S.
Yes
FDA
Licensed
Hong Kong
Yes
AFCD
Licensed
Macau
Yes
IACM
Licensed
Heartworm Antigen Test Kit
U.S.
Yes
USDA
Licensed
Competition
Our market is intensely competitive. Our competitors include animal health companies and major pharmaceutical companies that
have animal health divisions as well as human health companies. We also compete with independent, third-party distributors and
suppliers, including distributors and suppliers who sell products under their own private labels. In the POC diagnostic testing market,
our major competitors include IDEXX Laboratories, Inc. ("IDEXX") and Zoetis Inc. ("Zoetis"). Each of IDEXX and Zoetis has a larger
veterinary product and service offering than we do and a large sales infrastructure network and a well-established brand name. The
primary business of IDEXX, like ours, is veterinary diagnostics while the primary business of Zoetis is veterinary pharmaceuticals.
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 include C.H. Boehringer Sohn AG & Co. KG (Boehringer Ingelheim), CEVA Santé Animale, Elanco, Merck Animal
Health, Sanofi, Vétoquinol S.A., and Virbac S.A. 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.
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Human Capital Resources
As of December 31, 2022, we employed approximately 808 persons, 428 in North America and 380 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 53% women and 47% men with 44% of our U.S. management team (defined as Director, Vice President,
Senior Vice President and Executive Vice President) represented by women.
We believe that the current and future ability to execute on our 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 stockholder
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 work from
home policies for employees with the ability to work remotely, along with targeted on-site attendance for employees whose job
requires their physical presence. 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. We anticipate easing restrictions
implemented during the height of the pandemic and continuing limited return to work procedures throughout 2023. Internationally, we
continue to abide by local and country specific governmental requirements and follow local authority recommendations.
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).
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Information About Our Executive Officers
Our executive officers and their ages as of February 28, 2023 are as follows:
Name
Age
Position
Kevin S. Wilson
50
Chief Executive Officer and President
Catherine Grassman
47
Executive Vice President, Chief Financial Officer
Nancy Wisnewski, Ph.D.
60
Executive Vice President, Chief Operating Officer
Steven M. Eyl
57
Executive Vice President, Chief Commercial Officer, and President, scil animal care company
Christopher Sveen
40
Executive Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary,
Heska and President, Diamond Animal Health
Eleanor Baker
38
Executive Vice President, Managing Director and Chief Operating Officer scil animal care company
Anthony Providenti
56
Executive Vice President, Corporate Development
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 and software 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. 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. Dr. Wisnewski will step down from her current position effective March 31, 2023 and will remain with the Company in the position of
Chief Science Advisor to the CEO, but will no longer serve as an executive officer as of such time.
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.
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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 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.
Anthony Providenti was appointed Executive Vice President, Corporate Development in September 2021. Mr. Providenti brings over 25 years
of transactional experience and over 15 years of veterinary industry experience to this role. Prior to Heska, Mr. Providenti held key roles at
prominent animal health companies, having served most recently as Executive Vice President, Corporate Development at Covetrus, Inc. He
joined Covetrus in February 2019 as part of its formation after serving as Vice President, Corporate Business Development Group, Animal
Health and Medical at Henry Schein, Inc. (NASDAQ: HSIC). Before joining Henry Schein, Mr. Providenti acted as a corporate attorney at
Gibson, Dunn & Crutcher LLP. Mr. Providenti holds a Juris Doctor from Fordham University School of Law, where he served as an editor and
a member of the Fordham Law Review and a BS in Accounting from Lehigh University.
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
•
Our business is subject to risk based on global economic conditions, including inflationary pressures and lingering
economic effects of the COVID-19 pandemic.
•
If third parties with 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 rely substantially on third party suppliers and rights under contracts with third parties. The loss of products, or rights under
contracts, 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.
•
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.
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•
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.
•
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, investments, licenses, joint ventures, 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 regulatory requirements could cause significant losses from
affected inventory and the loss of market share.
•
Our future revenues depend on successful product development, direct manufacturing, contract manufacturing,
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 200 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.
-13-
•
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.
•
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
Our business is subject to risk based on global economic conditions, including inflationary pressures and
lingering economic effects of the COVID-19 pandemic.
Macroeconomic, global inflationary pressures and pandemic-related disruptions could have a material adverse effect on our
business, financial condition, results of operations and cash flows. Our veterinarians, their customers and the companion
animals they serve could be affected by continuing local and global inflationary pressures, lingering economic effects of the
COVID-19 pandemic, further or unexpected economic recessionary fears, increased political instability and threats of war and
could suffer from increased borrowing costs that limit discretionary consumer spending, which could lead to decreased pet
visits, demand for our products and delayed companion animal diagnostic testing and treatment.
The extent to which the COVID-19 pandemic will cause lingering economic effects on our business, results of operation and financial
condition is difficult to predict and depends on numerous rapidly evolving factors, such as the severity and transmission rate of the virus, the
emergence and spread of variants, infection rates in areas where we operate, the extent and effectiveness of containment actions, including
the continued availability and effectiveness of vaccines in the markets where we operate, the impact of actions taken by governmental
authorities and other third parties in response to the pandemic, and the impact of these and other factors on our employees, customers, and
suppliers. We are also monitoring the effects of the COVID-19 pandemic on the operation of veterinary clinics, consumer discretionary
spending on their pets’ health and wellbeing, research and development trends regarding animal health vis a vis human health, and the
ability of our sales staff to travel and our manufacturing staff to operate in their normal capacities. However, the effect of the COVID-19
pandemic on the foregoing issues and numerous other potential issues is difficult to predict, both in the short-term and in the long-term, and
any one of them could cause a material adverse effect on our business, results of operation and financial condition. Global economic
conditions and the COVID-19 pandemic could also have the effect of heightening other risk factors described in this report.
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If third parties with substantial marketing rights for certain 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 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 2019, Merck Animal Health failed to market, sell and support our heartworm preventive product,
which resulted in depressed PVD 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.
We rely substantially on third party suppliers and rights under contracts with third parties. The loss of products, or rights under
contracts, 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 POC laboratory instruments and consumable supplies for these instruments, for our imaging products and related
software and services, for key components of our POC 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 POC laboratory instruments and our digital radiography solutions, post-termination, 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.
-15-
•
Loss of exclusivity. In the case of our POC 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.
•
Supply chain constraints in raw materials to suppliers. Our suppliers rely on sourcing raw materials, instrument components and
other items necessary to produce the supply of products we offer our customers. Supply chain constraints faced by our suppliers
may delay a supplier’s ability to produce our products, which could create an interruption in our ability to fulfill orders.
•
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 POC 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.
•
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
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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 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, 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
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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.
We also expect that we may incur increased compensation expenses and higher-than-normal employee turnover as we
attempt to attract and retain skilled employees during a macro working environment where qualified labor is in short supply,
job-mobility is high in part because of remote working arrangements, and the benefits of company culture and personal
relationships are more difficult to realize outside of the traditional office setting.
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 POC diagnostic testing market, our major competitors include IDEXX and
Zoetis. 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 Animal Health, Sanofi, Vétoquinol S.A. and Virbac S.A. may be marketing or
developing products 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. 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.
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
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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 our products primarily to
or through veterinarians. The acceptance of our products by veterinarians is critical to our success. Changes in our ability 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 POC 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 customers 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.
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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:
•
Increased competition from global market competitors;
•
uncertain political and economic climates, including as a result of the conflict between Russia and the Ukraine;
•
fluctuations in exchange rates, such as the strengthening of the U.S. Dollar, that may increase the volatility of foreign-
based revenue and expense;
•
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 and cybersecurity laws in foreign countries, which may subject our data collection, storage and
processing to different and more expansive requirements 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.
We may face costly legal disputes, including disputes related to our intellectual property or technology or
that of our suppliers or collaborators.
We have faced, and may face in the future, 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. Insurance coverage may not cover any costs required to litigate a legal dispute or an unfavorable ruling or 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 contractual rights or patents issued to us or our collaborative partners,
to protect trade secrets or know-how owned by us or our collaborative partners, or to
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determine the enforceability, scope and validity of our contractual rights or 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 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
$135.9 million at December 31, 2022 and $118.8 million at December 31, 2021. There can be no assurance that future goodwill impairments
will not occur if projected financial results are not met, or otherwise.
We regularly evaluate, and we intend to pursue, acquisitions, investments, licenses, joint ventures, 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, our acquisitions of Lacuna, BiEsseA, and Biotech in 2021, our acquisition of VetZ in
2022, and our acquisition of LightDeck in 2023. 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 stockholder 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
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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.
We make investments into licenses, third parties, and contracts with legal, development and commercial rights and obligations. These investments
may not produce positive results, economic or strategic value, or any benefits and may decline in value or have no value.
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
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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.
Our future revenues depend on successful product development, direct manufacturing, contract manufacturing,
commercialization and/or market acceptance, any of which can be slower than we expect or may not occur.
The product development and regulatory approval and maintenance process for many of our current and 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.
Even if we are successful in the development of a product or obtain rights to a product from a third party supplier, we may
not be able to, ourselves or through a third party, manufacture such product or continue to manufacture such product on
an ongoing basis necessary to realize economic value or service customers, or manufacture such product economically or
to the standard necessary to realize economic value or service customers.
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 and components, 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;
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•
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.
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.
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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, and disclosure of personal information is demanding. There is frequent imposition of new and changing
requirements and enforcement risks, particularly as more U.S. states enact comprehensive privacy laws, including Colorado, which recently
passed the Colorado Privacy Act, effective July 2023. In addition, our customers, employees and suppliers expect that we will protect their
personal information. Any actual or perceived cyberattack, unauthorized access or acquisition of customer, employee or supplier data, or our
failure to comply with federal, state, local and foreign privacy laws, such as the European Union’s General Data Protection Regulation
(“GDPR”) and the Health Insurance Portability and Accountability Act, could result in lost sales, extensive remediation costs, and legal liability
including severe penalties, regulatory action and reputational harm. The GDPR became effective in 2018, for example, and requires
companies to meet enhanced requirements regarding the processing of personal data, and provides data subjects with various rights,
including the right 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 implementation of reasonable technical, administrative, and physical safeguards, and our efforts and
investments in technology to secure our ecosystem, no computer network or system can ever be 100% secure. Given the sophisticated and
evolving threat landscape, system disruptions or data incidents can occur and result in the compromise or misappropriation of personal or
confidential information. In addition, in the event of a data incident, failure to comply with applicable security requirements or timely rectify a
security issue may result in fines and notice obligations to regulators, consumers, or third parties, 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 our payment processing vendors without
negotiation. Such changes in fees and operational requirements may result in the 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. However, the costs related to
significant security breaches or disruptions could be material and exceed the limits of the cybersecurity insurance we maintain against such
risks, and given the increase in cyberattacks, cybersecurity insurance providers are increasingly raising premiums while narrowing the scope
of coverage. 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 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.
As of December 31, 2022, we had an accumulated deficit of $168.5 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.
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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.
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
year ended December 31, 2022, the closing price of our common stock has ranged from a low of $60.21 to a high of
$171.74, and the closing price of our common stock on February 16, 2023 was $83.41 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;
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•
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.
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 Stockholder (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
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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. In February 2021, our board of directors waived the application
of any NOL transfer restrictions contained in our Certificate of Incorporation with respect to the issuance and transfer of the shares of
common stock in our March 2021 public offering, and any subsequent and further transfer of any such shares, to the extent such restrictions
would otherwise have been applicable thereto. In July 2022, our board of directors granted a waiver to a non-affiliated stockholder with
respect to the acquisition of shares by such stockholder in reliance on receipt of certain representations and covenants from such
stockholder, to the extent such restrictions would have otherwise been applicable thereto. This waiver can be withdrawn with 90 days of
notice to the stockholder. 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 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 200 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 200 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 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
-28-
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
•
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.
-29-
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.
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. On February 8, 2023, we signed a
10-year lease for a new facility in Loveland of approximately 60,000 square feet to replace the current building, which will commence
in November 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. We also lease a building in Maryland that is used for research, development and
manufacturing. Following the acquisition of LightDeck on January 3, 2023, we lease approximately 65,000 square feet at a
manufacturing facility in Longmont, Colorado, and approximately 31,000 square feet at a facility in Boulder, Colorado.
-30-
Our principal international administrative and research and development activities are located in Germany, France, Spain, Canada,
Italy and Malaysia. In Germany, we own an office space and a warehouse that are approximately 45,000 and 15,000 square feet,
respectively, and lease a showroom that totals approximately 3,000 square feet. In addition, in Germany, we lease approximately
25,000 square feet at a facility for VetZ's administrative and research and development activities. In Spain and Malaysia, we lease
office spaces and warehouses. In Canada, we lease an office space. In Italy, we own an office space, warehouse, and showroom
and lease an office and a reference lab facility. In France, we own an office space and lease an office space and warehouse.
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, 2022, 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.
-31-
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 16, 2023, there were approximately 177 holders of record of our Public Common Stock. 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, 2022:
Total Number of
Approximate Dollar
Shares Purchased as
Value of Shares that
Total Number
Average Price
Part of Publicly
May Yet be Purchased
of Shares
Paid per Share
Announced Plans or
Under Plans or
Period
Purchased (1)
(1)
Programs
Programs
October 2022
—
$
—
—
$
—
November 2022
717
$
64.41
—
$
—
December 2022
—
$
—
—
$
—
717
$
64.41
—
$
—
(1) Shares of Public Common Stock we purchased between October 1, 2022 and December 31, 2022 were solely for the cancellation of shares of stock withheld for related tax obligations.
-32-
STOCK PRICE PERFORMANCE GRAPH
The following graph provides a comparison over the five-year period ended December 31, 2022 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:
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Dec-22
Heska Corporation
$
100
$
107
$
120
$
182
$
228
$
77
NASDAQ Medical Supplies Index
$
100
$
107
$
142
$
180
$
216
$
141
NASDAQ Composite Total Return Index
$
100
$
97
$
133
$
192
$
235
$
159
Item 6.
[Reserved]
-33-
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 Part II. 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 margin, 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 27, 2023, 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."
On January 3, 2023, the Company completed the acquisition of MBio Diagnostics, Inc., d/b/a LightDeck Diagnostics
("LightDeck") which represents a meaningful increase in our intellectual property portfolio as well as our manufacturing and
research and development capabilities. Refer to Note 4 - Investments in Unconsolidated Affiliates and Note 19 - Subsequent
Events to the consolidated financial statements included in Part II. Item 8 of this Annual Report on Form 10-K.
A discussion of significant changes from the periods ending December 31, 2021 compared to December 31, 2020 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, 2021.
-34-
Overview
We sell, manufacture, market and support diagnostic and specialty products and solutions for veterinary practitioners. Our
portfolio includes POC diagnostic laboratory instruments and consumables including rapid assay diagnostic products; digital
cytology services; POC digital imaging diagnostic products; local and cloud-based data services; PIMS and related software
and support; reference laboratory testing; allergy testing and immunotherapy; heartworm preventive products; and vaccines.
Our primary focus is on supporting companion animal veterinarians in providing care to their patients.
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 Germany, Italy, Spain, France, Switzerland, Australia and Malaysia. The product groups described below
are offered in both segments unless otherwise noted.
POC 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 and reference laboratory sales. Revenue from our POC laboratory
consumables, a recurring revenue stream, 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. The majority of our POC 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. Major
products in this area include our instruments for chemistry, hematology, blood gas, urine fecal, and immunodiagnostic testing and
their affiliated operating consumable as well as our rapid assay diagnostic tests and digital cytology services. More recently, the
Company has developed and/or acquired product rights pertaining to our urine fecal and immunodiagnostic platforms.
Radiography is the largest product offering in POC Imaging and Informatics, which includes digital and computed radiography, ultrasound
instruments, and diagnostic data and support. 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 contrast to the POC diagnostic laboratory placements discussed above where ongoing consumable revenue is often a
larger component of economic value as a given instrument is used. In 2022, the Company acquired VetZ, a provider of PIMS and other
clinical practice-related applications, which are primarily offered in our International segment.
Pharmaceuticals, Vaccines and Diagnostic ("PVD") revenue primarily includes 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 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
-35-
managed there. Our OVP revenue includes vaccines and pharmaceuticals produced for third parties. OVP is attributable
only to the North America segment.
Our products are ultimately sold primarily to or through veterinarians. 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 78% and 22%, respectively, of revenue for the year ended December 31,
2022 and 72% and 28%, respectively, for both the years ended December 31, 2021 and December 31, 2020.
Effects of Certain Industry and Economic Factors and Trends on Results of Operations
Industry Trends - We continue to see demand for companion animal healthcare, which supported solid growth for POC diagnostic products and services
compared to very strong prior year. We have a healthy liquidity position with cash of $156.6 million as of December 31, 2022. We continue to be active in
mergers and acquisitions and other pursuits that support our growth in the companion animal healthcare space.
Supply Chain and Logistics - Due to our dependence on global suppliers, manufacturers and shipping routes, we are experiencing
intermittent delays in receiving supply, increased shipping costs and some targeted increase in materials cost. Because our long-term
subscription programs, the commercial program of our largest revenue category, POC laboratory instruments and consumables,
include annual price adjustments at a greater of 4% or the consumer price index, we are able to mitigate some of these costs in this
highly inflationary environment. Further, we have worked closely with our suppliers to evaluate and identify products with long-lead
time parts and provided advanced purchase notification and have secured products in advance to further mitigate supply disruption.
Inflation, Foreign Currency, Interest Rate Risk Impact - Refer to Item 7A. Quantitative and Qualitative Disclosures about
Market Risk of this form 10-K.
Critical Accounting Estimates
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 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. Therefore, these are considered to be our critical accounting policies and estimates.
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.
-36-
The Company has financial liabilities resulting from our business combinations, including contingent consideration
arrangements and notes payable. We estimate the fair value of these financial liabilities using Level 3 inputs that require the
use of numerous assumptions and a probability-weighted outcome analysis, which may change based on the occurrence of
future events and lead to increased or decreased operating income in future periods. Estimating the fair value at an
acquisition date and in subsequent periods involves significant judgments, including projecting the future financial and product
development performance of the acquired businesses. The Company will update its assumptions each reporting period based
on new developments and record such amounts at fair value based on the revised assumptions. Changes in the fair value of
these financial liabilities are recorded in the Consolidated Statements of Loss within general and administrative expenses.
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.
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.
-37-
In the fourth quarter we elected to bypass the qualitative approach and instead proceeded directly to assessing the fair value of all of
our reporting units and comparing the fair value of each reporting unit to the carrying value to determine if any impairment exists. We
estimate the fair values of the reporting units using an income approach based on discounted forecasted cash flows. The income
approach involves making significant assumptions about the extent and timing of future cash flows, revenue growth rates, which
incorporate the continued growth of some of the existing products as well as success rates of newly launched or future launches of
products, and discount rates. Model assumptions are based on our projections and best estimates, using appropriate and customary
market participant assumptions. Changes in forecasted cash flows or the discount rate would affect the estimated fair values of our
reporting units and could result in a goodwill impairment loss in a future period. We also utilize a market approach utilizing the
guideline public company method or guideline transaction method, or both, which incorporate subjectivity of management in
determining appropriate comparable companies and transactions. Finally, the weighting of each approach is highly subjective and
could result in an impairment in a future period. No impairment existed based on the analysis. We performed qualitative
assessments in the fourth quarters of 2021 and 2020 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 a $0.2 million impairment of our intangible assets during the year ended December
31, 2022. We had no impairments of our intangible assets during the years ended December 31, 2021, and 2020.
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,
restricted stock awards, and restricted stock units, 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, restricted stock units, 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.
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Performance-Based Stock Compensation Awards
We grant restricted stock awards, restricted stock units, 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 or 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 units 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.
The following table sets forth, for the periods indicated, certain data derived from our Consolidated Statements of Loss (in thousands):
Year Ended December 31,
2022
2021
Revenue, net
$
257,307
$
253,739
Gross profit
111,167
105,794
Operating expenses
131,465
106,787
Operating loss
(20,298)
(993)
Interest and other expense, net
1,536
2,448
Loss before income taxes and equity in losses of unconsolidated affiliates
(21,834)
(3,441)
Income tax benefit
(3,410)
(3,573)
Net (loss) income before equity in losses of unconsolidated affiliates
(18,424)
132
Equity in losses of unconsolidated affiliates
(1,465)
(1,280)
Net loss attributable to Heska Corporation
$
(19,889)
$
(1,148)
Diluted loss per share attributable to Heska Corporation(1)
$
(1.92)
$
(0.11)
Non-GAAP net income per diluted share (1)(2)
$
1.58
$
1.61
Adjusted EBITDA (2)
$
27,203
$
29,739
Net margin (2)
(7.2)%
0.1 %
Adjusted EBITDA margin (2)
10.6 %
11.7 %
(1) Shares used in the diluted per share calculation for diluted loss per share attributable to Heska Corporation are (in thousands) 10,343 for the
year ended December 31, 2022 and 10,015 for the year ended December 31, 2021. Shares used in the diluted per share calculation for non-
GAAP net income per diluted share are (in thousands): 10,523 for the year ended December 31, 2022 compared to 10,407 for the year ended
December 31, 2021.
(2) See “Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA to net income, Non-GAAP net income per diluted share to Diluted
loss per share attributable to Heska Corporation, and Adjusted EBITDA margin to Net margin, the closest comparable GAAP measures, for each of
the periods presented.
Revenue
Total revenue increased 1.4% to $257.3 million in 2022 compared to $253.7 million in 2021. The increase in revenue is driven primarily by
the acquisition of VetZ, which was completed on January 3, 2022, and which contributed $12.2 million for the year ended December 31,
2022 that was not included in the prior year period. Revenue growth was also driven by the global launch of Element AIM, increased capital
lease placements globally and higher consumable sales mainly due to increased selling prices, particularly in North America. These were
partially offset by a 11.7% decline in PVD due to decreased demand for the heartworm preventive, Tri-Heart, as well as a $10.2 million
foreign exchange impact, primarily due to the weakening of the Euro, impacting the POC product lines.
-40-
Gross Profit
Gross profit increased 5.1% to $111.2 million in 2022 compared to $105.8 million in 2021. Gross margin percent expanded to 43.2% in 2022
compared to 41.7% in 2021. The increase in both gross profit and gross margin percentage is driven by higher sales of consumables relative
to total sales, which are our highest margin products, further strengthened by product rationalization and transition effort within our
International segment and overall annual price increases. The acquisition of VetZ also favorably impacted gross profit and gross margin.
Operating Expenses
Selling and marketing expenses increased 5.2% to $47.7 million in 2022 compared to $45.3 million in 2021. The increase is
driven by the acquisition of VetZ of $3.2 million, increased travel and trade show expenses due to relaxing COVID-19
restrictions, higher employee compensation costs, and higher non-recurring costs, partially offset by lower stock-based
compensation of $2.2 million and favorable foreign exchange impacts.
Research and development expenses increased to $19.8 million in 2022 from $7.0 million in 2021. The increase is primarily related to a
$10.0 million payment for an exclusive global supply and licensing agreement to develop and commercialize the Heska
Nu.Q® vet cancer screening test, a POC cancer monitoring and screening test. The remaining increase is due to
investment in new products and technologies acquired over the prior 18 months.
General and administrative expenses increased 17.5% to $64.1 million in 2022, compared to $54.5 million in 2021. The
increase is driven by the $3.9 million provision for credit losses on a convertible note receivable, increased costs related to
recent acquisitions and higher non-recurring items of $6.1 million, and increased cash and stock-based compensation costs,
partially offset by lower incentive compensation and favorable foreign exchange impacts.
Interest and Other Expense, Net
Interest and other expense, net, was $1.5 million in 2022, compared to $2.4 million in 2021. The decrease was primarily
driven by interest income earned in 2022 related to our investment in a money market fund that was not earned in 2021.
Income Tax (Benefit) Expense
In 2022, we had total income tax benefit of $3.4 million compared to a total income tax benefit in 2021 of $3.6 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) Attributable to Heska Corporation
Net loss attributable to Heska Corporation was $19.9 million in 2022, compared to net loss attributable to Heska Corporation of
$1.1 million in 2021 driven by the $10 million licensing payment, the $3.9 million provision for credit losses on the convertible
note receivable, increased cash compensation costs as well as non-recurring and recurring costs associated with recent
acquisitions, partially offset by increases in revenue and gross profit.
-41-
Adjusted EBITDA
Adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA") in 2022 was $27.2 million (10.6%
adjusted EBITDA margin), compared to $29.7 million (11.7% adjusted EBITDA margin) in 2021. The decrease is driven by
increased investments in growth and new technologies, such as the ongoing development of a cloud-based PIMS and the
new trūRapid™ portfolio, and higher cash compensation costs, partially offset by increased revenue and gross profit. 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
Diluted loss per share attributable to Heska was $1.92 in 2022 compared to loss of $0.11 per diluted share in 2021. The increased
loss is due to increased operating expenses, partially offset by higher revenue and gross profit, as discussed above.
Non-GAAP Earnings Per Share
Non-GAAP EPS was income of $1.58 per diluted share in 2022 compared to income of $1.61 per diluted share in 2021. The decrease is
primarily due to increased operating expenses, excluding non-recurring and acquisition-related costs, partially offset by higher revenue
and gross profit as discussed above. 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.
-42-
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):
Year Ended
December 31,
2022
2021
Net (loss) income (1)
$
(18,424)
$
132
Income tax (benefit)
(3,410)
(3,573)
Interest expense, net
613
2,404
Depreciation and amortization
13,966
13,555
EBITDA
$
(7,255)
$
12,518
Acquisition-related and other non-recurring/extraordinary costs (2)
$
19,919
$
238
Stock-based compensation
16,004
18,263
Equity in losses of unconsolidated affiliates
(1,465)
(1,280)
Adjusted EBITDA
$
27,203
$
29,739
Net margin (3)
(7.2)%
0.1 %
Adjusted EBITDA margin (3)
10.6 %
11.7 %
(1) Net (loss) income used for reconciliation represents the "Net income (loss) before equity in losses of unconsolidated affiliates."
(2) To exclude the effect of acquisition related costs, non-recurring items and extraordinary charges not indicative of ongoing operations of $19.9 million for the
year ended December 31, 2022 compared to $0.2 million for the year ended December 31, 2021. These costs were incurred as a result of a $10.0 million
licensing payment, the $3.9 million provision for credit losses for a convertible note receivable, the $1.0 million mark-to-market adjustment of the fair value of
the embedded derivative on the convertible note receivable, $2.2 million related to the acquisitions of LightDeck and VetZ as well as other acquisition related
and non-recurring charges, partially offset by a reduction in contingent consideration of $1.3 million for the year ended December 31, 2022.
(3) Net margin and adjusted EBITDA margin are calculated as the ratio of net (loss) income and adjusted EBITDA, respectively, to revenue.
-43-
Year Ended
December 31,
2022
2021
GAAP net loss attributable to Heska per diluted share
$
(1.92)
$
(0.11)
Acquisition related and other non-recurring/extraordinary costs(1)
1.89
0.02
Amortization of acquired intangibles(2)
0.81
0.60
Purchase accounting adjustments related to inventory and fixed asset step-up(3)
0.22
0.03
Amortization of debt discount and issuance costs
—
0.01
Stock-based compensation
1.52
1.75
Loss on equity investee transactions
0.14
0.12
Estimated income tax effect of non-GAAP adjustments(4)
(1.08)
(0.81)
Non-GAAP net income per diluted share
$
1.58
$
1.61
Shares used in diluted per share calculations
10,523
10,407
(1) To exclude the effect of acquisition related costs, non-recurring items and extraordinary charges not indicative of ongoing operations of $19.9 million for the
year ended December 31, 2022 compared to $0.2 million for the year ended December 31, 2021. These costs were incurred as a result of a $10.0 million
licensing payment, the $3.9 million provision for credit losses for a convertible note receivable, the $1.0 million mark-to-market adjustment of the fair value of
the embedded derivative on the convertible note receivable, $2.2 million related to the acquisitions of LightDeck and VetZ as well as other acquisition related
and non-recurring charges, partially offset by a reduction in contingent consideration of $1.3 million for the year ended December 31, 2022.
(2) To exclude the effect of amortization of acquired intangibles of $8.6 million in the year ended December 31, 2022, compared to $6.3 million in the year ended
December 31, 2021. These costs were incurred as part of the purchase accounting adjustments for recent acquisitions.
(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 $2.3 million for
the year ended December 31, 2022, compared to $0.3 million for the year ended December 31, 2021.
(4) Represents income tax expense utilizing an estimated effective tax rate that adjusts for non-GAAP measures including: acquisition related, non-recurring and
extraordinary costs (excluding charges which are not deductible for tax of $0.3 million for the year ended December 31, 2022 compared to benefits of $1.0 million for the
year ended December 31, 2021), amortization of acquired intangibles, purchase accounting adjustments, amortization of debt discount and issuance costs, and stock-
based compensation. This incorporates the tax expense related to stock-based compensation of $0.6 million for the year ended December 31, 2022 compared to $1.6
million benefit for the year ended December 31, 2021. Adjusted effective tax rates are approximately 25% for the years ended December 31, 2022 and December 31,
2021.
-44-
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 62.9% of our revenue and the International segment represented 37.1% of our
revenue for the year ended December 31, 2022.
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
Year Ended December 31,
Change
2022
2021
Dollar Change
% Change
POC Laboratory:
$
95,480
$
86,841
$
8,639
9.9 %
Instruments & Other
17,178
14,837
2,341
15.8 %
Consumables
78,302
72,004
6,298
8.7 %
POC Imaging & Informatics
27,335
29,512
(2,177)
(7.4)%
PVD
22,020
24,939
(2,919)
(11.7)%
OVP
16,927
17,606
(679)
(3.9)%
Total North America revenue
$
161,762
$
158,898
$
2,864
1.8 %
North America Gross Profit
$
75,528
$
74,426
$
1,102
1.5 %
North America Gross Margin
46.7 %
46.8 %
North America Operating (Loss) Income
$
(15,797)
$
650
$
(16,447)
NM
North America Operating (Loss) Income Margin
(9.8)%
0.4 %
North America segment revenue increased 1.8% to $161.8 million for the year ended December 31, 2022, compared to $158.9
million for the year ended December 31, 2021 driven by a 9.9% increase in POC laboratory instruments and consumables, in
part as a result of continued rollout of Element AIM, as well as increased capital lease placements and favorable price on
consumables due to annual price escalators. This is partially offset by an 11.7% decline in PVD due to lower demand for the
heartworm preventive, Tri-Heart, and a 7.4% decline in POC imaging & informatics.
Gross profit was $75.5 million compared to $74.4 million for the year ended December 31, 2022 and 2021, respectively. The increase in
gross profit is primarily driven by increased revenue in the current year, specifically related to POC laboratory instruments and consumables.
Gross margin was 46.7% for the year ended December 31, 2022, compared to 46.8% in the year ended December 31, 2021. The slight
margin decline is driven by increased AIM instrument placements and unfavorable product mix, which offset consumable price increases.
-45-
North America operating loss was $15.8 million in the year ended December 31, 2022 compared to operating income of $0.7 million for the
year ended December 31, 2021. The loss in the year ended December 31, 2022 is driven by increased operating expenses, primarily due to
higher acquisition related costs, non-recurring items and extraordinary charges not indicative of ongoing operations including a $10.0 million
licensing payment, a $3.9 million provision for credit losses on a convertible note receivable, increased acquisition costs higher cash-based
compensation expenses and increased travel, meals & trade show expenses due to easing COVID-19 restrictions. These are partially offset
by increased revenue and gross profit as well as lower stock-based and incentive compensation.
International Segment
Year Ended December 31,
Change
2022
2021
Dollar Change
% Change
POC Laboratory:
$
56,865
$
61,017
$
(4,152)
(6.8)%
Instruments & Other
15,660
15,001
659
4.4 %
Consumables
41,205
46,016
(4,811)
(10.5)%
POC Imaging & Informatics
35,209
28,492
6,717
23.6 %
PVD
3,471
5,332
(1,861)
(34.9)%
Total International revenue
$
95,545
$
94,841
$
704
0.7 %
International Gross Profit
$
35,639
$
31,368
$
4,271
13.6 %
International Gross Margin
37.3 %
33.1 %
International Operating Loss
$
(4,501)
$
(1,643)
$
(2,858)
(174.0)%
International Operating Loss Margin
(4.7)%
(1.7)%
International revenue was $95.5 million compared to $94.8 million for the year ended December 31, 2022 and 2021,
respectively, driven by the acquisition of VetZ, which delivered $12.2 million that was not present in the prior year period, and
the introduction of Element AIM, partially offset by $9.6 million of negative foreign currency impact.
Gross profit was $35.6 million compared to $31.4 million for the year ended December 31, 2022 and 2021, respectively. Gross margin for the
International segment was 37.3% for the year ended December 31, 2022, compared to 33.1% for the year ended December 31, 2021. The
increase in gross profit and gross margin for both periods is driven by increased revenue, excluding foreign exchange impacts, as well as
favorable product mix, particularly within POC laboratory consumables. The acquisition of VetZ also favorably impacted gross margin while
the introduction of Element AIM in the International segment unfavorably impacted gross margin.
International operating loss was $4.5 million for the year ended December 31, 2022 compared to a loss of $1.6 million for
the year ended December 31, 2021, driven primarily by increased operating expenses for the development of new PIMS
technology, partially offset by increased revenue and gross profit.
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 access other forms
of capital as well as 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,
including but not limited to effects of the COVID-19 pandemic. Our primary source of liquidity is our available cash of $156.6 million.
-46-
A summary of our cash from operating, investing and financing activities is as follows (in thousands):
December 31,
Change
Dollar
%
2022
2021
Change
Change
Net cash (used in) provided by operating activities
$
(21,813)
$
6,247
$
(28,060)
NM
Net cash used in investing activities
(35,770)
(35,001)
(769)
(2.2)%
Net cash (used in) provided by financing activities
(7,051)
166,404
(173,455)
NM
Foreign exchange effect on cash and cash equivalents
(2,322)
(410)
(1,912)
(466.3)%
(Decrease) increase in cash and cash equivalents
(66,956)
137,240
(204,196)
NM
Cash and cash equivalents, beginning of the period
223,574
86,334
137,240
159.0 %
Cash and cash equivalents, end of the period
$
156,618
$
223,574
$
(66,956)
(29.9)%
For the year ended December 31, 2022 and the year ended December 31, 2021, cash flow used in operations was $21.8
million and cash flow provided by operations was $6.2 million, respectively, which was primarily the result of (in thousands):
December 31,
Change
Dollar
%
2022
2021
Change
Change
Operating Activity:
$
(19,889)
$
(1,148)
$
(18,741)
(1,632.5)%
Non cash expenses and other adjustments
33,528
30,842
2,686
8.7 %
Change in accounts receivable
(1,494)
2,193
(3,687)
NM
Change in inventories, net
(13,981)
(14,905)
924
6.2 %
Change in lease receivables, net
(9,078)
(5,902)
(3,176)
(53.8)%
Change in other assets
(1,887)
(4,329)
2,442
56.4 %
Change in accounts payable
1,428
662
766
115.7 %
Change in other liabilities
(10,440)
(1,166)
(9,274)
(795.4)%
Net cash (used in) provided by operating activities
$
(21,813)
$
6,247
$
(28,060)
NM
For the year ended December 31, 2022 and the year ended December 31, 2021, cash flow used in investing activities was
$35.8 million and $35.0 million, respectively, which was primarily used for (in thousands):
December 31,
Change
Dollar
%
2022
2021
Change
Change
Acquisition of Biotech
$
—
$
(16,250)
$
16,250
NM
Acquisition of BiEssA, net of cash acquired
—
(4,513)
4,513
NM
Acquisition of Lacuna, net of cash acquired
—
(3,882)
3,882
NM
Acquisition of VetZ, net of cash acquired
(28,956)
—
(28,956)
NM
Promissory note receivable issuance
(4,700)
(9,000)
4,300
47.8 %
Purchases of property and equipment
(2,114)
(1,768)
(346)
(19.6)%
Proceeds from disposition of property and equipment
—
412
(412)
NM
Net cash used in investing activities
$
(35,770)
$
(35,001)
$
(769)
(2.2)%
-47-
For the year ended December 31, 2022 and the year ended December 31, 2021, cash flow used in financing activities was $7.1
million and cash flows provided by financing activities was $166.4 million, respectively, which was the result of (in thousands):
December 31,
Change
Dollar
%
2022
2021
Change
Change
Proceeds from issuance of common stock
$
3,191
$
169,230
$
(166,039)
(98.1)%
Purchase of shares withheld for tax obligations
(5,269)
(1,629)
(3,640)
(223.4)%
Payment of stock issuance costs
—
(314)
314
NM
Notes Payable
(4,770)
—
(4,770)
NM
Proceeds from line of credit borrowings
—
7
(7)
NM
Repayments of line of credit borrowings
(203)
(890)
687
77.2 %
Net cash provided by financing activities
$
(7,051)
$
166,404
$
(173,455)
NM
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, investment in key corporate functions, product development initiatives, and the build out of our new leased office space in
Loveland, Colorado (see Part I. Item 2. Properties), for at least the next 12 months. Our belief may prove to be incorrect, however, and we
could utilize our available financial resources sooner than we currently expect. For example, we actively seek opportunities 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". We may 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 $1.9 million to a $2.3 million negative impact in 2022, compared to a
$0.4 million negative impact in 2021. The net effect of foreign currency translation on cash changed $1.2 million in 2021 from a $0.8
million positive impact in 2020. 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, 2022 (in thousands):
Less Than 1
Total
Year
1 - 3 Years
3 - 5 Years
After 5 Years
Purchase obligations
$
55,291
$
27,361
$
24,065
$
3,865
$
—
Operating lease obligations
7,886
3,257
2,110
1,114
1,405
Finance lease obligations
460
168
236
56
—
Convertible senior notes (1)
86,250
—
—
86,250
—
Future interest obligations (2)
11,994
3,234
6,469
2,291
—
Total
$
161,881
$
34,020
$
32,880
$
93,576
$
1,405
(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 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, 2022, 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.
-49-
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 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, 2022.
Foreign Currency Risk
Foreign currency risk may impact our revenue and 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, 2022. We do not currently consider foreign currency risk to be
material to our business. However, to the extent that the U.S. Dollar is stronger in current or future periods relative to the
exchange rates in effect in comparative periods presented, our growth rates will be negatively affected.
Inflation Risk
Inflation generally impacts us by increasing our costs of labor, energy, material, transportation, increased price from suppliers,
and general overhead costs. The rates of inflation experienced in recent years have not had a material impact on our financial
statements as inflationary cost increases have been offset by annual price increases and productivity gains. However, any
price increases imposed may lead to declines in sales volume if competitors do not similarly adjust prices. We cannot
reasonably estimate our ability to successfully recover any impact of inflation cost increases into the future.
-50-
Item 8.
Financial Statements and Supplementary Data
HESKA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firm (PCAOB ID Number 248)
52
Consolidated Balance Sheets
56
Consolidated Statements of Loss
57
Consolidated Statements of Comprehensive Loss
58
Consolidated Statements of Stockholders' Equity
59
Consolidated Statements of Cash Flows
60
Notes to Consolidated Financial Statements
62
Note 1, Operations and Summary of Significant Accounting Policies
62
Note 2, Revenue
73
Note 3, Acquisition and Related Party Items
76
Note 4, Investments in Unconsolidated Affiliates
86
Note 5, Income Taxes
87
Note 6, Leases
91
Note 7, Earnings Per Share
94
Note 8, Goodwill and Other Intangibles
95
Note 9, Property and Equipment, Net
96
Note 10, Inventories
97
Note 11, Accrued Liabilities
97
Note 12, Capital Stock
97
Note 13, Accumulated Other Comprehensive Income
103
Note 14, Commitments and Contingencies
103
Note 15, Interest and Other Expense (Income), Net
104
Note 16, Convertible Notes
104
Note 17, Note Receivables
108
Note 18, Segment Reporting
10
9
Note 19, Subsequent Events
112
-51-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Heska Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Heska Corporation (a Delaware corporation) and subsidiaries (the
“Company”) as of December 31, 2022 and 2021, the related consolidated statements of loss, comprehensive loss, changes in stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2022, 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, 2022, 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 28, 2023 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 matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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 grants restricted stock awards, restricted stock
units, and stock options to management and directors. Certain restricted stock awards,
-52-
restricted stock units, and stock options have performance-based vesting conditions, which vest based on when performance
targets are met. Performance-based awards are recognized as 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 considerations for our determination that the probability assessment 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 achievement of future financial performance for sales growth, margins, and operating
performance. Changes in the subjective probability assessment can materially affect the amount and timing of stock-based compensation expense and
the probability assessment requires significant auditor subjectivity in evaluating the reasonableness of those judgments and
estimates.
Our audit procedures related to the probability assessment of achieving the performance targets included the following, among others.
– We tested the design and operating effectiveness of internal controls related to management’s determination of stock-based
compensation expense, including testing management’s review control over the Company’s forecast and multi-year outlook
to achieve those performance targets and the manual control over the calculation of performance-based stock compensation.
– 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, margin, and operating performance by comparing each to current market and industry trends, historical
information, and inquiring of individuals outside 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.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2020.
Denver, Colorado
February 28, 2023
-53-
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 (a Delaware corporation) and subsidiaries (the
“Company”) as of December 31, 2022, 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, 2022, 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, 2022, and our report dated February 28, 2023
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. 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.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
-54-
/s/ GRANT THORNTON LLP
Denver, Colorado
February 28, 2023
-55-
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
2022
2021
ASSETS
Current assets:
Cash and cash equivalents
$
156,618
$
223,574
Accounts receivable, net of allowance for losses of $1,129 and $874, respectively
29,493
27,995
Inventories
60,050
49,361
Net investment in leases, current, net of allowance for losses of $182 and $137, respectively
7,433
6,175
Prepaid expenses
5,514
5,244
Other current assets
5,926
7,206
Total current assets
265,034
319,555
Property and equipment, net
32,171
33,413
Operating lease right-of-use assets
6,897
5,198
Goodwill
135,918
118,826
Other intangible assets, net
62,393
56,705
Deferred tax asset, net
23,684
19,429
Net investment in leases, non-current
27,499
20,128
Investments in unconsolidated affiliates
3,959
5,424
Related party convertible note receivable, net
2,224
6,800
Promissory note receivable from investee, net
13,511
8,448
Other non-current assets
12,526
10,146
Total assets
$
585,816
$
604,072
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
16,403
$
15,374
Accrued liabilities
15,149
19,424
Operating lease liabilities, current
2,944
2,227
Deferred revenue, current, and other
5,081
6,901
Total current liabilities
39,577
43,926
Convertible note, non-current, net
84,467
84,034
Notes payable
11,130
15,900
Deferred revenue, non-current
4,096
3,854
Operating lease liabilities, non-current
4,528
3,509
Deferred tax liability
16,438
12,667
Other liabilities
3,372
4,328
Total liabilities
163,608
168,218
Commitments and contingencies (Note 14)
Stockholders' equity:
Preferred stock, $0.01 par value, 2,500,000 shares authorized, none issued or outstanding
—
—
Common stock, $0.01 par value, 20,000,000 shares authorized, none issued or outstanding
—
—
Public common stock, $0.01 par value, 20,000,000 shares authorized, 10,829,518 and 10,712,347 shares issued
108
107
and outstanding, respectively
Additional paid-in capital
597,139
579,354
Accumulated other comprehensive (loss) income
(6,506)
5,037
Accumulated deficit
(168,533)
(148,644)
Total stockholders' equity
422,208
435,854
Total liabilities and stockholders' equity
$
585,816
$
604,072
See accompanying notes to consolidated financial statements.
-56-
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(in thousands, except per share amounts)
Year Ended December 31,
2022
2021
2020
Revenue, net
$
257,307
$
253,739
$
197,323
Cost of revenue
146,140
147,945
116,033
Gross profit
111,167
105,794
81,290
Operating expenses:
Selling and marketing
47,661
45,284
38,468
Research and development
19,753
6,982
8,772
General and administrative
64,051
54,521
42,242
Total operating expenses
131,465
106,787
89,482
Operating loss
(20,298)
(993)
(8,192)
Interest and other expense, net
1,536
2,448
5,601
Net loss before income taxes and equity in losses of unconsolidated affiliates
(21,834)
(3,441)
(13,793)
Income tax (benefit) expense:
Current income tax expense
1,288
891
1,780
Deferred income tax benefit
(4,698)
(4,464)
(1,541)
Total income tax (benefit) expense
(3,410)
(3,573)
239
Net (loss) income before equity in losses of unconsolidated affiliates
(18,424)
132
(14,032)
Equity in losses of unconsolidated affiliates
(1,465)
(1,280)
(720)
Net loss after equity in losses of unconsolidated affiliates
(19,889)
(1,148)
(14,752)
Net loss attributable to redeemable non-controlling interest
—
—
(353)
Net loss attributable to Heska Corporation
$
(19,889)
$
(1,148)
$
(14,399)
Basic loss per share attributable to Heska Corporation
$
(1.92)
$
(0.11)
$
(1.66)
Diluted loss per share attributable to Heska Corporation
$
(1.92)
$
(0.11)
$
(1.66)
Weighted average outstanding shares used to compute basic loss per share
attributable to Heska Corporation
Weighted average outstanding shares used to compute diluted loss per share
attributable to Heska Corporation
10,343
10,015
8,653
10,343
10,015
8,653
See accompanying notes to consolidated financial statements.
-57-
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Year Ended December 31,
2022
2021
2020
Net loss after equity in losses of unconsolidated affiliates
$
(19,889)
$
(1,148)
$
(14,752)
Other comprehensive income (loss):
Minimum pension benefit (liability)
99
107
(40)
Translation adjustments and (losses) gains from intra-entity transactions
(11,642)
(9,239)
13,696
Comprehensive loss
(31,432)
(10,280)
(1,096)
Comprehensive loss attributable to redeemable non-controlling interest
—
—
(353)
Comprehensive loss attributable to Heska Corporation
$
(31,432)
$
(10,280)
$
(743)
See accompanying notes to consolidated financial statements.
-58-
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Additional
Accumulated
Total
Preferred Stock
Common Stock
Other
Paid-in
Comprehensive
Accumulated
Stockholders'
Shares
Amount
Shares
Amount
Capital
Income (Loss)
Deficit
Equity
Balances, December 31, 2019
—
$
—
7,882
$
79
$
290,216
$
513
$
(136,444)
$
154,364
Adoption of accounting standards
—
—
—
—
—
—
(18)
(18)
Balances, January 1, 2020
—
—
7,882
79
290,216
513
(136,462)
154,346
Net loss attributable to Heska Corporation
—
—
—
—
—
—
(14,399)
(14,399)
Issuance of common stock, net of shares
—
—
85
1
2,795
—
—
2,796
withheld for employee taxes
Issuance of preferred stock
122
1
—
—
121,785
—
—
121,786
Conversion to common stock
(122)
(1)
1,509
15
(14)
—
—
—
Stock-based compensation
—
—
—
—
9,490
—
—
9,490
Purchase of minority interest
—
—
—
—
(622)
—
—
(622)
Other comprehensive income
—
—
—
—
—
13,656
—
13,656
Balances, December 31, 2020
—
$
—
9,476
$
95
$
423,650
$
14,169
$
(150,861)
$
287,053
Adoption of accounting standards
—
—
—
—
(29,834)
—
3,365
(26,469)
Balances, January 1, 2021
—
—
9,476
95
393,816
14,169
(147,496)
260,584
Net loss attributable to Heska Corporation
—
—
—
—
—
—
(1,148)
(1,148)
Issuance of common stock, net of shares
—
—
295
3
3,098
—
—
3,101
withheld for employee taxes
Equity offering, net of issuance costs
—
—
941
9
164,177
—
—
164,186
Stock-based compensation
—
—
—
—
18,263
—
—
18,263
Other comprehensive loss
—
—
—
—
—
(9,132)
—
(9,132)
Balances, December 31, 2021
—
$
—
10,712
$
107
$
579,354
$
5,037
$
(148,644)
$
435,854
Net loss attributable to Heska Corporation
—
—
—
—
—
—
(19,889)
(19,889)
Issuance of common stock, net of shares
—
—
118
1
(2,079)
—
—
(2,078)
withheld for employee taxes
Equity contingent consideration
—
—
—
—
3,860
—
—
3,860
Stock-based compensation
—
—
—
—
16,004
—
—
16,004
Other comprehensive loss
—
—
—
—
—
(11,543)
—
(11,543)
Balances, December 31, 2022
—
$
—
10,830
$
108
$
597,139
$
(6,506)
$
(168,533)
$
422,208
See accompanying notes to consolidated financial statements.
-59-
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2022
2021
2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss after equity in losses from unconsolidated affiliates
$
(19,889)
$
(1,148)
$
(14,752)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization
13,966
13,555
11,385
Non-cash impact of operating leases
2,738
2,136
1,985
Deferred income tax benefit
(4,698)
(4,464)
(1,541)
Stock-based compensation
16,004
18,263
9,490
Provision for credit losses on convertible note receivable
3,899
—
—
Change in fair value of contingent consideration
(1,641)
(1,607)
—
Equity in losses of unconsolidated affiliates
1,465
1,280
720
Accretion of discounts and issuance costs
36
60
3,090
Provision for credit losses
—
353
614
Other losses (gains)
1,759
1,266
(91)
Changes in operating assets and liabilities (net of effect of acquisitions):
Accounts receivable
(1,494)
2,193
(5,755)
Inventories
(13,981)
(14,905)
(5,409)
Lease receivables
(9,078)
(5,902)
(611)
Other assets
(1,887)
(4,329)
340
Accounts payable
1,428
662
(280)
Other liabilities
(10,440)
(1,166)
159
Net cash (used in) provided by operating activities
(21,813)
6,247
(656)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of VetZ, net of cash acquired
(28,956)
—
—
Acquisition of Biotech
—
(16,250)
—
Acquisition of BiEssA, net of cash acquired
—
(4,513)
—
Acquisition of Lacuna, net of cash acquired
—
(3,882)
—
Acquisition of scil, net of cash acquired
—
—
(104,401)
Acquisition of CVM
—
—
(14,420)
Promissory note receivable issuance
(4,700)
(9,000)
—
Convertible note receivable issuance
—
—
(6,650)
Purchase of minority interest
—
—
(450)
Purchases of property and equipment
(2,114)
(1,768)
(686)
Proceeds from disposition of property and equipment
—
412
10
Net cash used in investing activities
(35,770)
(35,001)
(126,597)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
3,191
169,230
4,273
Payments for taxes related to shares withheld for employee taxes
(5,269)
(1,629)
(1,477)
Payment of stock issuance costs
—
(314)
(214)
Proceeds from issuance of preferred stock
—
—
122,000
Payments of related party debts
—
—
(1,140)
Borrowings on line of credit and other debts
—
7
613
Repayments of line of credit borrowings and other debts
(203)
(890)
(291)
Notes Payable
(4,770)
—
—
Net cash (used in) provided by financing activities
(7,051)
166,404
123,764
FOREIGN EXCHANGE EFFECT ON CASH AND CASH EQUIVALENTS
(2,322)
(410)
793
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(66,956)
137,240
(2,696)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
223,574
86,334
89,030
CASH AND CASH EQUIVALENTS, END OF YEAR
$
156,618
$
223,574
$
86,334
-60-
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-cash transfers of equipment between inventory and property and equipment, net
$
2,563
$
4,600
$
4,437
Non-cash conversion of preferred stock to common stock
$
—
$
—
$
122,000
Contingent consideration for acquisitions
$
3,860
$
4,034
$
—
Notes payable issued in acquisition
$
—
$
15,900
$
—
Indemnity holdback for acquisition
$
1,420
$
346
$
—
See accompanying notes to consolidated financial statements.
-61-
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, manufacture, market and
support diagnostic and specialty products and solutions for veterinary practitioners. Our portfolio includes POC diagnostic
laboratory instruments and consumables including rapid assay diagnostic products and digital cytology services; POC digital
imaging diagnostic products; local and cloud-based data services; PIMS and related software and support; reference
laboratory testing; allergy testing and immunotherapy; heartworm preventive products; and vaccines. Our primary focus is on
supporting companion animal veterinarians in providing care to their patients.
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, 2022 and 2021, as well as the results of
our operations, statements of stockholders' equity and cash flows for the years ended December 31, 2022, 2021 and 2020.
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 loss is reported as "Net loss attributable to non-
controlling interest" on our Consolidated Statements of Loss. 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").
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 credit losses 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 derivatives; determining the value of the
contingent consideration in a business combination and determining the value of the non-controlling interest in a business combination. Our
actual results may differ from these estimates and there may be changes to those estimates in future periods.
-62-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 high credit quality financial institutions, and at times may
have cash levels that exceed federally insured limits. 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.
No customer accounted for more than 10% of our consolidated accounts receivable at December 31, 2022 or 2021.
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
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.
Changes in the allowance for credit losses are summarized as follows (in thousands):
Years Ended December 31,
2022
2021
2020
Balances at beginning of period
$
874
$
769
$
186
Additions from acquisitions
—
3
90
Additions - charged to expense
485
353
614
Deductions - write offs, net of recoveries
(214)
(248)
(121)
Foreign exchange effects
(16)
(3)
—
Balances at end of period
$
1,129
$
874
$
769
-63-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The balance of accounts receivable, net of allowance for credit losses was $29.5 million, $28.0 million and $31.1 million as of
December 31, 2022, December 31, 2021 and December 31, 2020, respectively.
As discussed in Note 17, Notes Receivable, the Company also recorded an allowance for expected credit losses on our long-
term notes receivable. Inherent in the assessment of the allowance are certain judgments and estimates including, among
others, the borrower’s access to capital, the borrower’s willingness or ability to pay, general economic conditions and industry
default rates, and the ongoing relationship with the borrower.
Cash and Cash Equivalents
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):
As of December 31,
2022
2021
European Union Euros
12,497
5,497
Swiss Francs
1,342
224
Canadian Dollars
1,854
4,191
GB Pounds
104
—
Australian Dollars
564
676
Malaysian Ringgit
1,369
1,412
Fair Value of Financial Instruments
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.
-64-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's financial instruments consist of cash, 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 fair values of our financial instruments at December 31, 2022 and December 31, 2021 were (in thousands):
2022
Total
Level 1
Level 2
Level 3
Financial Assets
Money market fund
$
95,000
$
95,000
$
—
$
—
Convertible note receivable embedded derivative
177
—
—
177
Financial Liabilities
BiEsseA Contingent Consideration
438
—
—
438
Balances, December 31, 2022
$
95,615
$
95,000
$
—
$
615
2021
Total
Level 1
Level 2
Level 3
Financial Assets
Convertible note receivable embedded derivative
$
888
$
—
$
—
$
888
Promissory note receivable embedded derivative
337
—
—
337
Financial Liabilities
BiEsseA Contingent Consideration
2,334
—
—
2,334
Balances, December 31, 2021
$
3,559
$
—
$
—
$
3,559
The Company's financial assets based upon Level 3 inputs include embedded derivatives relating to its notes receivable. 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 using a probability-weighted scenario analysis. The
Company determined the warrant associated with its promissory note receivable represents a derivative. The estimated fair value of
the derivative asset is evaluated through Level 3 inputs, using an enterprise valuation model. For additional information regarding
the Company's note receivables and derivatives, refer to Note 17, Notes Receivable.
The estimated fair value of the Company's 3.75% Convertible Senior Notes due in 2026 (the "Notes"), is disclosed at each reporting period
and 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, refer to Note 16, Convertible Notes.
-65-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's financial liabilities based upon Level 3 inputs include contingent consideration arrangements and notes payable relating to
its acquisitions of Lacuna Diagnostics, Inc. ("Lacuna"), BiEsse A-Laboratorio die Analisi Veterinarie S.r.l. (“BSA”), and Biotech Laboratories
U.S.A. LLC ("Biotech"). The Company is obligated to pay contingent consideration payments of $2.0 million in connection with the Lacuna
acquisition based on the achievement of certain performance metrics within a twelve month period ("Initial Earn Out Period"), reducing to
$1.0 million if such metrics were met in a twelve month period subsequent to the Initial Earn Out Period. The fair value of the Lacuna
contingent consideration was $0 as of both December 31, 2021 and 2022. The Company is obligated to pay contingent consideration
payments of $2.7 million in connection with the BSA acquisition based on the achievement of certain revenue metrics within three annual
periods after 2021. Refer to Note 3, Acquisitions and Related Party Items for further discussion.
The fair value of our contingent consideration and notes payable arrangements was determined at inception based on a
probability-weighted outcome analysis. The fair value of the contingent consideration and notes payable liabilities associated
with future payments were based on several factors, the most significant of which are the financial and product development
performance of the acquired businesses. For the contingent consideration liabilities, the Company will update its assumptions
each reporting period based on new developments and record such amounts at fair value based on the revised assumptions
until the agreements expire. Changes in fair value are recorded in the Consolidated Statements of Loss within general and
administrative expenses. The note payable associated with the Biotech acquisition is not adjusted to fair value each period.
The following table presents the changes of our recurring Level 3 assets and liabilities as of December 31, 2022 (in thousands):
Derivative Assets
Contingent Consideration Liabilities
Convertible note
Promissory note
receivable
receivable
Lacuna
BiEsseA
Balances, December 31, 2021
$
888 $
337
$
—
$
2,334
Changes in fair value
(711)
(337)
—
(1,641)
Foreign currency impact
—
—
—
(255)
Balances, December 31, 2022
$
177 $
—
$
—
$
438
Options Embedded in Non-controlling Interest
In connection with the Biotech acquisition, the Company applied the guidance in ASC 480, Distinguishing Liabilities from Equity, to
determine whether the put and call options embedded in shares representing a non-controlling interest represent a liability. If the fixed price of the embedded
put and call options are identical at a stated future date, the embedded options and the non-controlling interest are accounted
for on a combined basis as a financing arrangement of the purchase of the non-controlling interest and are recorded as a liability at fair value
on the reporting date. The Company fully consolidates the subsidiary, including 100 percent of the subsidiary net income
or loss, in its Consolidated Statements of Loss.
-66-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. 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:
Estimated
Asset Classification
Useful Life
Building
10 to 43 years
Machinery and equipment
2 to 10 years
Office furniture and equipment
3 to 13 years
Computer hardware and software
3 to 5 years
Leasehold and building improvements
5 to 30 years
We capitalize certain costs incurred in connection with developing or obtaining software designated for internal use based on three
distinct stages of development. Qualifying costs incurred during the application development stage, which consist primarily of internal
payroll and direct fringe benefits and external direct project costs, including labor and travel, are capitalized and amortized on a
straight-line basis over the estimated useful life of the asset, which range from three to five years. Costs incurred during the
preliminary project and post-implementation and operation phases are expensed as incurred. These costs are general and
administrative in nature and related primarily to the determination of performance requirements, data conversion and training. Costs
capitalized in connection with internal-use software were immaterial for the years ended December 31, 2022, 2021, and 2020.
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.
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.
-67-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
As a result of the recent global economic disruption and uncertainty due to the COVID-19 pandemic, the 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 2021 and 2020 and determined that no indications of impairment existed. Despite no indication of a triggering event or indications
of impairment throughout 2022, in the fourth quarter, we elected to bypass the qualitative approach and instead proceeded directly to
assessing the fair value of all of our reporting units and comparing the fair value of each reporting unit to the carrying value to
determine if any impairment exists. We estimate the fair values of the reporting units using an income approach based on discounted
forecasted cash flows. The income approach involves making significant assumptions about the extent and timing of future cash
flows, growth rates and discount rates. Model assumptions are based on our projections and best estimates, using appropriate and
customary market participant assumptions. Changes in forecasted cash flows or the discount rate would affect the estimated fair
values of our reporting units and could result in a goodwill impairment loss in a future period. We also utilize a market approach
utilizing guideline public company method or guideline transaction method, or both.
No goodwill impairment was identified during the year ended December 31, 2022.
-68-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 a $0.2 million impairment of our intangible assets during the year ended December
31, 2022. We had no impairments of our intangible assets during the years ended December 31, 2021 and 2020.
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 POC laboratory transactions while outright sales to customers are the
majority of both POC imaging diagnostic transactions and Pharmaceuticals, Vaccines and Diagnostic ("PVD") revenue.
With the acquisition of VetZ on January 3, 2022, the Company entered the market for veterinary PIMS. Revenue for the sale
of software licenses is recognized at a point in time upon delivery of the software. The software has significant stand-alone
functionality, and provides the customer with the right to use the intellectual property as it exists at the point in time at which
the license is granted. Revenue for support services, cloud-based services, and installation and training is recognized over
time as the services are performed. Refer to Note 3 for further details regarding the VetZ acquisition.
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.
The Company may enter into contracts that represent a bill-and hold-arrangement, under which the Company bills a customer for product
but retains physical possession of the product until some future point in time. For bill-and-hold arrangements, the Company recognizes
revenue when control of the product transfers to the customer in accordance with the additional criteria in ASC 606-10-55-83.
-69-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our revenue under subscription agreements relates to operating-type lease ("OTL") arrangements or sales-type lease ("STL")
arrangements. Classification of an OTL or STL is primarily determined as a result of the length of the contract as compared to the
estimated economic 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. An 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 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 Other Vaccines and Pharmaceuticals ("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.
-70-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 on the present value of lease payments over the lease term. The measurement
of future lease payments includes fixed payments, as well as fixed rate increases that are initially measured at the lease
commencement date. Variable lease payments, typically based on the usage of the underlying asset or changes in an index or rate,
are excluded from the measurement of ROU assets and lease liabilities and are expensed as incurred.
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. There is no residual value taken into consideration as it does not meet our
capitalization requirements. There is no option for a lessee to purchase the underlying asset and the lease term does not include an
assumption that the lease will be extended or terminated. 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.
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.
-71-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Advertising Costs
Advertising costs are expensed as incurred and are included in sales and marketing expenses. Advertising expenses were $1.4 million for the year ended
December 31, 2022, $0.6 million for the year ended December 31, 2021, and $0.4 million for the year ended December 31, 2020.
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.
-72-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Warranty Costs
The Company generally provides for the estimated cost of hardware and software warranties in the period the related revenue
is recognized. The Company assesses the adequacy of its accrued warranty liabilities and adjusts the amounts as necessary
based on actual experience and changes in future estimates. Should product failure rates differ from our estimates, actual
costs could vary significantly from our expectations. Extended warranties are sold to our customers and revenue is recognized
over the term of the warranty agreement, as expected costs are incurred.
Adoption of New Accounting Pronouncements
Effective January 1, 2022, we adopted ASU 2021-05, Leases (Topic 842), Lessors- Certain Leases with Variable Lease
Payments. This guidance amends the lease classification accounting for lessors for certain leases with variable lease
payments that do not depend on a reference index or a rate and would have resulted in the recognition of a loss at lease
commencement if classified as a sale-type or direct financing lease. Under the new guidance, these leases will be classified as
an operating lease. We evaluated the impact of the standard on our consolidated financial statements and the adoption of this
ASU did not have a material impact on our consolidated financial statements and disclosures.
Effective January 1, 2022, we early adopted ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and
Contract Liabilities from Contracts with Customers. This guidance requires an acquiring entity to recognize and measure contract
assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, the acquirer
should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. We evaluated the
impact of the standard on our consolidated financial statements and the adoption of this ASU did not 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 Company's reportable segments.
-73-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes our segment revenue (in thousands):
Year Ended December 31,
2022
2021
2020
North America Revenue:
POC Lab Instruments & Other
$
17,178
$
14,837
$
13,663
POC Lab Consumables
78,302
72,004
59,247
POC Imaging & Informatics
27,335
29,512
20,651
PVD
22,020
24,939
19,810
OVP
16,927
17,606
17,695
Total North America Revenue
$
161,762
$
158,898
$
131,066
International Revenue:
POC Lab Instruments & Other
$
15,660
$
15,001
$
7,782
POC Lab Consumables
41,205
46,016
32,354
POC Imaging & Informatics
35,209
28,492
22,537
PVD
3,471
5,332
3,584
Total International Revenue
$
95,545
$
94,841
$
66,257
Total Revenue
$
257,307
$
253,739
$
197,323
Remaining Performance Obligations
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
noncancellable purchase orders, the non-lease portion of minimum purchase commitments under long-term supply arrangements, extended
warranty, service and other long-term contracts. Remaining performance obligations do not include revenue from contracts with customers
with an original term of one year or less, revenue from long-term supply arrangements with no minimum purchase requirements, revenue
expected from purchases made in excess of the minimum purchase requirements, or revenue from instruments leased to customers. While
the remaining performance obligation disclosure is similar in concept to backlog, the definition of remaining performance obligations
excludes leases and contracts that provide the customer with the right to cancel or terminate for convenience with no substantial penalty,
even if historical experience indicates the likelihood of cancellation or termination is remote. Additionally, the Company has elected to
exclude contracts with customers with an original term of one year or less from remaining performance obligations.
-74-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of December 31, 2022, the aggregate amount of the transaction price allocated to remaining minimum performance obligations
was approximately $219.2 million. As of December 31, 2022, the Company expects to recognize revenue as follows (in thousands):
Year Ending December 31,
Revenue
2023
$
51,556
2024
47,923
2025
41,660
2026
36,428
2027
22,720
Thereafter
18,941
$
219,228
Contract Balances
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, 2022 were $1.8 million and $5.9 million for current
and non-current assets, respectively, shown net of related unearned interest. The balances as of December 31, 2021 were $1.5
million and $5.1 million for current and non-current assets, respectively, shown net of related unearned interest. The increase in
contract assets for the twelve-month period ended December 31, 2022 is primarily related to additional contract assets recorded for
contracts with a free term, partially offset by payments received. 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.
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, 2022, 2021 and 2020 contract liabilities were $8.3 million, $9.6
million and $9.9 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, 2022 is attributable to approximately $10.9 million of revenue recognized during the period and an exchange rate impact of $0.1
million, partially offset by approximately $8.8 million of additional deferred sales in 2022, and the acquisition of VetZ contract liabilities
of approximately $0.9 million. The decrease in the contract liability balance during the year ended December 31, 2021 is $6.8 million
of revenue recognized during the period, offset by $6.5 million of additional deferred sales. Contract liabilities are reported on the
accompanying Consolidated Balance Sheets on a contract-by-contract basis.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Contract Costs
The Company capitalizes certain direct incremental costs incurred to obtain customer contracts, typically sales-related commissions, where
the recognition period for the related revenue is greater than one year. Contract costs are classified as current or non-current, and are
included in "Other current assets" and "Other non-current assets" in the Consolidated Balance Sheets based on the timing of when the
Company expects to recognize the expense. Contract costs are generally amortized into selling and marketing expense with a certain
percentage recognized immediately based upon placement of the instrument with the remainder recognized on a straight-line basis (which is
consistent with the transfer of control for the related goods or services) over the average term of the underlying contracts, approximately 6
years. Management assesses these costs for impairment at least quarterly on a portfolio basis and as “triggering” events occur that indicate
it is more-likely-than-not that an impairment exists. The balances of contract costs as of December 31, 2022, 2021 and 2020 were $5.0
million, $4.1 million and $3.0 million respectively. The increase in contract costs for the year ended December 31, 2022 is due to
approximately $2.4 million of additional contract cost capitalization, offset by amortization expense of approximately $1.5 million. In the year
ended December 31, 2021, approximately $2.2 million of additional contract costs were capitalized, offset by
amortization expense of approximately $1.1 million. Contract costs are calculated and reported on a portfolio basis.
3. ACQUISITION AND RELATED PARTY ITEMS
VetZ Acquisition
On January 3, 2022, the Company acquired 100% of the equity of VetZ, a European leader in veterinary PIMS, for an
aggregate purchase price of approximately $35.5 million. The purchase price consisted of approximately $31.6 million in
cash as well as contingent consideration as described below. The cash purchase price includes a general indemnity
holdback of approximately $1.4 million to be released within 18 months of closing. The cash purchase price was also
reduced by a negative net working capital adjustment of approximately $0.6 million.
As additional consideration for the acquisition, the Company agreed to a contingent earn-out of 91,039 shares of Heska stock, with a
total value of $15.5 million, which will be issued in tranches based on future financial and non-financial milestones. The fair value of
the contingent consideration as of the acquisition date was approximately $3.9 million, determined using a Monte-Carlo simulation
model. The Company evaluated whether the contingent earn-out should be treated as a liability or equity in accordance with ASC
480, Distinguishing Liabilities from Equity (“ASC 480”), and ASC 815, Derivatives and Hedging (“ASC 815”). The contingent earn-out
did not meet the ASC 480 definition of a liability as it is not mandatorily redeemable, is not an obligation to repurchase the
Company’s shares, and it can only be settled with a fixed number of shares. Additionally, the Company noted the contingent earn-
out met the scope exception in ASC 815-10 as the earn-out is indexed to the Company’s own shares, and also met the criteria in
ASC 815-40 to be classified in equity as the Company has sufficient authorized and unissued shares, the earn-out has an explicit
share limit, there are no required cash payments. As such the contingent earn-out is classified in equity, and is not subsequently
remeasured each reporting period. Subsequent settlement of the obligation will be accounted for within equity.
The purchase price exceeded the fair value of the identifiable net assets, resulting in goodwill of $22.0 million, all of which is
attributable to our International segment. The goodwill resulting from this acquisition consists of new product offerings from
entering the PIMS market. All of the goodwill is tax deductible for purposes of calculating Controlled Foreign Corporation
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 as a business combination in accordance with ASC 805, Business Combinations. As such,
the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of
January 3, 2022. The total purchase consideration is subject to customary working capital adjustments.
The information below represents the purchase price allocation as of the acquisition date (in thousands):
January 3, 2022
Purchase price in cash
$
31,627
Fair value of equity contingent consideration
3,860
Total purchase consideration
$
35,487
Cash and cash equivalents
$
1,251
Inventory
359
Accounts receivable
824
Prepaid expenses and other assets
318
Property and equipment, net
602
Operating lease right-of-use assets
2,962
Intangible assets
18,504
Total assets acquired
24,820
Accounts payable
520
Accrued liabilities
1,260
Operating lease liabilities, current
247
Deferred revenue, current, and other
1,014
Operating lease liabilities, non-current
2,714
Deferred tax liabilities
5,246
Other liabilities
318
Net assets acquired
13,501
Goodwill
21,986
Total fair value of consideration transferred
$
35,487
During the year ended December 31, 2022, the Company made certain valuation adjustments to provisional amounts
previously recognized. These measurement period adjustments resulted in a net $584 thousand decrease of goodwill,
primarily due to fair value adjustments and a change in municipality tax rate resulting in an increase in net identifiable assets
acquired. The Company finalized the accounting for the VetZ acquisition in the fourth quarter of 2022.
Intangible assets acquired, amortization method and estimated useful life as of January 3, 2022, were as follows (dollars in thousands):
Weighted- Average
Amortization
Useful Life
Method
Fair Value
Customer relationships
12 years
Straight-line
$
12,941
Trade name
8 years
Straight-line
1,816
Developed technology
4.3 years
Straight-line
3,747
Total intangible assets acquired
$
18,504
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
VetZ generated net revenue of $12.2 million and a net loss of $1.5 million for the period from January 3, 2022 to December 31, 2022.
The Company incurred acquisition related costs of approximately $0.7 million and $0.6 million for the twelve months ended December 31,
2022 and 2021, respectively, which are included within general and administrative expenses on our Consolidated Statements of Loss.
Unaudited Pro Forma Financial Information
The following table presents unaudited supplemental pro forma financial information as if the acquisition had occurred on
January 1, 2021 (in thousands):
Year Ended December 31,
2022
2021
Revenue, net
$
257,307
$
265,093
Net (loss) income before equity in losses of unconsolidated affiliates
$
(18,424)
$
940
Net loss attributable to Heska Corporation
$
(19,889)
$
(340)
Biotech Acquisition
On September 1, 2021, Heska acquired 65% of the equity of Biotech Laboratories U.S.A. LLC ("Biotech"), a developer of rapid assay
diagnostic testing, in exchange for approximately $16.3 million in cash. As part of the purchase, Heska entered into put and call
options in order to purchase the remaining 35% ownership in future years. The counterparty, Chinta Lamichhane, DVM, Ph.D,
maintains an interest in Biotech and is an employee of the Company, thus commencing a related party relationship. Aside from the
acquisition described herein, there were no financial or non-financial transactions between the Company and the counterparty.
In conjunction with the acquisition, the Company entered into various put and call options which are classified on the Consolidated Balance
Sheets as Notes payable. The Company is obligated to pay contingent notes of up to $17.5 million based on the achievement of certain
product development milestones or at a predetermined date in the future. The written put options can be exercised after June 30, 2024, at a
valuation identical to the initial purchase price. The written call options can be exercised at any time prior to June 30, 2026, at an amount
equal to two times the initial valuation or after June 30, 2026, at a valuation identical to the initial purchase price. Additionally, if certain
product development milestones are met, the shares may be bought in various tranches at two times the initial valuation. The Company
evaluated the put and call options embedded in the shares representing the non-controlling interest under the guidance in ASC 480,
Distinguishing Liabilities from Equity, and determined the instrument met the criteria to be recorded as a liability because the fixed price of
the put and call options are identical starting after June 30, 2026. As a result, the Company recorded the transaction as a financing
arrangement of the purchase of the non-controlling interest, and will record 100% of the income and loss of Biotech in our Consolidated
Statements of Loss. The options were not redeemable as of the acquisition date. As of the period ending December 31, 2022, two of the
product development milestones were achieved. During the year ended December 31, 2022, the Company made payments of $5.3 million.
$4.8 million was a reduction to Notes payable and $0.5 million was recorded to interest expense. The Company acquired an additional
10.50% interest for a majority interest ownership of 75.50%. The counterparty owns the remaining minority interest of 24.50%. The
estimated fair value of the Notes Payable as of the acquisition date of $15.9 million is inclusive of the probability weighted outcomes of the
options described herein and was determined using Level 3 inputs. As of the period ending December 31, 2022, the remaining value of the
Notes Payable is $11.1 million.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in goodwill of $25.8
million, all of which is attributable to our North America segment and primarily consists of opportunities to expand product offerings
and the experienced workforce acquired. In connection with the acquisition and pursuant to the elections under Section 754 of the
Internal Revenue Code, the Company expects to obtain an increase with respect to the tax basis in the assets of Biotech.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total
purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of September 1, 2021.
The total purchase consideration is subject to customary working capital adjustments, which were finalized as of September 1, 2022.
The information below represents the purchase price allocation as of the acquisition date (in thousands):
September 1, 2021
Purchase price in cash
$
16,250
Notes payable
15,900
Total purchase consideration
$
32,150
Accounts receivables
$
18
Other current assets
1
Inventories
190
Property and equipment, net
148
Operating lease right-of-use assets
1,033
Other intangible assets, net
6,000
Other non-current assets
15
Total assets acquired
7,405
Accounts payable
11
Accrued liabilities
33
Operating lease liabilities, current
188
Operating lease liabilities, non-current
845
Net assets acquired
6,328
Goodwill
25,822
Total fair value of consideration transferred
$
32,150
Intangible assets acquired, amortization method and estimated useful life as of September 1, 2021, was as follows (dollars in thousands):
Amortization
Useful Life
Method
Fair Value
Developed technology
6 years
Straight-line
$
6,000
Total intangible assets acquired
$
6,000
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company incurred acquisition related costs of approximately $0.6 thousand and $0.4 million for the years ended December 31, 2022
and 2021, respectively, which are included within general and administrative expenses on our Consolidated Statements of Loss.
Pro forma financial information related to the acquisition of Biotech has not been provided as it is not material to our
consolidated results of operations.
BiEsseA Acquisition
On July 1, 2021, the Company completed the acquisition of BiEsse A-Laboratorio die Analisi Veterinarie S.r.l. (“BSA”). The
Company acquired 100% of the issued and outstanding shares of BSA for an aggregate purchase price of $7.2 million,
consisting of $4.8 million in cash and contingent consideration described below. On January 1, 2022, BSA was merged into
scil animal care company Srl, a wholly owned subsidiary of scil animal care company GmbH ("scil").
As additional consideration for the shares, the Company agreed to a contingent earn-out of an additional $2.7 million based on
the achievement of certain performance metrics within three annual periods after 2021, each of which can pay up to one third
of the total earn-out. The fair value of the contingent consideration was $2.3 million as of the acquisition date and as of
December 31, 2021, and subsequently decreased to $0.4 million as of December 31, 2022.
The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in $4.6 million of goodwill, all of
which is attributable to our International segment. The goodwill resulting from this acquisition consists largely of the Company's expected
future product sales and synergies from combining operations. All of the goodwill is tax deductible for purposes of calculating Controlled
Foreign Corporation tested income, which may result in a decrease to the Company's future U.S. federal income tax liability.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total
purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of July 1, 2021. The
total purchase consideration is subject to customary working capital adjustments, which were finalized as of December 31, 2021.
Per the tax indemnification included in the purchase agreement of BSA, the seller has indemnified the Company for $0.5 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 2025. As of December 31, 2022, approximately $0.3 million of the indemnification agreement remains outstanding.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The information below represents the purchase price allocation as of the acquisition date (in thousands):
July 1, 2021
Purchase price in cash
$
4,835
Fair value of contingent consideration
2,334
Total purchase consideration
$
7,169
Cash and cash equivalents
$
322
Accounts receivables
152
Other receivables
497
Prepaid expenses
8
Other current assets
275
Property and equipment, net
89
Operating lease right-of-use assets
44
Other intangible assets, net
3,329
Total assets acquired
4,716
Accounts payable
208
Accrued liabilities
334
Operating lease liabilities, current
37
Deferred revenue, current, and other
85
Operating lease liabilities, non-current
20
Deferred tax liability, net
925
Other liabilities
500
Net assets acquired
2,607
Goodwill
4,562
Total fair value of consideration transferred
$
7,169
Intangible assets acquired, amortization method and estimated useful life as of July 1, 2021, was as follows (dollars in thousands):
Useful Life
Amortization Method
Fair Value
Customer relationships
14 years
Straight-line
$
3,329
Total intangible assets acquired
$
3,329
The Company incurred acquisition related costs of approximately $0 and $0.3 million for the years ended December 31, 2022
and 2021, respectively, which are included within general and administrative expenses on our Consolidated Statements of Loss.
Pro forma financial information related to the acquisition of BSA has not been provided as it is not material to our
consolidated results of operations.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Lacuna Acquisition
On February 1, 2021, the Company completed the acquisition of Lacuna Diagnostics, Inc. ("Lacuna"), a veterinary digital cytology company,
to broaden the Company's POC diagnostic offerings. The Company acquired 100% of the issued and outstanding shares of Lacuna for a
purchase price of $4.3 million. The Company then dissolved Lacuna on February 1, 2021. In accordance with the purchase agreement, the
Company is required to hold a $0.4 million general indemnity holdback that is intended to provide a non-exclusive source of funds for the
payment of any losses identified and shall be released within 18 months of closing. $0.3 million and $0.1 million of the indemnification
holdback was released for licensing fees during the twelve months ended December 31, 2022 and 2021, respectively. As
of December 31, 2022, $0.0 million of the indemnification holdback remains outstanding.
As additional consideration for the shares, the Company agreed to a contingent earn-out of an additional $2.0 million based on the
achievement of certain performance metrics within a twelve month period ("Initial Earn Out Period"), reducing to $1.0 million if such
metrics were met in a twelve month period subsequent to the Initial Earn Out Period. The fair value of the contingent consideration as of the
acquisition date was $1.7 million, and subsequently decreased to $0 as of December 31, 2022 and 2021, which resulted in a $1.7 million
gain included within general and administrative expenses in the Consolidated Statement of Loss for the year ended December 31, 2021.
The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in $4.2 million of goodwill,
primarily related to expanded opportunities with our offerings. All of the goodwill is allocated to the North America segment
and is not tax deductible for income tax purposes.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total
purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of February 1, 2021. The
total purchase consideration is subject to customary working capital adjustments, which were finalized as of February 1, 2022.
The information below represents the purchase price allocation as of the acquisition date (in thousands):
February 1, 2021
Purchase price in cash
$
4,255
Fair value of contingent consideration
1,700
Total purchase consideration
$
5,955
Cash and cash equivalents
$
3
Accounts receivable
170
Property and equipment, net
530
Other intangible assets, net
1,185
Total assets acquired
1,888
Deferred tax liability
133
Net assets acquired
1,755
Goodwill
4,200
Total fair value of consideration transferred
$
5,955
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Intangible assets acquired, amortization method and estimated useful life as of February 1, 2021, was as follows (dollars in thousands):
Amortization
Useful Life
Method
Fair Value
Developed technology
3 years
Straight-line
$
1,000
Customer relationships
6 months
Straight-line
150
Trade name
11 months
Straight-line
35
Total intangible assets acquired
$
1,185
The Company incurred acquisition related costs of approximately $0 and $0.1 million for the years ended December 31, 2022
and 2021, respectively, which are included within general and administrative expenses on our Consolidated Statements of Loss.
Pro forma financial information related to the acquisition of Lacuna has not been provided as it is not material to our
consolidated results of operations.
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.
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 Company finalized the accounting for the acquisition as of March 31, 2021.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The information below represents the final purchase price allocation of scil (in thousands):
April 1, 2020
Total purchase consideration
$
110,290
Cash and cash equivalents
$
5,889
Accounts receivable
10,707
Inventories
11,278
Net investment in leases, current
311
Prepaid expenses
1,692
Other current assets
1,338
Property and equipment, net
19,320
Operating lease right-of-use assets
877
Other intangible assets, net
44,517
Net investment in leases, non-current
1,027
Investments in unconsolidated affiliates
55
Other non-current assets
291
Total assets acquired
97,302
Accounts payable
8,221
Accrued liabilities
7,067
Operating lease liabilities, current
356
Deferred revenue, current, and other
3,220
Deferred revenue, non-current
94
Operating lease liabilities, non-current
529
Deferred tax liability
13,249
Other liabilities
276
Net assets acquired
64,290
Goodwill
46,000
Total fair value of consideration transferred
$
110,290
Per the tax indemnification included in the purchase agreement of scil, 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, 2022, approximately $0.1 million of the indemnification agreement remains outstanding.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Intangible assets acquired, amortization method and estimated useful life as of April 1, 2020, was as follows (dollars in thousands):
Useful Life
Amortization Method
Fair Value
Customer relationships
10 years
Straight-line
$
36,272
Internally developed software
7 years
Straight-line
353
Backlog
0.2 years
Straight-line
210
Non-compete agreements
2 years
Straight-line
60
Trade name subject to amortization
0.8 years
Straight-line
66
Trademarks and trade names not subject to amortization
n/a
Indefinite
7,556
Total intangible assets acquired
$
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 $0, $0 and $6.3 million for the years ended December 31, 2022, 2021
and 2020, respectively, which are included within general and administrative expenses on our Consolidated Statements of Loss.
Unaudited Pro Forma Financial Information
The following tables present unaudited supplemental pro forma financial information as if the acquisition had occurred on
January 1, 2020 (in thousands):
Year Ended
December 31, 2020
Revenue, net
$
215,874
Net loss before equity in losses of unconsolidated affiliates
$
(14,848)
Net loss attributable to Heska Corporation
$
(15,215)
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.
Other Related Party Activities
In connection with the VetZ acquisition, the Company entered into a related party building lease agreement with the former owners, who are
now employees of the Company. The Company recorded operating lease expense of $284 thousand related to this lease for the twelve
months ended December 31, 2022. The right-of-use asset and lease liability related to the building lease were approximately $2.3 million and
$2.3 million as of December 31, 2022, respectively.
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Prior to the closing of the VetZ acquisition, the former owners who are now employees of the Company purchased vehicles
and bicycles from VetZ. As of January 3, 2022, a receivable of approximately $165 thousand was included in the preliminary
purchase price allocation related to these transactions. These receivables were settled in full on January 7, 2022.
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The carrying values of investments in unconsolidated affiliates, categorized by type of investment, is as follows (in thousands):
December 31, 2022 December 31, 2021
Equity method investment
$
941 $
2,406
Non-marketable equity security investment
3,018
3,018
Investment in Unconsolidated Affiliates
$
3,959 $
5,424
Equity Method Investment
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, 2022, our ownership interest in the business was 26.0%. 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. The Company has a note
receivable from the equity method investee. Refer to Note 17, Notes Receivable, for additional details.
Non-Marketable Equity Security Investment
On August 8, 2018, the Company invested approximately $3.0 million, including costs, in exchange for preferred stock of
LightDeck. 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 LightDeck
produce and commercialize products that will enhance the Company's diagnostic portfolio. As part of this agreement, the
Company made an 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
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
development operating expenses. Expense is recognized ratably when incurred and in accordance with the development plan.
On January 3, 2023 (the "closing date"), the Company acquired 100% of the shares of LightDeck for approximately $37 million, of
which $13.7 million was the reacquisition of the Company's previously held promissory notes discussed further below and in Note
17. The agreement also included a general indemnity holdback of approximately $2.6 million. The preliminary cash purchase price is
subject to potential purchase price adjustments, and the holdback must be released within 18 months of the closing date. The
preliminary allocation of the cash purchase price to the fair value of assets acquired and liabilities assumed has not yet been
completed. It is not practicable to disclose the preliminary purchase price allocation for this acquisition given the short period of time
between the acquisition date and the issuance of these consolidated financial statements.
The Company evaluated the investment in LightDeck as well as a First Promissory Note and Second Promissory Note,
discussed in Note 17, to determine whether we met the requirement for consolidation prior to the acquisition within the
Variable Interest Entity ("VIE") and Voting Interest Entity ("VOE") models. In accordance with both the VIE and VOE models, it
was concluded that while the Company does have a variable interest in LightDeck, the Company does not assert control over
LightDeck and therefore should not consolidate their financial results prior to closing a merger transaction.
5. INCOME TAXES
The components of income before income taxes were as follows (in thousands):
Year Ended December 31,
2022
2021
2020
Domestic
$
(13,465)
$
2,347
$
(9,441)
Foreign
(8,369)
(5,788)
(4,352)
$
(21,834)
$
(3,441)
$
(13,793)
-87-
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):
December 31,
2022
2021
Inventory
$
6,995
$
4,616
Accrued compensation
182
(70)
Stock options
3,882
3,581
Research and development tax credit
1,803
1,276
Research and development expense
6,387
3,291
Deferred revenue
1,411
1,390
Property and equipment
1,533
524
Net operating loss carryforwards
3,764
4,401
Foreign tax credit carryforward
—
64
Sales-type leases
1,800
2,494
Foreign intangible
(14,098)
(11,477)
Foreign net investment in leases
(2,474)
—
Allowance for bad debt
1,319
219
Interest expense limitation
807
—
Other
(598)
(759)
12,713
9,550
Valuation allowance
(4,997)
(2,788)
Total net deferred tax assets
$
7,716
$
6,762
The components of the income tax (benefit) expense are as follows (in thousands):
Year Ended December 31,
2022
2021
2020
Current income tax expense (benefit) :
Federal
$
273
$
—
$
(24)
State
1,041
666
339
Foreign
(26)
225
1,465
Total current expense
$
1,288
$
891
$
1,780
Deferred income tax (benefit) expense:
Federal
$
(2,930)
$
(4,364)
$
369
State
(1,223)
(813)
289
Foreign
(545)
713
(2,199)
Total deferred benefit
(4,698)
(4,464)
(1,541)
Total income tax (benefit) expense
$
(3,410)
$
(3,573)
$
239
-88-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's income tax (benefit) expense relating to income (loss) for the periods presented differs from the amounts
that would result from applying the federal statutory rate to that income (loss) as follows:
Year Ended December 31,
2022
2021
2020
Statutory federal tax rate
21 %
21 %
21 %
State income taxes, net of federal benefit
1 %
3 %
(4)%
Non-consolidated investment income
1 %
8 %
1 %
Foreign income inclusion
— %
— %
(12) %
Non-temporary stock option benefit
4 %
49 %
6 %
Other permanent differences
(1)%
— %
1 %
Foreign tax rate differences
3 %
10 %
2 %
Change in tax rate
— %
8 %
1 %
Change in valuation allowance
(11)%
88 %
(4)%
Other deferred differences
(1)%
(25)%
(2)%
Transaction costs
— %
(4)%
(6)%
Executive compensation limitation
(9)%
(65)%
(6)%
Research & development credit
6 %
(1)%
2 %
Equity investment
(1) %
(8) %
(4) %
Change in uncertain tax benefits
— %
11 %
3 %
Contingent consideration
2 %
10 %
— %
Other foreign income taxes due
— %
(2) %
— %
Other
1 %
1 %
(1)%
Effective income tax rate
16 %
104 %
(2)%
In 2022, we had total income tax benefit of $3.4 million, including $4.2 million in domestic deferred income tax benefit and $0.5 million in
foreign deferred income tax benefit, and $1.3 million in current income tax expense. In 2021, we had total income tax benefit of $3.6 million,
including approximately $5.2 million in domestic deferred income tax benefit and $0.7 million of foreign deferred income tax expense, and
$0.9 million in current income tax expense. In 2020, we had total income tax expense of $0.2 million, including approximately $0.6 million in
domestic deferred income tax expense and $2.2 million of foreign deferred income tax benefit, and approximately $1.8 million in current
income tax expense. Income tax benefit decreased in 2022 from 2021 due to income tax expense related to change in valuation allowance
offset by the additional tax benefit from financial reporting loss and research and development credits. Income tax expense decreased in
2021 from 2020 due to change in valuation allowance, stock option benefits, and executive compensation limitation.
Cash paid for income taxes for the years ended December 31, 2022, 2021 and 2020 was $2.7 million, $2.4 million and
$993 thousand, respectively.
-89-
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 2019 - 2021 remain open to examination by the Internal Revenue Service.
As of December 31, 2022, the Company had a domestic research and development tax credit carryforward of approximately
$1.8 million for federal tax purposes, which is offset by the uncertain tax position of $0.5 million, discussed below. All federal
net operating loss carryforwards (“NOL”) are expected to be utilized in 2022. Our foreign NOL of $13.1 million and foreign
interest expense limitation carryforward of $0.8 million do 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, 2022. Due to future projected income and IRC §174 research and development capitalization
requirements, the Company believes it will be able to utilize the remaining research and development tax credits before they expire. For
foreign purposes, the Company believes due to projected losses and historical three year cumulative losses in Germany, France, Italy and
Spain, all statutory deferred tax assets will not be utilized and therefore increased the valuation allowance against all statutory deferred
balances. As a result, the Company recorded an additional $2.2 million tax effected increase to the current partial valuation allowance
against the Company's statutory foreign assets for the year ended December 31, 2022. As of December 31, 2022, the Company had a
deferred tax asset of approximately $6.4 million from net operating losses, interest expense limitation carryforward, and tax credits and a net
partial valuation allowance of approximately $5.0 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 (in thousands):
Year Ended December 31,
2022
2021
Balance at beginning of period
$
(893)
$
(808)
Additions based on prior year tax positions
(378)
(508)
Additions based on current year tax position
(104)
—
Reductions from lapse in statues of limitation
436
404
Currency translation adjustment
47
19
Other adjustment
28
—
Balance at the end of period
$
(864)
$
(893)
-90-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The total amount of unrecognized tax benefits as of December 31, 2022 was approximately $0.9 million, which may impact the effective tax
rate if recognized. Historically, these unrecognized tax benefits were recognized as part of the acquisition of scil animal care company GmbH
("scil") in 2020 and BiEssA A-Laboratorio die Analisi Veterinarie S.r.l ("BSA") in 2021. Per the tax indemnification included in the purchase
agreements of scil and BSA, the sellers have indemnified the Company for these other liabilities, which would reduce the economic impact to
the Company if these positions were settled with tax authorities. In 2022, the Company increased unrecognized tax benefits of $0.5 million
related to the 2019 - 2022 domestic research and development tax credits. These credits often receive challenge and include controversy in
the Internal Revenue Service's interpretation of both facts and law that may differ from that of the Company. 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, 2022 are $28 thousand.
As of December 31, 2022, the Company had accumulated undistributed earnings generated by foreign subsidiaries of
approximately $4.1 million, which would be subject to U.S. taxes and foreign withholding taxes of approximately $0.2
million if repatriated. 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
Balance Sheet Location
December 31, 2022
December 31, 2021
Assets
Operating
Operating lease right-of-use assets
$
6,897
$
5,198
Finance
Property and equipment, net
1,471
1,650
Total Leased Assets
$
8,368
$
6,848
Liabilities
Operating
Operating lease liabilities, current
$
2,944
$
2,227
Operating lease liabilities, non-current
4,528
3,509
Finance
Deferred revenue, current, and other
127
200
Other liabilities
307
331
Total Lease Liabilities
$
7,906
$
6,267
For the year ended December 31, 2022, operating lease expense was approximately $3.2 million, including immaterial variable lease costs.
For the year ended December 31, 2021, operating lease expense was approximately $3.1 million, including immaterial variable lease costs.
For the year ended December 31, 2020, operating lease expense was approximately $2.8 million, including immaterial variable lease costs.
Finance lease amortization expense was $0.2 million, $0.4 million, and $0.3 million for the years ended December 31, 2022,
2021 and 2020, respectively. Finance lease interest expense was $15 thousand, $12 thousand, and $10 thousand for the
years ended December 31, 2022, 2021 and 2020, respectively.
-91-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental cash flow information related to the Company's operating and finance leases for the years ended December 31,
2022, 2021, and 2020 respectively, was as follows (in thousands):
Year Ended
December 31,
2022
2021
2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows - operating leases
$
2,984
$
2,315
$
2,213
Operating cash outflows - finance leases
$
15
$
12
$
10
Financing cash outflows - finance leases
$
199
$
290
$
250
ROU assets obtained in exchange for new lease obligations:
Operating leases
$
1,781
$
1,028
$
788
Finance leases
$
122
$
310
$
159
The following table presents the weighted average remaining lease term and weighted average discount rate related to the Company's leases:
December 31,
2022
2021
Weighted average remaining lease term:
Operating
4.8 years
3.0 years
Finance
3.2 years
3.5 years
Weighted average discount rate:
Operating
3.7 %
4.2 %
Finance
3.5 %
3.0 %
The following table presents the maturity of the Company's lease liabilities as of December 31, 2022 (in thousands):
Year Ending December 31,
Operating Leases
Finance Leases
2023
$
3,255
$
168
2024
1,212
134
2025
898
102
2026
653
50
2027
461
5
Thereafter
1,405
—
Total lease payments
7,884
459
Less: imputed interest
412
25
Total lease liabilities
$
7,472
$
434
-92-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Lessor Accounting
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, 2022 (in thousands):
Year Ending December 31,
Sales-Type Leases
2023
$
7,674
2024
7,451
2025
6,636
2026
5,888
2027
4,335
Thereafter
2,948
Total lease receivables
$
34,932
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):
Year Ended
December 31,
2022
2021
2020
Sales-type lease revenue
$
16,273 $
12,243
$
5,617
Sales-type lease cost of revenue
13,553
9,925
3,951
Profit recognized at commencement for sales-type leases
$
2,720 $
2,318
$
1,666
Operating lease income
$
1,669 $
2,110
$
1,012
-93-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net loss 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, 2022, 2021 and 2020 (in thousands, except per share data):
Years ended December 31,
2022
2021
2020
Net loss attributable to Heska Corporation
$
(19,889)
$
(1,148)
$
(14,399)
Basic weighted-average common shares outstanding
10,343
10,015
8,653
Assumed exercise of dilutive stock options and restricted shares
—
—
—
Diluted weighted-average common shares outstanding
10,343
10,015
8,653
Basic loss per share attributable to Heska Corporation
$
(1.92)
$
(0.11)
$
(1.66)
Diluted loss per share attributable to Heska Corporation
$
(1.92)
$
(0.11)
$
(1.66)
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):
Years ended December 31,
2022
2021
2020
Convertible preferred stock
—
—
458
Convertible senior notes
996
996
118
Stock options and restricted shares
278
404
328
1,274
1,400
904
As more fully described in Note 16, the Notes are convertible under certain circumstances, as defined in the indenture, into a
combination of cash and shares of the Company's common stock. As discussed in Note 1, the Company early adopted ASU 2020-
06, effective January 1, 2021, which amends certain guidance on the computation of EPS for convertible instruments. Prior to the
adoption of ASU 2020-06, the Company used the treasury stock method when calculating the potential dilutive effect of the
conversion feature of the Notes on earnings per share, if any. Under ASU 2020-06, the treasury stock method is no longer available,
and entities must apply the if-converted method for convertible instruments and the effect of potential share settlement must be
included in the diluted earnings per share calculation when an instrument may be settled in cash or shares. To determine the dilutive
effect to earnings per share using the if-converted method, interest expense on the outstanding Notes is added back to the diluted
earnings per share numerator and all of the potentially dilutive shares are included in the diluted earnings per share denominator.
For year ended December 31, 2022, all of the potentially issuable shares with respect to the Notes were excluded from the
-94-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
calculation of diluted net earnings per share because the effect was anti-dilutive. The Company has elected to
apply the modified retrospective method of adoption and will not restate EPS for the prior period.
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 year 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, 2022 and 2021 (in thousands):
North America
International
Total
Carrying amount, December 31, 2020
$
35,414
$
52,862
$
88,276
Goodwill attributable to acquisitions
30,039
4,562
34,601
Foreign currency adjustments
82
(4,133)
(4,051)
Carrying amount, December 31, 2021
$
65,535
$
53,291
$
118,826
Goodwill attributable to acquisitions
—
21,986
21,986
Measurement period adjustment to prior year acquisition
(17)
—
(17)
Foreign currency adjustments
(606)
(4,271)
(4,877)
Carrying amount, December 31, 2022
$
64,912
$
71,006
$
135,918
Other intangibles assets, net consisted of the following as of December 31, 2022 and 2021 (in thousands):
2022
2021
Gross Carrying
Accumulated
Net Carrying Gross Carrying
Accumulated
Net Carrying
Amount
Amortization
Amount
Amount
Amortization
Amount
Intangible assets subject to
amortization:
Customer relationships and other
$
56,900
$
(16,002)
$
40,898 $
47,629
$
(11,145)
$
36,484
Developed technology
19,143
(6,462)
12,681
15,633
(3,218)
12,415
Trade names
1,818
(319)
1,499
223
(166)
57
Intangible assets not subject to
amortization:
Trade names
7,315
—
7,315
7,749
—
7,749
Total intangible assets
$
85,176
$
(22,783)
$
62,393 $
71,234
$
(14,529)
$
56,705
Amortization expense relating to other intangibles is as follows (in thousands):
Years Ended December 31,
2022
2021
2020
Amortization expense
$
8,559
$
6,291
$
5,196
-95-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During the twelve months ended December 31, 2022, the Company impaired customer relationship and trade name
intangible assets as a result of entity rationalization due to acquisition activity. Impairment expense of $0.2 million was
recorded to Sales and marketing within operating expenses.
The remaining weighted-average amortization period for intangible assets is approximately 7.6 years.
Estimated amortization expense related to intangibles for each of the five years from 2023 through 2027 and thereafter is
as follows (in thousands):
Year Ending December 31,
2023
$
8,470
2024
7,870
2025
7,826
2026
7,432
2027
6,505
Thereafter
16,975
Total amortization related to finite-lived intangible assets
55,078
Indefinite-lived intangible assets
7,315
Net intangible assets
$
62,393
9. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following (in thousands):
December 31,
2022
2021
Land
$
2,182
$
2,959
Building
11,558
11,288
Machinery and equipment
39,141
39,851
Office furniture and equipment
1,951
1,732
Computer hardware and software
5,923
5,285
Leasehold and building improvements
10,854
10,796
Construction in progress
283
286
Property and equipment, gross
71,892
72,197
Less accumulated depreciation
(39,721)
(38,784)
Total property and equipment, net
$
32,171
$
33,413
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, 2022 and 2021 was $15.7
million and $15.1 million, respectively, before accumulated depreciation of $6.5 million and $5.8 million, respectively.
Depreciation expense for property and equipment was $4.7 million, $6.4 million and $6.2 million for the years ended
December 31, 2022, 2021 and 2020, respectively.
-96-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. INVENTORIES
Inventories consisted of the following (in thousands):
December 31,
2022
2021
Raw materials
$
20,978
$
16,094
Work in process
4,102
3,656
Finished goods
34,970
29,611
Total inventories
$
60,050
$
49,361
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):
December 31,
2022
2021
Accrued payroll and employee benefits
$
7,908
$
9,392
Accrued property taxes
670
656
Accrued purchase orders
203
552
Accrued taxes
2,123
3,574
Other
4,245
5,250
Total accrued liabilities
$
15,149
$
19,424
Other accrued liabilities consist of items that are individually less than 5% of total current liabilities.
12. CAPITAL
STOCK Stock Plans
The Company has stock incentive plans which authorize granting of stock options, restricted stock awards, restricted stock units, 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. In May 2021, stockholders
approved the Heska Corporation Equity Incentive Plan (the "Stock Plan") that replaced the Stock Incentive Plan and the 2003 Plan and
includes a reserve for an additional 250,000 shares of common stock along with any shares that remained available for grant under the prior
plans. The total number of shares reserved for issuance as of December 31, 2022 was 132,024.
-97-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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. No stock options were granted during 2022.
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:
2021
2020
Risk-free interest rate
0.98%
3.64%
Expected lives
5.6 years
5.3 years
Expected volatility
47%
46%
Expected dividend yield
0%
0%
A summary of our time vesting stock option activity is as follows:
Year Ended December 31,
2022
Weighted Average Exercise
Options
Price
Outstanding at beginning of period
420,202
$
64.06
Granted at market
—
$
—
Forfeited
(7,416)
$
122.56
Expired
(291)
$
150.29
Exercised
(72,457)
$
25.87
Outstanding at end of period
340,038
$
70.84
Exercisable at end of period
322,662
$
66.18
-98-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The total estimated fair value of time vesting stock options granted was computed to be approximately $1.6 million and $2.4 million during
the years ended December 31, 2021 and 2020, respectively. The amounts are amortized ratably over the requisite service periods of the
options. The weighted average estimated fair value per option of options granted was computed to be approximately $82.77 and $28.66
during the years ended December 31, 2021 and 2020, respectively. The total intrinsic value of options exercised was $7.2 million, $9.9
million and $5.0 million during the years ended December 31, 2022, 2021 and 2020, respectively. The cash proceeds from options
exercised were $2.2 million, $3.3 million and $3.4 million during the years ended December 31, 2022, 2021 and 2020, respectively.
The following table summarizes information about time vesting stock options outstanding and exercisable at December 31, 2022.
Options Outstanding
Options Exercisable
Weighted
Weighted
Number of
Average
Weighted
Number of
Average
Weighted
Remaining
Average
Remaining
Average
Exercise Prices
Options
Contractual
Exercise
Options
Contractual
Exercise
Outstanding
Life in Years
Price
Exercisable
Life in Years
Price
$7.36 - $21.09
36,148
1.41 $
12.49
36,148
1.41
$
12.49
$21.10 - $69.76
89,717
6.11 $
54.97
89,717
6.11
$
54.97
$69.77 - $71.83
80,851
5.33 $
69.81
80,851
5.33
$
69.81
$71.84 - $95.65
86,131
5.80 $
79.59
86,131
5.80
$
79.59
$95.66 - $188.62
47,191
7.05
$
131.51
29,815
6.46
$
116.40
$7.36 - $188.62
340,038
5.48 $
70.84
322,662
5.34
$
66.18
As of December 31, 2022, there was approximately $0.8 million of total unrecognized compensation cost related to
outstanding time vesting stock options. That cost is expected to be recognized over a weighted-average period of 1.1 years
with all cost to be recognized by the end of May 2024, assuming all options vest according to the vesting schedules in place at
December 31, 2022. As of December 31, 2022, the aggregate intrinsic value of outstanding options was approximately $2.4
million and the aggregate intrinsic value of exercisable options was approximately $2.4 million.
-99-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Performance Stock Options
Our performance-based stock options are tied to either market-related vesting conditions or Company performance metrics,
including future product launches, future sales targets, operating performance, and EBITDA.
A summary of our performance-based stock option activity is as follows:
Year Ended December 31,
2022
Weighted Average Exercise
Options
Price
Outstanding at beginning of period
254,800
$
79.71
Granted at market
—
$
—
Forfeited
(5,000)
$
60.94
Exercised
(5,000)
$
60.94
Outstanding at end of period
244,800
$
80.48
Exercisable at end of period
93,750
$
60.94
The total estimated fair value of performance-based stock options granted was computed to be approximately $2.6 million and $6.0 million
during the years ended December 31, 2021 and 2020, respectively. The weighted-average estimated fair value per option of options granted
was computed to be approximately $75.62 and $25.04 during the years ended December 31, 2021 and 2020, respectively. As of
December 31, 2022, the aggregate intrinsic value of outstanding options was approximately $0.3 million and the aggregate intrinsic value of
exercisable options was approximately $0.1 million. As of December 31, 2022, there was approximately $0.4 million of total unrecognized
compensation cost related to outstanding performance-based stock options that is expected to be recognized over a weighted-average period
of 0.7 years.
Options Outstanding
Options Exercisable
Number of
Weighted
Number of
Weighted
Options
Options
Outstanding
Average
Weighted
Exercisable
Average
Weighted
at
Remaining
Average
at
Remaining
Average
Exercise Prices
December 31,
Contractual
Outstanding
December 31,
Contractual
Exercise
2022
Life in Years
Price
2022
Life in Years
Price
$60.94
210,000
7.29
$
60.94
93,750
7.29
$
60.94
$198.40
34,800
3.44
$
198.40
—
—
$
—
$60.94 - $198.40
244,800
6.75
$
80.48
93,750
7.29
$
60.94
As of December 31, 2022, we reviewed each of the underlying corporate performance targets and determined that approximately
75,000 shares were related to corporate performance targets of which we did not deem achievement probable. The unrecognized
compensation cost associated with the performance options not deemed probable, based on grant date fair value, is approximately
$1.9 million. Any change in the probability determination could accelerate the recognition of this expense.
Restricted Stock Awards and Units
We have granted unvested restricted stock awards and restricted stock units (collectively, “restricted stock”) to management and directors
pursuant to the Stock Incentive Plan. The restricted stock awards and units have varying vesting periods, but generally become fully
vested between one and seven 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
-100-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
at the target amount of shares that may be earned and are tied to future sales targets, product development, profitability measures such as
gross margin and operating profit, and/or non-GAAP measures such as EBITDA and adjusted EBITDA margin. We value the restricted stock
awards and units 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, 2022:
Restricted Stock Awards
Restricted Stock Units
Weighted-Average
Weighted-Average
Grant Date Fair Value
Grant Date Fair Value
Restricted Stock
Per Award
Restricted Stock
Per Award
Non-vested as of December 31, 2021
493,513 $
141.98
6,000 $
172.11
Granted
78,236 $
115.91
26,173 $
100.97
Vested
(114,991) $
90.57
— $
—
Forfeited
(14,239) $
91.17
(243) $
127.09
Non-vested as of December 31, 2022
442,519 $
152.36
31,930 $
114.14
The weighted average grant date fair value per share of awards granted during the year was $115.91, $207.24, and $87.29 for
the years ended December 31, 2022, 2021 and 2020, respectively. Fair value of restricted stock vested was $15.8 million,
$5.6 million, and $5.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.
As of December 31, 2022, there was approximately $16.1 million and $2.1 million of total unrecognized compensation cost related to
restricted stock awards and restricted stock units, respectively, 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 1.7 years for restricted
stock awards and 2.0 years for restricted stock units. As of December 31, 2022, we reviewed each of the underlying corporate
performance targets and determined that approximately 222,000 shares of common stock for restricted stock awards and
approximately 3,000 shares of common stock for restricted stock units were related to corporate performance targets of which we did
not deem achievement probable. The unrecognized compensation cost associated with the restricted stock awards and restricted
stock units not deemed probable, based on grant date fair value, is approximately $33.5 million and $0.6 million, respectively. 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 21,484 had been issued as of December 31, 2022. 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.
-101-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
We issued 12,188, 5,437 and 3,859 shares under the ESPP for the years ended December 31, 2022, 2021 and 2020, respectively. In the
year ended December 31, 2020, we also issued 6,210 shares under a previous ESPP. The weighted-average fair value of the purchase
rights granted was $14.43, $29.56 and $16.19 per share for the years ended December 31, 2022, 2021 and 2020, 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.
2021 Equity Offering
On March 5, 2021, the Company completed a public offering of 940,860 shares of common stock, $0.01 par value per share, at a public
offering price of $186.00 per share. The Company received net proceeds of approximately $164.2 million after deducting underwriting
discounts and commissions and issuance costs. The Company granted the underwriters an option to purchase up to an additional 141,129
shares of common stock from the Company at the offering price of $186.00 per share (less the underwriting discounts and commissions),
within 30 days of the Prospectus Supplement dated March 2, 2021. The Company evaluated the accounting treatment of the option under
ASC 815-40, Derivatives and Hedging - Contracts on an Entity's Own Equity, and determined that it met the criteria for equity treatment
thereunder. The underwriters’ option was not exercised and expired on April 1, 2021. The Company is using the net proceeds of the offering
for general corporate purposes, including working capital, further development and potential commercialization of current and future product
initiatives, collaborations, and capital expenditures. The Company may also use a portion of the net proceeds of this offering to fund possible
investments in or acquisitions of complementary businesses, products or technologies, or to repay indebtedness. See the Consolidated
Statements of Cash Flows for further details regarding investing activities completed thus far.
-102-
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):
Foreign Currency
Total Accumulated
Other
Pension
Foreign Currency
Gain on Intra-
Entity
Comprehensive
Adjustments
Translation1
Transactions2
Income
Balances at December 31, 2020
$
(386)
$
5,872
$
8,683
$
14,169
Other comprehensive income (loss)
107
(3,898)
(5,341)
(9,132)
Balances at December 31, 2021
(279)
1,974
3,342
5,037
Other comprehensive income (loss)
99
(6,874)
(4,768)
(11,543)
Balances at December 31, 2022
$
(180)
$
(4,900)
$
(1,426)
$
(6,506)
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. Historically, the Company
has incurred minimal warranty costs. The Company's warranty reserve was $0.3 million and $0.5 million as of December 31, 2022 and 2021.
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 defended itself from the claim but ultimately reached a settlement agreement and paid $0.8 million
to the defendant on April 28, 2022. The Company is indemnified by the scil acquisition agreement for this claim.
At December 31, 2022, 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.
-103-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Global Supply and Licensing Agreement
On March 28, 2022, the Company entered into a global supply and licensing agreement with VolitionRx Limited (“Volition”) to adapt
and commercialize the Nu.Q® Vet Cancer Screening Test at the POC for canines and felines on Heska’s technology. On March
30, 2022, the Company made an upfront milestone payment of $10 million to Volition in exchange for exclusive rights to develop
the Nu.Q® Vet Cancer Screening Test for the POC and non-exclusive rights for central reference lab testing. The $10 million
payment was expensed to Research and development on the Consolidated Statements of Loss for the year ended December 31,
2022. The Company is obligated to pay an additional $13 million on or before December 31, 2024, if certain milestones are met, or
to obtain an extended timeline to meet those milestones. If those milestones are not met by the agreed upon extension, the
agreement may be terminated. However, if the $13 million milestones are met, the agreement will have a total term of 22 years for
exclusivity in POC testing. If the first milestones are met and the agreement does not terminate, there will be another $5 million
payment due upon the achievement of an additional milestone within the remaining term of the agreement. These potential future
milestone payments have not yet been accrued, as the Company has not deemed them probable at this time.
Off-Balance Sheet Commitments
We have no off-balance sheet arrangements. Refer to Note 4 for discussion of our variable interest entity.
Purchase Obligations
The Company has contractual obligations with suppliers for unconditional annual minimum inventory purchases
through 2026 in the aggregate amount of $55.3 million as of December 31, 2022.
15. INTEREST AND OTHER EXPENSE, NET
Interest and other expense, net, consisted of the following (in thousands):
Year Ended December 31,
2022
2021
2020
Interest income
$
(3,578)
$
(1,797)
$
(607)
Interest expense
4,191
4,201
6,374
Other expense (income), net
923
44
(166)
Interest and other expense, net
$
1,536
$
2,448
$
5,601
Cash paid for interest was $4.3 million, $3.3 million and $3.2 million for the years ended December 31, 2022, 2021 and 2020, 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 (the "Notes"), 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.
-104-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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
-105-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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 prior to the adoption of ASU 2020-06, the Company initially 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 represented the debt discount, which was 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 was 15.3% per annum prior to adopting ASU 2020-06. The equity component of the Notes was approximately $39.5 million, net of
allocated issuance costs of $1.5 million. 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, 2022.
The Company early adopted ASU 2020-06, effective January 1, 2021, which simplifies the accounting for certain convertible
instruments. Under the new standard, qualifying convertible debt is accounted for as a single liability measured at its amortized cost,
as long as no other features require bifurcation and recognition as derivatives. As a result of ASU 2020-06, the Company's cash
interest expense is not impacted, however, the Company's non-cash interest accretion is limited to the amortization of debt issuance
costs under ASC 835-30. The new effective interest rate of the Notes post-adoption is 4.35%. The Company also reversed the
conversion feature amount recorded in APIC and reversed the difference in non-cash interest expense via retained earnings.
During the years ended December 31, 2022 and 2021, no portion of the Notes was converted and the liability was classified as
long-term debt on the Company's Consolidated Balance Sheet as of December 31, 2022.
-106-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the net carrying amount of the Notes as of December 31, 2022 (in thousands):
December 31, 2022
December 31, 2021
Principal amount of the Notes
$
86,250
$
86,250
Unamortized debt discount
(1,783)
(2,216)
Net carrying amount
$
84,467
$
84,034
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):
Year Ended December 31,
2022
2021
2020
Interest expense related to contractual coupon interest2
$
3,234
$
3,755
$
3,234
Interest expense related to amortization of debt discount1
434
415
3,111
Total interest expense
$
3,668
$
4,170
$
6,345
1 Immaterial out of period error correction of non-cash interest identified and recorded during the fourth fiscal quarter of 2020.
2The year ended December 31, 2021 includes $0.5 million of additional interest expense related to the restrictive legend on the Notes.
The legend was removed as of December 31, 2021 and the Notes will not accrue additional interest in future periods.
As of December 31, 2022, the remaining period over which the unamortized discount will be amortized is 3.8 years.
The estimated fair value of the Notes was $89.1 million and $194.3 million as of December 31, 2022 and 2021, respectively,
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 $62.16 on December 31, 2022, the if-
converted value did not exceed the aggregate principal amount of the Notes.
-107-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. NOTES RECEIVABLE
Convertible Promissory Note
On December 9, 2020, the Company's equity method investee (the “Equity Method 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 Convertible 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 (income) expense, net on the Consolidated
Statements of Loss. The fair value of the derivative will be remeasured each reporting period, with the mark-to-market adjustment to be
included in Interest and other (income) expense, net on the Consolidated Statements of Loss.
The following table summarizes the net carrying amount of the note receivable, including the unamortized discount and
allowance for expected credit losses, as well as the fair value of the embedded derivative asset (in thousands):
December 31, 2022
December 31, 2021
Principal amount
$
6,650
$
6,650
Unamortized discount
(339)
(672)
Allowance for expected credit losses
(4,264)
(66)
Net carrying amount
$
2,047
$
5,912
Embedded derivative asset
177
888
Related party convertible note receivable, net
$
2,224
$
6,800
The Company recorded an allowance for expected credit losses on the promissory note of $4.3 million as of December 31, 2022. The allowance for
expected credit losses increased $4.2 million from December 31, 2021. The change reflects increased risk of collectability given the investee's current
financial position and ability to achieve certain events required for conversion of the note, which are largely driven by more recent challenges and
uncertainties in the macro-economic environment. These factors increased the probability of default.
Promissory Notes
On February 1, 2021, one of the Company's equity investees, LightDeck, which the Company accounts for as a non-
marketable equity security, issued a Promissory Note to the Company (the “First Promissory Note”) with a principal amount of
$9.0 million and a stated interest rate of 10.0% per annum that is payable monthly.
-108-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The First Promissory Note has a maturity date of December 1, 2024 and provides for interest only payments through December 1,
2023. Beginning on January 1, 2024, the First Promissory Note requires repayment of the principal and interest over twelve
consecutive monthly payments. As additional consideration, the Company was also issued a warrant to acquire securities of
LightDeck that expires December 31, 2034. On September 19, 2022, a second Promissory Note (the "Second Promissory Note") was
issued to the Company with a principal amount of $4.7 million and a stated interest rate of 10.0% per annum that is payable on
December 31, 2023. The Second Promissory Note has a maturity date of the earlier of December 31, 2023 and a merger transaction
with LightDeck. Refer to Note 4 for additional information on our equity investments and the acquisition of LightDeck.
The Company evaluated the accounting treatment of the warrant to acquire securities and determined it is a freestanding instrument
that meets the definition of a derivative under ASC 815 and requires bifurcation from the note receivable host. The Company
measured the warrant 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 First Promissory Note using the effective interest
method. The effective interest rate of the Promissory Note is 10.99%, and the amortization of the discount will be included as
interest income within Interest and other (income) expense, net on the Consolidated Statements of Loss. The fair value of the
derivative was $0.3 million at issuance and $0 as of December 31, 2022, and is included in Other non-current assets on the
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 Interest and other expense, net on the Consolidated Statements of Loss.
The following table summarizes the carrying value of the notes receivable, including the unamortized discount and
allowance for expected credit losses (in thousands):
December 31, 2022
December 31, 2021
Principal amount
$
13,700
$
9,000
Unamortized discount
(189)
(254)
Allowance for expected credit loss
—
(298)
Net carrying amount
$
13,511
$
8,448
18. SEGMENT REPORTING
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 are certain corporate expenses included in the North America segment that the
Company does not allocate. Such expenses include research and development, and 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.
Our Chief Operating Decision Maker ("CODM") evaluates segment performance and allocates 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, 2022, due to the acquisition of VetZ on January 3, 2022.
-109-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summarized financial information concerning the Company's reportable segments is shown in the following tables (in thousands):
Year Ended December 31, 2022
North America
International
Total
Total revenue
$
161,762
$
95,545
$
257,307
Cost of revenue
86,234
59,906
146,140
Gross profit
75,528
35,639
111,167
Gross margin
47%
37%
43%
Operating loss
(15,797)
(4,501)
(20,298)
Loss before income taxes
(13,830)
(8,004)
(21,834)
Investments in unconsolidated affiliates
3,959
—
3,959
Total assets
374,737
211,079
585,816
Net assets
248,882
173,326
422,208
Capital expenditures
837
1,277
2,114
Depreciation and amortization
5,216
8,750
13,966
Year Ended December 31, 2021
North America
International
Total
Total revenue
$
158,898
$
94,841
$
253,739
Cost of revenue
84,472
63,473
147,945
Gross profit
74,426
31,368
105,794
Gross margin
47%
33%
42%
Operating income (loss)
650
(1,643)
(993)
Income (loss) before income taxes
2,072
(5,513)
(3,441)
Investments in unconsolidated affiliates
5,424
—
5,424
Total assets
441,234
162,838
604,072
Net assets
308,973
126,881
435,854
Capital expenditures
700
1,068
1,768
Depreciation and amortization
5,673
7,882
13,555
-110-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Year Ended December 31, 2020
North America
International
Total
Total revenue
$
131,066
$
66,257
$
197,323
Cost of revenue
70,163
45,870
116,033
Gross profit
60,903
20,387
81,290
Gross margin
46%
31%
41%
Operating loss
(4,977)
(3,215)
(8,192)
Loss before income taxes
(7,871)
(5,922)
(13,793)
Investments in unconsolidated affiliates
6,704
—
6,704
Total assets
238,550
161,289
399,839
Net assets
156,931
130,122
287,053
Capital expenditures
443
243
686
Depreciation and amortization
4,735
6,650
11,385
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):
For the Year Ended December 31,
2022
2021
2020
United States
$
145,014
$
141,588
$
120,244
Canada
16,748
17,310
10,822
Germany
53,529
44,148
29,543
France
13,607
18,671
12,615
Spain
11,106
14,071
12,995
Italy
9,128
10,145
5,850
Switzerland
3,472
3,885
3,343
Other International
4,703
3,921
1,911
Total
$
257,307
$
253,739
$
197,323
Total long-lived assets by principal geographic areas were as follows (in thousands):
As of December 31,
2022
2021
2020
United States
$
14,351
$
12,502
$
11,805
Canada
1,274
719
643
Germany
15,429
12,795
14,630
France
3,362
3,127
4,205
Spain
1,167
1,051
1,209
Italy
2,090
1,966
1,944
Switzerland
87
63
46
Other International
1,308
1,190
1,060
Total
$
39,068
$
33,413
$
35,542
No customers accounted for more than 10% of our consolidated revenue for the years ended December 31, 2022, 2021 or 2020.
-111-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
19. SUBSEQUENT EVENTS
LightDeck Acquisition
On January 3, 2023, the Company completed the acquisition of MBio Diagnostics, Inc., d/b/a LightDeck Diagnostics ("LightDeck").
The LightDeck acquisition represents a meaningful increase in our intellectual property portfolio as well as our manufacturing and
research and development capabilities. Total acquisition related expense for the year ended December 31, 2022 was $1.4 million
and is recorded within General and administrative in the Consolidated statements of loss. See Note 4 for further discussion.
Stock Issuances
On January 11, 2023, the Compensation Committee of the Company's Board of Directors authorized the issuance of
47,400 performance-based restricted stock awards to executive officers . The vesting of the restricted stock awards is
subject to the achievement of certain Company performance conditions. The performance conditions must be achieved by
December 31, 2026, otherwise the restricted stock awards are forfeited.
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, 2022.
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, 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, 2022.
-112-
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, 2022.
Changes in Internal Control over Financial Reporting
We evaluated our internal controls over financial reporting in relation to recurring performance 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 2022 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
-113-
PART III
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 2023 Annual Meeting of Stockholders.
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.
-114-
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, 2022, including the Equity Incentive Plan, 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.
(c) Number of Securities
(a) Number of Securities to be Issued
(b) Weighted-Average Exercise
Remaining Available for Future
Issuance Under Equity
Plan Category
Upon Exercise of Outstanding
Price of Outstanding Options
Compensation Plans (excluding securities
Options and Rights
and Rights
reflected in column (a))
Equity Compensation Plans Approved
584,838
$74.88
310,540
by Stockholders
Equity Compensation Plans Not
Approved
None
None
None
by Stockholders
Total
584,838
$74.88
310,540
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 2023 Annual Meeting of Stockholders.
-115-
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
Notes
Description of Document
Number
2.1#++
(19)
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.
2.2#
(22)
Amendment Agreement dated April 1, 2020 regarding the agreement on the sale and purchase of the sole
share in scil animal care company GmbH.
2.3
(27)
Sale and Purchase Agreement dated November 1, 2021 regarding Veterinärmedizinisches
Dienstleistungszentrum (VetZ) GmbH Online-Dienstleistungen F✔r Tierärzte among Registrant, Heska
GmbH, F2 Beteiligungs GmbH & Co. KG, F3P GmbH, Mr. Ingo Fraedrich, and Mr. Thomas Fraedrich.
2.4#++
(28)
Agreement and Plan of Merger dated September 9, 2022 by and among Heska Corporation, Mbio Merger
Sub, Inc., Mbio Diagnostics, Inc. and Shareholder Representative Services LLC
2.5#
(28)
Amendment No. 1 to Agreement and Plan of Merger dated October 24, 2022 by and among Heska
Corporation, Mbio Merger Sub, Inc., Mbio Diagnostics, Inc. and Shareholder Representative Services LLC
3(i)
(4)
Restated Certificate of Incorporation of the Registrant.
3(ii)
(4)
Certificate of Amendment to Restated Certificate of Incorporation of Registrant.
3(iii)
(4)
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3(iv)
(9)
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3(v)
(10)
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3(vi)
(13)
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3(vii)
(15)
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3(viii)
(20)
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
-116-
3(ix)
(27)
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3(x)#
(22)
Certificate of Designation of Preferences, Rights and Limitations of Series X Convertible Preferred Stock.
3(xi)
(15)
Amended and Restated Bylaws of the Registrant, as amended.
4.1
(18)
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).
4.2
(29)
Description of Securities
10.1*
(23)
Heska Corporation Equity Incentive Plan.
10.2*
(20)
Heska Corporation Stock Incentive Plan, as amended and restated.
10.3*
(17)
Stock Incentive Plan Restricted Stock Grant Agreement.
10.4*
(17)
Stock Incentive Plan Restricted Stock Grant Agreement (Performance-based Award).
10.5*
(17)
Stock Incentive Plan Restricted Stock Grant Agreement (Management Incentive Plan Award).
10.6*
(17)
Stock Incentive Plan Restricted Stock Grant Agreement (Outside Director Award).
10.7*
(17)
Stock Incentive Plan Employees and Consultants Option Agreement.
10.8*
(17)
Stock Incentive Plan Outside Directors Option Agreement.
10.09*
(3)
2003Equity Incentive Plan, as amended and restated.
10.10*
(9)
2003Equity Incentive Plan Restricted Stock Grant Agreement (Performance-based Award).
10.11*
(9)
2003Equity Incentive Plan Restricted Stock Grant Agreement (Management Incentive Plan Award).
10.12*
(9)
2003Equity Incentive Plan Restricted Stock Grant Agreement (Outside Director Award).
10.13*
(9)
2003 Equity Incentive Plan Employees and Consultants Option Agreement.
10.14*
(9)
2003Equity Incentive Plan Outside Directors Option Agreement.
10.15*
(20)
2020 Employee Stock Purchase Plan of Registrant, as amended and restated.
10.16*
(26)
Amended and Restated Management Incentive Plan Master Document.
10.17*
(19)
Director Compensation Policy.
10.18*
(2)
Form of Indemnification Agreement entered into between Registrant and its directors and certain officers.
10.19*
(24)
Amended and Restated Employment Agreement dated June 8, 2021 by and between Registrant and Kevin
Wilson.
10.20*
(5)
Restricted Stock Grant Agreement between Registrant and Kevin S. Wilson, effective as of March 26, 2014.
10.21*
(7)
Restricted Stock Grant Agreement between Registrant and Kevin S. Wilson, effective as of May 6, 2014.
10.22*
(11)
Restricted Stock Grant Agreement between Registrant and Kevin S. Wilson, effective as of December 1,
2017.
10.23*
(12)
Restricted Stock Grant Agreement between Registrant and Kevin S. Wilson, effective as of March 7, 2018.
10.24*
(14)
Restricted Stock Grant Agreement between Registrant and Kevin S. Wilson, effective as of May 3, 2018.
10.25*
(16)
Employment Agreement between Registrant and Catherine I. Grassman, effective as of June 1, 2019
-117-
10.26*
(1)
Employment Agreement between Registrant and Nancy Wisnewski, effective as of April 15, 2002.
10.27*
(2)
Amendment to Employment Agreement between Registrant and Nancy Wisnewski, effective as of January
1, 2008.
10.28*
(21)
Employment Agreement between Registrant and Steven M. Eyl, effective as of April 16, 2020.
10.29*
(26)
Employment Agreement between Registrant and Christopher Sveen, effective as of April 15, 2020
10.30*
(26)
Employment Agreement between Registrant and Eleanor Baker, effective as of April 9, 2020
10.31*
Employment Agreement between Registrant and Anthony Providenti, effective as of June 20, 2020
10.32*
(12)
Restricted Stock Grant Agreement form for grants issued on March 7, 2018 (for officers other than Kevin S.
Wilson).
10.33*
(12)
Notice of Stock Option Grant for grants issued on March 7, 2018.
10.34+
(6)
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.
10.35
(8)
Second Amendment to Clinical Chemistry Analyzer Agreement between Registrant and FUJIFILM
Corporation, effective as of April 1, 2015.
10.36++
(19)
Third Amendment to Clinical Chemistry Analyzer Agreement between Registrant and FUJIFILM
Corporation, effective as of August 27, 2019.
10.37#++
(25)
Fourth Amendment to Clinical Chemistry Analyzer Agreement between Registrant and FUJIFILM
Corporation, effective as of February 18, 2021.
10.38+
(11)
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.
10.39++
(21)
First Amendment to Exclusive Supply Agreement by and between Registrant and Shenzhen Mindray Bio-
Medical Electronics Co., Ltd., effective as of June 1, 2020.
10.40+
(21)
Amended and Restated Supply Agreement by and between Registrant and Shenzhen Mindray Bio-Medical
Electronics Co., Ltd., effective as of June 1, 2020.
10.41+
(11)
Master Supply Agreement between Registrant and Butler Animal Health Supply, LLC d/b/a Henry Schein
Animal Health effective as of October 17, 2014.
10.42*
(30)
Amendment to Heska Corporation Equity Incentive Plan, effective May 4, 2022.
21.1
Subsidiaries of the Company.
23.1
Consent of Grant Thornton LLP.
24.2
Power of Attorney (See Signature Page of this Form 10-K).
31.1
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.
31.2
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.
32.1**
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.
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
-118-
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
104.0
Cover Page Interactive Data File (embedded within the Inline XBRL document contained in Exhibit 101)
Notes
*
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.
(1)
Filed with the Registrant's Form 10-K for the year ended December 31, 2006.
(2)
Filed with the Registrant's Form 10-K for the year ended December 31, 2007.
(3)
Filed with the Registrant's Form 10-K for the year ended December 31, 2008.
(4)
Filed with the Registrant's Form 10-K for the year ended December 31, 2012.
(5)
Filed with the Registrant's Form 10-K for the year ended December 31, 2013.
(6)
Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2014.
(7)
Filed with the Registrant's Form 10-K for the year ended December 31, 2014.
(8)
Filed with the Registrant's Form 10-Q for the quarter ended March 31, 2015.
(9)
Filed with the Registrant's Form 10-K for the year ended December 31, 2016.
(10)
Filed with the Registrant's Form 10-Q for the quarter ended March 31, 2017.
(11)
Filed with the Registrant's Form 10-K for the year ended December 31, 2017.
(12)
Filed with the Registrant's Form 10-Q for the quarter ended March 31, 2018.
(13)
Filed with the Registrant's Form 8-K on May 9, 2018.
(14)
Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2018.
(15)
Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2019.
(16)
Filed with the Registrant's Form 8-K on June 1, 2019.
(17)
Filed with the Registrant's Form 10-K for the year ended December 31, 2018.
(18)
Filed with the Registrant's Form 8-K on September 17, 2019.
(19)
Filed with the Registrant's Form 10-K for the year ended December 31, 2019.
(20)
Filed with the Registrant’s Form 10-Q for the quarter ended March 31, 2020.
(21)
Filed with the Registrant’s Form 10-Q for the quarter ended June 30, 2020.
(22)
Filed with the Registrant’s Form 8-K on April 1, 2020.
(23)
Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2021.
(24)
Filed with the Registrant's Form 8-K on June 10, 2021.
(25)
Filed with the Registrant's Form 10-Q for the quarter ended March 31, 2021.
(26)
Filed with the Registrant's Form 10-K for the year ended December 31, 2020.
(27)
Filed with the Registrant’s S-3 on February 16, 2022, File Number 333-262795.
(28)
Filed with the Registrant’s Form 10-Q for the quarter ended September 30, 2022.
(29)
Filed with the Registrant’s Form 10-K for the year ended December 31, 2021.
(30)
Filed with the Registrant’s Form 10-Q for the quarter ended June 30, 2022.
-119-
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.
-120-
SIGNATURES
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 28, 2023.
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
Title
Date
/s/ KEVIN S. WILSON
Chief Executive Officer, President and Director (Principal Executive
February 28, 2023
Kevin S. Wilson
Officer)
/s/ CATHERINE GRASSMAN
Executive Vice President, Chief Financial Officer (Principal
February 28, 2023
Catherine Grassman
Financial and Accounting Officer)
/s/ SCOTT HUMPHREY
Chair
February 28, 2023
Scott Humphrey
/s/ ROBERT L. ANTIN
Director
February 28, 2023
Robert L. Antin
/s/ STEPHEN L. DAVIS
Director
February 28, 2023
Stephen L. Davis
/s/ MARK F. FURLONG
Director
February 28, 2023
Mark F. Furlong
/s/ JOACHIM HASENMAIER
Director
February 28, 2023
Joachim Hasenmaier
/s/ SHARON J. MAPLES
Director
February 28, 2023
Sharon J. Maples
/s/ DAVID E. SVEEN
Director
February 28, 2023
David E. Sveen, Ph.D.
-121-
Exhibit 4.2
HESKA CORPORATION
DESCRIPTION OF SECURITIES
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 of 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 42,500,000 shares of capital stock, par value $0.01 per share, of which:
•
20,000,000 shares of original common stock are designated as Traditional common stock;
•
20,000,000 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.
The number of authorized shares of common stock may be increased or decreased (but not below the number of shares
thereof then outstanding) by the affirmative vote of the holders of a majority of the capital stock of the Company entitled to vote.
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 are elected for a one year term of office expiring at the next annual meeting of stockholders.
Directors are elected by a plurality of the vote of the holders of a majority of the stock present in person or represented by
proxy and entitled to vote on the election of directors. Except as provided otherwise in the Certificate of Incorporation, the bylaws, or
applicable Delaware law, the vote of the holders of a majority of the stock present in person or represented by proxy
and entitled to vote on the subject matter shall decide any matter brought before a 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 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
2
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 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
3
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
Exhibit 10.31
EMPLOYMENT AGREEMENT
This Employment Agreement (the “Agreement”) is entered into and effective on June 20, 2021, by and
between Heska Corporation, a Delaware corporation (“Heska”), and Anthony Providenti (“Executive”). This
Agreement refers to Heska and Executive collectively as the “Parties” and individually as a “Party.”
RECITALS
WHEREFORE, Heska desires to employ Executive as Executive Vice President, Corporate Development
commencing on August 1, 2021, or such earlier date as is mutually agreed upon by the Parties (the “Effective
Date”) on the terms and conditions set forth herein.
WHEREFORE, Executive desires to be employed by Heska on such terms and conditions.
NOW, THEREFORE, in consideration of the mutual promises, covenants, and agreements contained herein, the
sufficiency of which is acknowledged by the Parties, and intending to be legally bound, the Parties agree as follows:
TERMS
1. Duties and Scope of Employment.
a.
Position and Duties. During the Term of Agreement (as defined below), Executive shall serve as the Executive
Vice President, Corporate Development of Heska. Such position is one of trust and confidence to aid Heska in strategic growth
and sales of Heska’s point of care products, including in-clinic veterinary analyzers and lab equipment, blood testing instruments
and supplies, allergy testing and immunotherapy products, digital imaging products, and pumps and supplements, to veterinary
healthcare providers. Executive will render such business and professional services in the performance of Executive’s duties,
consistent with Executive’s executive-level position within Heska and/or its subsidiaries, as will reasonably be assigned to
Executive by Heska’s Board of Directors or Chief Executive Officer. Executive’s duties will be subject to review, and adjustments
will be made at the discretion of the Chief Executive Officer. During the Term, Executive shall be a member of the executive
leadership team for Heska, as such team may be characterized from time to time.
b.
Obligations. During the Term of Agreement (as defined below), Executive will devote Executive’s full attention,
skills, business time and efforts to Heska and/or its subsidiaries and to the faithful performance of his duties under this Agreement.
For the duration of the Term of Agreement, Executive agrees not to engage in any other employment, occupation, or consulting
activity, for any direct or indirect remuneration, or in any activity that would create a conflict of interest, or the appearance of a
conflict of interest, with Heska, without the prior approval of the Chief Executive Officer, Board of Directors or the Corporate
Governance Committee of the Board (which approval will not be unreasonably withheld); provided, however, that Executive may,
without the approval of the Chief Executive Officer, Board of Directors or the Governance Committee, manage personal
investments and participate (in any capacity) with any civic, educational, or charitable organization, provided such services do not
interfere with Executive’s obligations to Heska.
c.
Place of Performance. Executive shall work from his home office; provided that Executive may be
required to travel on Heska business during the Term of Agreement.
2
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 1st anniversary of the Effective
Date, and on each anniversary of the Effective Date thereafter, this Agreement will automatically renew for an
additional twelve-month term unless Heska provides Executive with notice of non-renewal at least one hundred
twenty (120) days prior to the date of automatic renewal (“Non-Renewal Termination”); provided, however, that
either Heska or Executive may terminate Executive’s employment pursuant to the provisions in Section 6 below.
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 any accrued but unpaid Base Salary (as defined below), 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 of Directors so requests.
3. Compensation.
a.
Base Salary. Heska will pay Executive an annual salary of $365,000.00 (the “Base Salary”) as compensation for
Executive’s employment. The Base Salary will be paid periodically in accordance with Heska’s normal payroll practices and will
be subject to required withholdings and deductions. Executive’s Base Salary will be subject to review, and adjustments will be
made by Heska’s Board of Directors or Compensation Committee of the Board (the “Compensation Committee”) or the Chief
Executive Officer Executive based upon Heska’s standard practices.
b.
Annual Bonus. During the Term of Agreement, Executive will be eligible to participate in the Company’s
Management Incentive Plan Master Document (as amended and restated, the “MIP”), an incentive compensation
plan intended to reward near-term performance, which may be determined and paid from time to time at the sole
discretion of the Compensation Committee. This Agreement refers to such incentive compensation as “MIP
Payouts.” MIP Payouts, if any, will be paid in accordance with the MIP, provided, however, that any MIP Payout
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 shorter or 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
Payout. Executive’s target MIP Payout with respect to 2021 shall equal Twenty Percent (20%) of Executive’s Base
Salary, pro-rated based on the Effective Date. Except as otherwise provided in the MIP, in order to be entitled to, and
to earn, MIP Payouts, Executive must be employed with Heska at the time MIP Payouts are paid. By signing this
Agreement, Executive acknowledges that, except as otherwise provided in the MIP, MIP Payouts are not earned,
vested, or determinable until MIP Payouts are paid, and Employee will not receive MIP Payouts if Employee is not
employed by Heska at the time it is paid. Any MIP Payouts will be subject to applicable withholdings and deductions.
c.
Sign-On Cash Bonus. Solely in consideration of Executive’s acceptance of a position with Heska as Executive
Vice President, Corporate Development, Heska will pay to Executive a one-time cash sign-on bonus in the amount of Two
Hundred Thousand Dollars ($200,000) (the “Sign-On Bonus”), payable within fourteen (14) days of the Effective Date, subject to
continued employment through the date of payment and subject to applicable withholdings and deductions.
3
d.
Equity Incentive Awards.
i.
Sign-On Grant. As an inducement to Executive’s employment with Heska, the Compensation
Committee has approved a grant of Twenty Three Thousand Five Hundred (23,500) restricted shares of the
Heska’s common stock (the “Sign-On Equity Grant”) pursuant to the Heska Corporation Equity Incentive
Plan (the “Plan”), such grant to be made effective as of the Effective Date. The Sign-On Equity Grant shall be
subject to the terms and conditions set forth in the award agreement attached hereto as Exhibit A.
ii.
Annual Grants. Beginning in 2022, Executive shall be eligible to receive equity-based compensation
commensurate with his position in connection with any annual equity-based awards made to senior executives of Heska.
Such awards shall be made in the sole discretion of the Compensation Committee and shall be subject to the terms and
conditions set forth in the Plan (or other applicable plan) and any applicable award agreements.
iii.
Replacement Grant. As further inducement to Executive’s employment with Heska and in recognition of
Executive’s forfeiture of certain equity compensation with his former employer, the Compensation Committee has
approved an additional one- time grant of Sixteen Thousand Five Hundred (16,500) restricted shares of common stock
(the “Replacement Grant”), such grant to be made effective as of the Effective Date. The Replacement Grant shall be
subject to the terms and conditions set forth in the award agreement attached hereto as Exhibit B.
4. Expenses.
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. Executive Benefits.
During the Term of Agreement, Executive will be eligible to participate in the benefits offered to other executive employees of
Heska, in accordance with Benefit Plans (as defined below), 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), or due to Executive’s death or Disability (as defined below) or
pursuant to a Non-Renewal Termination, 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.
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 six months following such termination, or (B) in equal installments
over the period beginning on the date of such termination with a lump sum of any remaining balance of the amount
specified above paid on March 15 of the year following the year of termination.
4
ii.
Provided that, within thirty (30) days of the 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 is 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.) Executive shall notify Heska immediately upon Executive’s
acceptance of employment with another employer. For the remaining 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.
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 a Non-Renewal Termination, and the termination is 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.
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 with a lump sum of any remaining
balance paid on March 15 of the year following the year of termination.
ii.
Provided that, within thirty (30) days of the 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 is 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). Executive shall notify Heska immediately upon Executive’s
acceptance of employment with another employer. For the remaining 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.
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)
any and 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 Heska-provided or paid plans, policies, and arrangements, and (iii) Executive will not be
entitled to unpaid MIP Payouts or any severance payments or benefits.
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
5
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 entitlement and receipt of any severance pursuant
to Section 6 (except for terminations due to Executive’s death or Disability) will be subject to Executive signing and
not revoking a confidential separation agreement and general release and waiver of all claims and disputes 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, officers, employees, agents, or representatives. No severance
will be paid or provided until the confidential separation agreement and general release becomes effective. No
severance will be paid or provided if Executive’s confidential separation agreement and general release is not signed
and irrevocable within forty- five (45) days after 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. Executive acknowledges the substantial amount of time, money and effort that Heska has spent
and will spend in developing its products and services and other strategically important information (including its confidential
proprietary information, such as trade secrets, and other intellectual property), and Heska’s ability to reserve these for the
exclusive knowledge and use of Heska is of great competitive importance and commercial value to Heska. Executive further
understands that the nature of Executive’s position and management and executive duties gives Executive access to and
knowledge of Heska’s confidential and proprietary information and places Executive in a position of trust and confidence with
Heska. Because of Heska’s legitimate business interests described in this Agreement and the consideration offered to Executive,
in the event of a termination of Executive’s employment (i) for Cause by Heska, (ii) without Good Reason by Executive, or (iii)
without Cause by Heska or for Good Reason by Executive in Connection with a Change of Control pursuant to Section 6(c),
Executive agrees not to engage in Competition (as defined below) for twelve (12) months following the termination date. The
geographic scope of this Section 7(b) is the United States of America and Europe where Heska is engaged in its business or is
actively planning to engage in its business at the time Executive’s employment with Heska terminates. If Executive engages in
Competition within such period, all continuing payments and benefits to which Executive otherwise may be entitled pursuant to
Section 6(a) or 6(b) will cease immediately.
c.
Non-Solicitation. Executive acknowledges that Heska has expended and continues to expend
significant time and resources in recruiting and training employees. Executive further
6
acknowledges that, in the course of his employment, Executive will have access to and learn about many or all of the Heska’s
customers, clients, and merchants, such as their names and contact information, order history, preferences, chain of command,
pricing information, and other information specific to Heska’s customers, clients, and merchants, which constitute confidential
proprietary information and trade secrets belonging to Heska. Because of Heska’s legitimate business interests described in this
Agreement and the consideration offered to Executive, in the event of a termination of Executive’s employment that would entitle
Executive to the receipt of severance pursuant to Section 6(a) or 6(b), or a termination for Cause by Heska, or a termination
without Good Reason by Executive pursuant to Section 6(c), 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, or attempt to solicit, induce, or
influence, any person to modify his or her employment or consulting relationship with Heska (the “No- Inducement”), and (ii) will
not intentionally divert business away, or attempt to divert business away, from Heska by soliciting business from any of Heska’s
customers and users who would otherwise have engaged in a business relationship with Heska (the “No Solicit”). The
geographic scope of this Section 7(c) is the United States of America and Europe where Heska has engaged in, or has sought to
develop, its business at any time during Executive’s employment with Heska. 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(a) or 6(b) will
cease immediately.
d.
Reasonableness. The Parties agree that the covenants and restrictions set forth in this Agreement are
appropriate and reasonable when considered in light of the nature and extent of Heska’s legitimate business
interests. Executive further acknowledges and agrees that (i) Heska has a legitimate interest in protecting Heska’s
business activities and confidential and proprietary information, including its trade secrets; (ii) the covenants and
restrictions set forth herein are not oppressive to Executive and contain reasonable limitations as to time, scope,
geographical area, and activities; (iii) Executive has received and will receive substantial consideration for agreeing
to the restrictions and covenants set forth herein; and (iv) if Executive were to engage in prohibited activities in
violation of the Non-Compete or Non-Solicitation clauses, above, it would irreparably harm Heska.
e.
Remedies. In the event of Executive’s breach of Section 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 7. 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.
f.
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.
7
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 or Chief Executive Officer 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 thirty (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, within the temporal and geographic limitations identified in Section 7(b), above, 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 to
any individual, entity, or company providing veterinary products or services for the companion animal health industry, or whose
business involves imaging products or services for the veterinary market in which Executive will use, or is likely to use, Heska’s
confidential proprietary information, such as Heska’s trade secrets, or for which Executive’s duties are the same or similar to
those performed by Executive for Heska (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. Without limiting the generality of the foregoing, a Restricted Company specifically includes
Zoetis, Inc. Abaxis, Inc. (currently a wholly-owned subsidiary of Zoetis, Inc.), IDEXX Laboratories, Inc., and Sound Technologies,
Inc. (currently a unit of Mars, Incorporated). Notwithstanding the foregoing, nothing contained in this Section 8(d) or in Section
7(b) above shall prohibit Executive from being employed (or 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
8
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:
A.
Executive’s level with Heska is, or Executive’s duties or responsibilities are, materially
diminished relative to Executive’s level, duties, and responsibilities as in effect immediately prior to
such change;
B.
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 Employees 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;
C.
a 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 home office;
D.
any willful material breach by Heska of any provision of this Agreement; and
E.
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 thirty
(30)-day period if the relevant condition remains uncured by Heska 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 (or, if earlier, three (3) months prior to the date Heska reaches a definitive agreement to enter into a
Change of Control) and ending eighteen (18) months following a Change of Control.
9. Confidential Information.
Executive acknowledges that Executive has executed Heska’s Confidential Information and Invention
Agreement (the “Confidentiality Agreement”), which is incorporated herein by reference. 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
9
versions of Heska’s form of employee confidential information agreement as may be required of substantially all
of Heska’s Employees.
10. Executive Representations and Warranties and Third Party Agreements.
Executive represents and warrants that he has disclosed to Heska the terms of any contract or agreement (collectively, “Third
Party Agreements”) with any current (as of the Effective Date) or former employer that might restrict in any way Executive’s
performance of his duties to Heska during the Term of Agreement, including, but not limited to any non-solicitation, non-
recruitment, non-compete and similar post-employment restrictions imposed upon Executive by an agreement between Executive
and any other employer (collectively, “Third-Party Restrictions”). In connection with Executive’s employment, Executive shall not
use or disclose any trade secrets or other proprietary information or intellectual property in which Executive or any other person
has any right, title or interest and Executive’s employment will not infringe or violate the rights of any other person. Executive
represents, warrants and covenants to Heska that he has or will prior to the Effective Date returned all property and confidential
information belonging to any prior employer, other than confidential information that has become generally known to the public or
within the relevant trade industry. The Parties agree that Executive shall not, in connection with his employment with Heska,
engage in activities that violate Executive’s Third Party Restrictions until such restrictions lapse, including, during the first year of
the Term of Agreement, not engaging in development, sales, marketing, or other activity related to animal health products and
services that Executive was directly or indirectly involved in behalf of any former employer in violation of a Third Party Agreement.
If a prior employer brings suit against Executive to enforce a Third Party Agreement, Heska agrees to indemnify and defend
Executive in such litigation. In the event the Board of Directors of Heska determines in good faith following consultation with
counsel that performing any of his duties for Heska would violate a Third Party Agreement or if Executive is enjoined from
performing any of his duties for Heska because of a Third Party Agreement, Heska and Executive agree that: (i) the Parties shall
work in good faith to temporarily restructure Executive’s duties and responsibilities under this Agreement to comply with the terms
of such Third Party Agreement/injunction during the period that such restrictions remain in effect (“Restricted Period”), (ii) during
the Restricted Period Executive shall continue to be paid his Base Salary and remain eligible for a MIP Payout and other benefits
in accordance with this Agreement, (iii) the Parties shall work with the Compensation Committee to determine in good faith
whether the outside date(s) related to the satisfaction of the performance vesting criteria with respect to any of Executive’s Sign-
On Equity Grant should be extended because of such Restricted Period and amend the award(s) accordingly and (iv) such
restrictions and/or temporary modifications of Executive’s duties during the Restricted Period shall not be a breach of this
Agreement by Executive or be the basis of a ‘for Cause’ termination of Executive.
11. Notices.
All notices, requests, demands, and other communications called for hereunder will be in writing and will be deemed given:
a.
on the date of delivery if delivered personally,
b.
one (1) day after being delivered through a nationally recognized overnight courier service, or
c.
five (5) business days after the date of mailing if sent certified or registered mail.
d.
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.
10
12. Successors and Assigns.
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.
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. Notwithstanding the foregoing, Executive’s
employment by Heska shall be supplemented by Heska’s policies applicable to its employees as currently in force or as may be
adopted or amended by Heska from time to time in its sole discretion
14. Interpretation.
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.
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 shall 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.
Should any provision of this Agreement be held by a court of competent jurisdiction to be enforceable only if modified, or if any
portion of this Agreement shall be held as unenforceable and thus stricken, such holding shall not affect the validity of the
remainder of this Agreement, the balance of which shall continue to be binding upon the Parties with any such modification to
become a part hereof and treated as though originally set forth in this Agreement. The Parties further agree that any such court is
expressly authorized to modify any such unenforceable provision of this Agreement in lieu of severing such unenforceable
provision from this Agreement in its entirety, whether by rewriting the offending provision, deleting any or all of the offending
provision, adding additional language to this Agreement, or by making such other
11
modifications as it deems warranted to carry out the intent and agreement of the Parties as embodied herein to the maximum
extent permitted by law. The Parties further expressly agree that this Agreement as so modified by the court shall be binding upon
and enforceable against each Party. In any event, should one or more of the provisions of this Agreement be held to be invalid,
illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions hereof,
and if such provision or provisions are not modified as provided above, this Agreement shall be construed as if such invalid,
illegal, or unenforceable provisions had not been set forth herein.
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
12
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. Indemnification.
Heska shall indemnify the Executive, to the maximum extent permitted by applicable law and in accordance with Heska’s
governing documents, against all costs, charges and expenses incurred or sustained by him in connection with any action, suit or
proceeding to which he may be made a party by reason of Executive being an officer, director or employee of the Company or of
any subsidiary or affiliate of the Company with terms no less favorable than provided to any other Heska executive officer and
subject to the terms of a separate written indemnification agreement.
20. Governing Law; Waiver of Jury Trial.
This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado without
regard to conflict of law principles. In addition, each Party irrevocably and unconditionally waives, to the fullest extent
permitted by applicable law, any right it may have to a trial by jury in any legal action, proceeding, cause of action or
counterclaim arising out of or relating to this Agreement, including appendices attached to this agreement, the
Confidentiality Agreement, or the transactions contemplated hereby. The Parties each acknowledge that it has
considered the implications of this waiver of jury trial and makes this waiver knowingly and voluntarily.
21. Counterparts.
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]
13
IN WITNESS WHEREOF, the Parties have executed this Employment Agreement on the dates stated below.
EXECUTIVE:
/s/ Anthony Povidenti
Date
June 22, 2021
Anthony Providenti
HESKA CORPORATION:
/s/ Kevin Wilson
June 19, 2021
Kevin Wilson Date
Chief Executive Officer and President
Exhibit 21.1
SUBSIDIARIES OF COMPANY
Diamond Animal Health, Inc., an Iowa corporation
BioTech Laboratories U.S.A. LLC, a Delaware limited liability company
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 SCI A. Duchene Immo, a real estate company formed under the laws of France
Veterinärmedizinisches Dienstleistungszentrum (VetZ) GmbH, a corporation incorporated under the laws of Germany
VetZ B.V., a limited liability company (besloten vennootschaap) organized
under the laws of The Netherlands
VetZ Ltd., a limited liability company organized under the laws of England and
Wales 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 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 28, 2023, 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, 2022. 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, 333-255803, 333-266637) and on Forms S-3 (File No. 333-238005, 333-253700, and 333-262795).
/s/ GRANT THORNTON LLP
Denver, Colorado
February 28, 2023
Exhibit 31.1
CERTIFICATION
I, Kevin S. Wilson, certify that:
1. I have reviewed this annual report on Form 10-K of Heska Corporation;
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 28, 2023
/s/ Kevin S. Wilson
KEVIN S. WILSON
Chief Executive Officer and President
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION
I, Catherine Grassman, certify that:
1. I have reviewed this annual report on Form 10-K of Heska Corporation;
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 28, 2023
/s/ Catherine Grassman
CATHERINE GRASSMAN
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 32.1
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
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, 2022 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 28, 2023
By:
/s/ Kevin S. Wilson
Name:
KEVIN S. WILSON
Title:
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, 2022 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 28, 2023
By:
/s/ Catherine Grassman
Name:
CATHERINE GRASSMAN
Title:
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.