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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORTS 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 [I.R.S. Employer Identification No.]
of incorporation or organization]
1825 SHARP POINT DRIVE
FORT COLLINS, COLORADO 80525
(Address of principal executive offices)
(970) 493-7272
(Registrant's telephone number, including area code)
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 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 [X] No
The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding at August 11, 1997 was 18,717,431
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HESKA CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June
30, 1997 (Unaudited) and December 31, 1996 .......... 1
Condensed Consolidated Statements of Operations
(Unaudited) for the three months and six months
ended June 30, 1997 and 1996 ........................ 2
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the six months ended June 30, 1997
and 1996 ............................................ 3
Notes to Condensed Consolidated Financial
Statements (Unaudited) .............................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................... Not Applicable
Item 2. Changes in Securities ............................... Not Applicable
Item 3. Defaults upon Senior Securities ..................... Not Applicable
Item 4. Submission of Matters to a Vote of Security
Holders ............................................. 21
Item 5. Other Information ................................... Not Applicable
Item 6. Exhibits and Reports on Form 8-K .................... 22
Signatures ..................................................... 23
Exhibits ....................................................... 24
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HESKA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS
ASSETS
<TABLE>
<CAPTION>
Pro Forma
June 30, June 30, December 31,
1997 1997 1996
------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 2,293 $ 2,293 $ 6,609
Marketable securities 3,341 3,341 17,091
Accounts receivable, net 767 767 749
Inventories, net 5,957 5,957 4,430
Other current assets 529 529 334
------------ ------------ ------------
Total current assets 12,887 12,887 29,213
Property and equipment, net 11,550 11,550 8,209
Intangible assets, net 3,805 3,805 3,480
Restricted marketable securities and other assets 2,013 2,013 1,267
------------ ------------ ------------
Total assets $ 30,255 $ 30,255 $ 42,169
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,237 $ 3,237 $ 1,634
Accrued liabilities 2,169 2,169 940
Deferred revenue 1,230 1,230 1,413
Current portion of capital lease obligations 570 570 464
Current portion of long-term debt 1,718 1,718 807
------------ ------------ ------------
Total current liabilities 8,924 8,924 5,258
Capital lease obligations, less current portion 1,680 1,680 1,459
Long-term debt, less current portion 4,351 4,351 2,942
Accrued pension liability 157 157 127
------------ ------------ ------------
Total liabilities 15,112 15,112 9,786
------------ ------------ ------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par value, 25,000,000 shares
authorized; 10,583,999, none and 10,459,999 shares issued and
outstanding, with an aggregate liquidation preference of $63,824,
none and $62,588, respectively 63,824 -- 62,588
Common stock, $.001 par value, 40,000,000 shares authorized;
1,774,075, 13,063,463 and 1,021,645 shares issued and
outstanding, respectively 2 13 1
Additional paid-in capital 4,496 68,309 1,067
Deferred compensation (1,994) (1,994) (879)
Cumulative translation adjustment 3 3 --
Stock subscription receivable from officers (153) (153) (118)
Accumulated deficit (51,035) (51,035) (30,276)
------------ ------------ ------------
Total stockholders' equity 15,143 15,143 32,383
------------ ------------ ------------
Total liabilities and stockholders' equity $ 30,255 $ 30,255 $ 42,169
============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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HESKA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Products and services, net $ 3,933 $ 1,780 $ 6,559 $ 1,819
Research and development 199 945 637 1,062
-------- -------- -------- --------
4,132 2,725 7,196 2,881
Costs and operating expenses:
Cost of sales 2,814 1,403 4,962 1,423
Research and development 5,494 3,274 10,013 5,900
Selling and marketing 1,999 442 3,572 442
General and administrative 2,712 805 5,130 1,180
Amortization of intangible assets and deferred compensation 447 297 1,080 297
Purchased research and development 2,468 -- 2,468 --
Other (contract termination fee) 750 -- 750 --
-------- -------- -------- --------
16,684 6,221 27,975 9,242
-------- -------- -------- --------
Loss from operations (12,552) (3,496) (20,779) (6,361)
Other income (expense):
Interest income 152 438 448 509
Interest expense (193) (102) (363) (118)
Other, net (59) (1) (65) (1)
-------- -------- -------- --------
Net loss $(12,652) $ (3,161) $(20,759) $ (5,971)
======== ======== ======== ========
Pro forma net loss per share $ (0.91) $ (1.51)
======== ========
Shares used to compute pro forma net loss per share 13,872 13,709
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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HESKA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------------
1997 1996
-------- --------
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CASH FLOWS USED IN OPERATING ACTIVITIES:
Net cash used in operating activities $(16,206) $ (5,276)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired (258) (478)
Cash deposited in escrow account related to Bloxham acquisition (244) --
Purchase of marketable securities -- (32,462)
Proceeds from sale of marketable securities 14,227 --
Purchases of property and equipment (3,749) (1,543)
-------- --------
Net cash provided by (used in) investing activities 9,976 (34,483)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 161 1
Proceeds from borrowings 2,604 72
Repayments of debt and capital lease obligations (858) (433)
Proceeds from issuance of preferred stock -- 36,000
-------- --------
Net cash provided by financing activities 1,907 35,640
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 7 --
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (4,316) (4,119)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,609 6,827
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,293 $ 2,708
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 326 $ 112
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of intangible assets through the issuance of debt 320 207
Issuance of Preferred Stock and options to purchase Common Stock
in exchange for the common stock of Diamond, net of cash received -- 7,058
Purchase of assets under direct capital lease financing 255 --
Issuance of Preferred Stock in exchange for the capital stock of Bloxham,
net of cash received 648 --
Issuance of Common and Preferred Stock in exchange for the capital stock
of Astarix 2,468 --
</TABLE>
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HESKA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Heska Corporation (the "Company") discovers, develops, manufactures and
markets companion animal health products and services. The Company also
manufactures and sells animal health products and services in the United
States, Canada and Europe through Diamond Animal Health, Inc. ("Diamond") and
Bloxham Laboratories Limited ("Bloxham"), its wholly-owned subsidiaries . In
May 1997, the Company reincorporated in Delaware.
The Company continues to incur substantial operating losses due
principally to its research and development and sales and marketing activities.
Cumulative operating losses from inception of the Company in 1988 through June
30, 1997 and December 31, 1996 have totaled $51,035,000 (unaudited) and
$30,276,000, respectively.
During 1996, the Company progressed from being primarily a research and
development company to a fully-integrated research, development, manufacturing
and marketing company. The Company's products are subject to long development
and regulatory approval cycles and there can be no assurance that the Company
will successfully develop, manufacture or market these products.
The Company's ability to achieve profitable operations will depend
primarily upon its ability to commercialize products that are currently under
development. There can be no assurance that the Company will successfully
develop, manufacture, or market these products. During the period required to
develop its products, the Company intends to finance operations with additional
equity and debt financing. There can be no assurance that such financing will
be available when required or will be obtained under favorable terms.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. The balance sheets as of June 30, 1997, the
statements of operations for the three and six months ended June 30, 1997 and
1996 and the statements of cash flows for the six months ended June 30, 1997
and 1996 are unaudited, but include all adjustments (consisting of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position, operating results and cash flows for
the periods presented. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries since the dates of
their respective acquisitions. All material intercompany transactions and
balances have been eliminated in consolidation. Although the Company believes
that the disclosures in these financial statements are adequate to make the
information presented not misleading, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission.
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Results for any interim period are not necessarily indicative of results
for any future interim period or for the entire year. The accompanying
financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto for the year ended
December 31, 1996, included in the Company's Form S-1 filed with the Securities
and Exchange Commission.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
Revenue Recognition
Revenues from products and services are recognized at the time goods are
shipped or services are provided to the customer, with an appropriate provision
for returns and allowances.
The Company recognizes revenue from sponsored research and development as
research activities are performed or as development milestones are completed
under the terms of the research and development agreements. Costs incurred in
connection with the performance of sponsored research and development are
expensed as incurred. The Company defers revenue recognition related to
payments received during the current period for research activities to be
performed in the following period.
Unaudited Pro Forma Information
Upon closing of the Company's initial public offering (the "IPO"), all of
the outstanding shares of Series A, B, C, D, E and F Preferred Stock were
automatically converted into shares of Common Stock. The unaudited pro forma
condensed consolidated balance sheet as of June 30, 1997 reflects the
conversion of 10,583,999 shares of Preferred Stock into 11,289,388 shares of
Common Stock (after giving effect to certain anti-dilution adjustments that
occurred as a result of the sale of common stock in the IPO).
2. UNAUDITED PRO FORMA NET LOSS PER SHARE
The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
convertible preferred stock into common stock following the closing of the
Company's IPO. Accordingly, historical net loss per common share is not
considered meaningful as it would differ materially from the pro forma net loss
per common share and common stock equivalent shares given the changes in the
capital structure of the Company.
Pro forma net loss per common share is computed using the weighted average
number of common shares outstanding during the period. Common equivalent shares
from stock options and warrants are excluded from the computation as their
effect is anti-dilutive, except as required by the SEC. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83, common stock and
common stock equivalent shares issued by the Company during the 12 months
immediately preceding the filing of the IPO, plus shares which became issuable
during the same period as a result of the granting of options to purchase
common stock, have been included in the calculation of weighted average number
of shares of common stock as if they were outstanding for all periods presented
(using the treasury stock method). Accordingly, only those common stock
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and common stock equivalent shares issued during the 12 months immediately
preceding the filing of the IPO have been included in the computation of pro
forma net loss per common share. In addition, the Company has assumed the
conversion of convertible preferred stock issued into common stock for all
periods presented.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". The Company will be required to adopt these new rules effective
December 15, 1997. Management does not anticipate any significant impact
resulting from the adoption of this new standard upon current or previously
reported earnings per share.
3. BALANCE SHEET INFORMATION
Inventories are stated at the lower of cost or market using the first-in,
first-out method. If the cost of inventories exceeds fair market value,
provisions are made for the difference between cost and fair market value.
Inventories, net of provisions, consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
Raw materials .......................... $ 949 $ 885
Work in process ........................ 4,072 3,103
Finished goods ......................... 936 442
------------ ------------
$ 5,957 $ 4,430
============ ============
</TABLE>
4. BUSINESS ACQUISITIONS
Astarix Institute, Inc. ("Astarix") - In May 1997, the Company acquired
all of the capital stock of Astarix, a privately held development stage company
specializing in allergy research, for 376,000 shares of common stock, 70,000
shares of convertible preferred stock, and options to purchase 124,000 shares
of the Company's Common Stock, granted to Astarix consultants at an exercise
price of $5.00 per share. The transaction was valued at $2,468,000 and the
entire purchase price was allocated to unfinished research and development
projects as development of these projects had not yet reached technological
feasibility. The technology acquired has no currently identified alternative
future use and will require additional development by the Company. Accordingly,
these costs were expensed as of the acquisition date. As a result of the
acquisition, Astarix became a wholly-owned subsidiary of the Company.
5. SUBSEQUENT EVENTS
Initial Public Offering - In July 1997 the Company completed its initial
public offering of 5,637,850 shares of common stock (including an underwriters'
over-allotment option exercised for 637,850 shares) at a price of $8.50 per
share, providing the Company with net proceeds of approximately $43.9 million.
Additionally all outstanding shares of preferred stock were converted into
11,289,388 shares of common stock upon the completion of the IPO.
Acquisition of Center Laboratories' Allergy Business ("Center") - In July
1997 the Company purchased the allergy immunotherapy products business of
Center Laboratories, an FDA and USDA licensed manufacturer
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of allergy immunotherapy products, including allergenic extracts, located in
Port Washington, NY. Center was purchased from EM Industries, Incorporated, a
subsidiary of Merck KGaA of Darmstadt, Germany, in a transaction valued at
approximately $3.5 million, the appraised fair market value of certain of the
tangible assets used in the business. The acquisition will be accounted for
under the purchase method of accounting and the operating results of Center
will be included in the Company's consolidated results of operations subsequent
to July 21, 1997. EM Industries will finance, via a note, approximately $3.0
million of the purchase price for three years.
7
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PART I. FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When used in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, the word "expects" and similar expressions
are intended to identify forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that could cause actual results, performance, or achievements of Heska or its
subsidiaries to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Heska's
ability to achieve these results is dependent on many factors, including among
others, the following: timely development, introduction and acceptance of new
products, delays in integration of businesses, failure to receive or delays in
regulatory approvals; lack of enforceability of patents and proprietary rights;
quality of management; the impact of competition; changes in business strategy
or development plans; inability to manufacture products at currently projected
costs and the other risks detailed below under "Factors that May Affect
Results" and throughout the Company's filings with the Securities and Exchange
Commission. These forward-looking statements represent the Company's judgment
as of the dates of the filing of this Form 10-Q and Form S-1, respectively. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions, or circumstances on which any such statement is
based.
OVERVIEW
Heska discovers, develops, manufactures and markets companion animal
health products, primarily for dogs, cats and horses. From the Company's
inception in 1988 until early 1996, the Company's operating activities related
primarily to research and development activities, entering into collaborative
agreements, raising capital and recruiting personnel. Prior to 1996, the
Company had not received any revenues from the sale of products, and it has
incurred net losses since inception. As of June 30, 1997, the Company's
accumulated deficit was $51.0 million.
During 1996, Heska grew from being primarily a research and development
concern to a fully-integrated research, development, manufacturing and
marketing company. The Company accomplished this through the acquisitions of
Diamond Animal Health, Inc. ("Diamond"), a licensed pharmaceutical and
biological manufacturing facility in Des Moines, Iowa, and the canine allergy
business of Bioproducts DVM, Inc. (the "Bioproducts Business"), hiring key
employees and support staff, establishing marketing and sales operations to
support the Bioproducts Business and other Heska products introduced in 1996,
and the design and implementation of more sophisticated operating and
information systems. The Company also expanded the scope and level of its
scientific and business development activities, increasing the opportunities
for new products. In the first quarter of 1997, the Company launched additional
products and expanded internationally through the acquisition of Bloxham
Laboratories Limited ("Bloxham"), a veterinary diagnostic laboratory in
Teignmouth, England. Each of the acquisitions of Diamond, the Bioproducts
Business and Bloxham was accounted for under the purchase method of accounting
and accordingly, the Company's financial statements reflect the operations of
these businesses only for the periods subsequent to the acquisitions.
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The Company anticipates that it will continue to incur additional
operating losses for the next several years as it introduces new products and
continues its research and development activities for products under
development. There can be no assurance that the Company will attain
profitability or, if achieved, will remain profitable on a quarterly or annual
basis in the future.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 and 1996
Total revenues, which include product and service revenues and research
and development revenues, increased to $4.1 million for the quarter ended June
30, 1997 compared to $2.7 million for the second quarter of 1996. Product and
service revenues were $3.9 million for the three months ended June 30, 1997 as
compared to $1.8 million for the corresponding period in 1996. Revenues from
one customer comprised 35% of total revenues for the three months ended June
30, 1997 and are expected to continue to represent a majority of total revenues
for the 1997 fiscal year, as they did for the 1996 fiscal year. This customer
purchases under the terms of a take-or-pay contract which expires in June 1999.
Revenues from sponsored research and development decreased to $199,000 in
the three months ended June 30, 1997 from $945,000 in the corresponding period
in 1996. Fluctuations in revenues from sponsored research and development are
generally the result of changes in the number of funded research projects as
well as the timing and performance of contract milestones.
Cost of goods sold was $2.8 million for the three months ended June 30,
1997 as compared to $1.4 million for the comparable period in 1996. The Company
expects that its gross margins will improve as sales volumes increase and
manufacturing capacity is more fully utilized. Future Heska products will be
manufactured by Diamond or contract manufacturers.
Research and development expenses increased to $5.5 million for the three
months ended June 30, 1997 from $3.3 million in the comparable period of 1996,
due to a substantial increase in the level and scope of research and
development activities. Research and development expenses include expenses both
for development of products to be marketed by the Company and development under
sponsored research and development agreements, and consist primarily of
salaries and benefits for scientific, development and regulatory personnel,
intellectual property costs, license fees, contract research, supplies and
materials, depreciation and rental of lab equipment and facility costs.
Selling and marketing expenses increased to $2.0 million for the three
months ended June 30, 1997 from $442,000 in 1996 and consist primarily of
salaries and benefits for sales and marketing personnel, commissions, market
research, product promotion, consulting fees, and trade show costs. The Company
added senior sales management and 22 field sales persons late in the first
quarter of 1997 to support planned product introductions, and their costs were
not fully reflected until the second quarter. The Company expects that these
costs will continue to increase through 1997 as the Company continues to launch
and market new products and incurs commission expense on increasing product
sales.
General and administrative expenses increased to $2.7 million for the
three months ended June 30, 1997 from $805,000 for the comparable period in
1996 as a result of significant growth in the Company's accounting and finance,
human resources, legal, administrative, information systems, business
development and facilities operations.
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Amortization of intangible assets increased to $447,000 for the three
months ended June 30, 1997, compared to $297,000 for the second quarter of
1996 as a result of the Bloxham acquisition in February 1997. Net intangible
assets at June 30, 1997 totaled $3.8 million as a result of the acquisitions of
Diamond ($2.4 million) and the Bioproducts Business ($0.3 million) in 1996, and
Bloxham ($1.1 million) in 1997.
In connection with the grant of certain stock options in the three months
ended June 30, 1997, the Company recorded deferred compensation in its
stockholders' equity accounts of $242,000, representing the difference between
the deemed value of the Common Stock for accounting purposes and the exercise
price of such options at the date of grant, which amount is amortized ratably
over the vesting period of the options. The Company's options generally vest
over a four year period. The amortization of deferred compensation resulted in
a non-cash charge to operations in the three months ended June 30, 1997 of
$18,000. In connection with options granted through June 30, 1997, the Company
will incur a non-cash charge to operations of approximately $140,000 per
quarter through the second quarter of 2001 for amortization of deferred
compensation.
Second quarter 1997 expenses include one-time charges of $2.5 million
resulting from Heska's purchase of Astarix in May 1997 and $750,000 for the
termination of a supply agreement for allergy immunotherapy products which
Heska will now obtain from its recently acquired subsidiary, Center
Laboratories Incorporated.
Interest income decreased to $152,000 for the three months ended June 30,
1997 compared to $438,000 for the three months ended June 30, 1996 due to
reduced cash balances as the Company used the sale of marketable securities to
finance business operations. Interest expense increased to $193,000 for the
three months ended June 30, 1997 compared to $102,000 for the comparable period
in 1996 due to increases in debt financing for laboratory and manufacturing
equipment acquired during 1996 and the first half of 1997.
The Company reported a net loss of $12.7 million for the three months
ended June 30, 1997 as compared to a net loss of $3.2 million for the three
months ended June 30, 1996. The Company expects to incur additional operating
losses for the next several years.
Six Months Ended June 30, 1997 and 1996
Total revenues for the six months ended June 30, 1997 increased to $7.2
million from $2.9 million in the first half of 1996. Product and service
revenues were $6.6 million for the six months ended June 30, 1997 as compared
to $1.8 million for the corresponding period in 1996. Revenues from one
customer comprised 38% of total revenues for the six months ended June 30, 1997
and are expected to continue to represent a majority of revenues for the 1997
fiscal year, as they did for the 1996 fiscal year. This customer purchases
under the terms of a take-or-pay contract which expires in June 1999.
Revenues from sponsored research and development decreased to $637,000 for
the six months ended June 30, 1997 from $1.1 million in the six months ended
June 30, 1996. Fluctuations in revenues from sponsored research and development
are generally the result of changes in the number of funded research projects
as well as the timing and performance of contract milestones.
Cost of goods sold totaled approximately $5.0 million in the six months
ended June 30, 1997. The gross margin for the six months ended June 30, 1997
increased to $1.6 million from $400,000 for the comparable period in 1996. The
Company expects that its gross margins will improve as sales volumes increase
and manufacturing capacity is more fully utilized. Future Heska products will
be manufactured by Diamond or contract manufacturers.
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Research and development expenses increased to $10.0 million in the six
months ended June 30, 1997, from $5.9 million for the corresponding period in
1996. The increase in 1997 is due primarily to substantial increases in the
level and scope of research and development activities for products to be
marketed by the Company and increases in intellectual property costs.
Selling and marketing expenses totaled $3.6 million for the six months
ended June 30, 1997, up from $442,000 in the first half of 1996. The increase
in 1997 reflects the Company's establishment of a sales and marketing
organization to support Heska's launch and sale of products in early 1997.
General and administrative expenses increased to $5.1 million in the six
months ended June 30, 1997 from $1.2 million in 1996. The increase in 1997
resulted from the significant growth of accounting and finance, human
resources, legal, administrative, information systems, business development and
facilities operations to support the Company's increased business and financing
activities.
Amortization of intangible assets increased to $1.1 million for the six
months ended June 30, 1997 from $297,000 for the six months ended June 30,
1996, as a result of the acquisitions of Diamond and the Bioproducts Business
in 1996 and Bloxham in 1997.
In connection with the grant of certain stock options in the six months
ended June 30, 1997, the Company recorded deferred compensation in its
stockholders' equity accounts of $1.8 million, representing the difference
between the deemed value of the Common Stock for accounting purposes and the
exercise price of such options at the date of grant. The amortization of
deferred compensation resulted in a non-cash charge to operations in the six
months ended June 30, 1997 of $244,000.
Interest income decreased to $448,000 for the six months ended June 30,
1997 from $509,000 in the first half of 1996 as a result of reduced cash
available for investment as the proceeds of equity investments in 1996 were
used to finance business operations. Interest expense increased to $363,000 in
the six months ended June 30, 1997 from $118,000 in the comparable period for
1996 due to the assumption of debt in connection with the Diamond acquisition
in April 1996 and an increase in debt financing for laboratory and
manufacturing equipment.
The Company reported a net loss in the six months ended June 30, 1997 of
$20.8 million as compared to a net loss of $6.0 million for the first half of
1996. The increase in losses between the periods reflects the increases in
research and development, selling and marketing activities, and general and
administrative expenses as the Company built a management and systems
infrastructure to support growing business operations in 1997 and beyond.
Expenses in the first half of 1997 also include one-time charges of $ 2.5
million resulting from Heska's purchase of Astarix and $750,000 for the
termination of a supply agreement for allergy immunotherapy products which
Heska will now obtain from its recently acquired subsidiary, Center
Laboratories Incorporated.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily with the
net proceeds received from private placements of equity securities and from
revenues from sponsored research and development. As of June 30, 1997, the
Company had received aggregate proceeds of $55.8 million from equity
transactions, including $36.0 million received in April 1996 in connection with
an equity investment by Novartis and $10.0 million received in 1995 from equity
investments by Volendam Investeringen N.V. The Company has also received funds
totaling $11.4 million through June 30, 1997 under collaborative agreements, of
which $10.9 million has been recognized as revenue from sponsored research and
development.
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<PAGE> 14
In addition, the Company has received proceeds from equipment financing
totaling $5.7 million through June 30, 1997 and assumed $4.3 million in short
and long-term debt in connection with the 1996 acquisition of Diamond. Capital
lease obligations and term debt owed by the Company totaled $8.3 million as of
June 30, 1997, with installments payable through 2001. Expenditures for
property and equipment totaled $3.7 million and $1.5 million for the six months
ended June 30, 1997 and 1996, respectively, and are expected to be
approximately $2.8 million for the remainder of 1997. The Company anticipates
that it will continue to use capital equipment lease and debt facilities to
fund equipment acquisitions and, if possible, leasehold improvements. The
Company expects to finance accounts receivable and inventory at Diamond through
an asset based borrowing facility, although no agreement has been entered into.
The Company will also seek similar borrowing facilities to finance Heska's
accounts receivable and inventory if acceptable terms can be negotiated.
Net cash used for operating activities was $16.2 million and $5.3 million
for the six months ended June 30, 1997 and 1996, respectively. Cash was used
for operations primarily to fund research and development activities along with
the establishment of sales and marketing operations and administrative
infrastructure.
The Company currently expects to spend approximately $1.5 million per year
for the next several years to improve Diamond's facility, a portion of which
may be funded through debt financing. These improvements include remodeling and
relocation of certain manufacturing operations to improve efficiencies as well
as various enhancements to assure ongoing compliance with certain regulatory
requirements. In addition, Diamond is negotiating to provide manufacturing
services to new customers that would require the construction of specialized
facilities and the purchase of specialized equipment. Diamond will, to the
extent possible, ask such customers to bear or share these costs. Additionally,
the Company may utilize cash generated from operating activities to meet
certain of Diamond's capital requirements.
The Company has financed its acquisition activities primarily through the
issuance of Preferred Stock and in connection therewith issued Preferred Stock
valued at $7.1 million in April 1996 to acquire Diamond, $648,000 in February
1997 to acquire Bloxham, and $588,000 in May 1997 to acquire Astarix. In
addition, the Company issued Common Stock valued at $1.9 million as part of the
Astarix acquisition. Cash used for acquisition activities, including funds
deposited in a restricted cash account, totaled $502,000 for the six months
ended June 30, 1997 relating to Bloxham, and $500,000 in the six months ended
June 30, 1996 relating to the Bioproducts Business.
The Company's primary short-term needs for capital, which are subject to
change, are for continuing research and development efforts, funding its sales
and marketing activities and for capital expenditures relating to the expansion
and development of the Company's manufacturing operations. At June 30, 1997,
the Company's principal source of liquidity was $5.6 million in cash, cash
equivalents and short-term investments. Pro forma, including net proceeds from
the IPO, at June 30, 1997, the Company's principal source of liquidity would
have been $49.5 million in cash, cash equivalents and short-term investments.
The Company expects its working capital requirements to increase over the next
several years as it introduces new products, expands its sales and marketing
capabilities, improves its manufacturing capabilities and facilities and
acquires businesses, technologies or products complementary to the Company's
business. The Company's future liquidity and capital funding requirements will
depend on numerous factors, including the extent to which the Company's
products under development are successfully developed and gain market
acceptance, the timing of regulatory actions regarding the Company's potential
products, the costs and the timing of expansion of sales, marketing and
manufacturing activities, the cost, timing and business management of current
and potential acquisitions, the procurement and enforcement of patents
important to the Company's business and the results of product trials and
competition.
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<PAGE> 15
The Company believes that its available cash and cash from operations,
together with the net proceeds from the IPO, will be sufficient to satisfy its
funding requirements for current operations, including the recent acquisition
of Center, for the next twelve months, assuming no significant uses of cash in
acquisition activities. Thereafter if cash generated from operations is
insufficient to satisfy the Company's working capital requirements, the Company
may need to raise additional capital to fund its research and development
programs, to scale up manufacturing activities and to expand its sales and
marketing force. There can be no assurance that such additional capital will be
available on terms acceptable to the Company, if at all. Furthermore, any
additional equity financing may be dilutive to stockholders and debt financing,
if available, may include restrictive covenants. If adequate funds are not
available, the Company may be required to curtail its operations significantly
or to obtain funds through entering into collaborative agreements or other
arrangements on unfavorable terms. The failure by the Company to raise capital
on acceptable terms when needed could have a material adverse effect on the
Company's business, financial condition or results of operations.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1996, the Company had a net operating loss ("NOL")
carryforward of approximately $26.9 million and approximately $731,000 of
research and development ("R&D") tax credits available to offset future federal
income taxes. The NOL and tax credit carryforwards, which are subject to
alternative minimum tax limitations and to examination by the tax authorities,
expire from 2003 to 2010. The Company's acquisition of Diamond resulted in a
"change of ownership" under the provisions of Section 382 of the Internal
Revenue Code of 1986, as amended. As such, the Company will be limited in the
amount of NOLs incurred prior to the merger that it may utilize to offset
future taxable income. This limitation will total approximately $4.3 million
per year for periods subsequent to the Diamond acquisition. Similar limitations
also apply to utilization of R&D tax credits to offset taxes payable.
FACTORS THAT MAY AFFECT RESULTS
This report includes certain forward looking statements about the
Company's business and results of operations which are subject to risks and
uncertainties that could cause the Company's actual results to vary materially
from those indicated from such forward-looking statements. Factors that could
cause such differences include those discussed below, as well as those
discussed elsewhere herein and in the Company's Form S-1 as filed with the
Securities and Exchange Commission. The factors discussed below should be read
in conjunction with the risk factors discussed in the Company's Form S-1, which
are incorporated by reference.
Dependence on Development and Introduction of New Products
Most of the Company's products are still under development and there can
be no assurance such products will be successfully developed or commercialized
on a timely basis, or at all. The Company believes that its revenue growth and
profitability, if any, will substantially depend upon its ability to complete
development of and successfully introduce its new products. The Company will be
required to undertake time-consuming and costly development activities and seek
regulatory approval for these new products. There can be no assurance that the
Company will not experience difficulties that could delay or prevent
successfully developing, obtaining regulatory approvals to market or
introducing these new products, that regulatory clearance or approval of any
new products will be granted by the United States Department of Agriculture
("USDA"), the United States Food and Drug Administration ("FDA"), the
Environmental Protection Agency ("EPA") or foreign regulatory authorities on a
timely basis, or at all, or that the new products will be successfully
commercialized. The Company's strategy is to develop a broad range of products
addressing different disease indications. The Company has limited resources to
devote to the development of all its products and consequently a delay in the
development of one product or the use of resources for product development
efforts that prove unsuccessful may
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delay or jeopardize the development of its other products. Further, to a
certain extent, the Company is dependent on collaborative partners to
successfully and timely perform research and development activities on behalf
of the Company. In order to successfully commercialize any new products, the
Company will be required to establish and maintain a reliable, cost-efficient
source of manufacturing for such products. If the Company is unable, for
technological or other reasons, to complete the development, introduction or
scale up of manufacturing of any new product or if any new product is not
approved for marketing or does not achieve a significant level of market
acceptance, the Company could be materially and adversely affected. Following
the introduction of a product, adverse side effects may be discovered that make
the product no longer commercially viable. Publicity regarding such adverse
effects could affect sales of the Company's other products for an indeterminate
time period. The Company is dependent on the acceptance of its products by both
veterinarians and pet owners. The failure of the Company to engender confidence
in its products and services could affect the Company's ability to attain
sustained market acceptance of its products.
Loss History and Accumulated Deficit; Uncertainty of Future Profitability;
Quarterly Fluctuations and Customer Concentration
Heska has incurred net losses since its inception. At June 30, 1997, the
Company's accumulated deficit was $51.0 million. The Company anticipates that
it will continue to incur additional operating losses for the next several
years. Such losses have resulted principally from expenses incurred in the
Company's research and development programs and, to a lesser extent, from
general and administrative and sales and marketing expenses. Currently, a
substantial portion of the Company's revenues are from Diamond, which
manufactures veterinary biologicals and pharmaceuticals on a contract basis for
major companies in the animal health industry. Revenues from one Diamond
customer comprised approximately 64% of total revenues in 1996 and 38% for the
first half of 1997 under the terms of a take-or-pay contract which expires in
June 1999. If this customer does not continue to purchase from Diamond and if
the lost revenues are not replaced by other customers or products, the
Company's financial condition and results of operations could be adversely
affected.
There can be no assurance that the Company will attain profitability or,
if achieved, will remain profitable on a quarterly or annual basis in the
future. The Company believes that future operating results will be subject to
quarterly fluctuations due to a variety of factors, including whether and when
new products are successfully developed and introduced by the Company or its
competitors, market acceptance of current or new products, regulatory delays,
product recalls, competition and pricing pressures from competitive products,
manufacturing delays, shipment problems, product seasonality, and changes in
the mix of products sold. Because the Company is continuing to increase its
operating expenses for personnel and new product development and marketing, the
Company's operating results will be adversely affected if its sales do not
correspondingly increase or if its product development efforts are unsuccessful
or subject to delays.
Limited Sales and Marketing Experience; Dependence on Others
In 1996 Heska began to build a sales force and commenced initial sales of
its products. To be successful, Heska will have to develop and train its direct
sales force or rely on marketing partners or other arrangements with third
parties for the marketing, distribution and sale of its products. The Company
is currently marketing its products to veterinarians through a direct sales
force and certain third parties. There can be no assurance that the Company
will be able to successfully establish and maintain marketing, distribution or
sales capabilities or make arrangements with third parties to perform those
activities on terms satisfactory to the Company.
In addition, the Company has granted marketing rights to certain products
under development to third parties, including Novartis AG ("Novartis"), Bayer
AG ("Bayer") and Eisai Co., Ltd. ("Eisai"). Novartis has the right to
manufacture and market throughout the world (except in countries where Eisai
has such rights) under
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Novartis trade names any flea control vaccine or feline heartworm vaccine
developed by the Company on or before December 31, 2005. The Company retained
the right to co-exclusively manufacture and market these products throughout
the world under its own trade names. Accordingly, if both elect to market these
products, the Company and Novartis will be direct competitors, with each party
sharing revenues on the other's sales. Heska also granted Novartis a right of
first refusal pursuant to which, prior to granting rights to any third party
for any products or technology developed or acquired by the Company for either
companion animal or food animal applications, Heska must first offer Novartis
such rights. Bayer has exclusive marketing rights to the Company's canine
heartworm vaccine and its recombinant feline toxoplasmosis vaccine (except in
countries where Eisai has such rights). Eisai has exclusive rights in Japan and
most countries in East Asia to market the Company's feline and canine heartworm
vaccines, feline and canine flea control vaccines and feline toxoplasmosis
vaccine. The Company's agreements with its marketing partners contain no
minimum purchase requirements in order for such parties to maintain their
exclusive or co-exclusive marketing rights. There can be no assurance that
Novartis, Bayer or Eisai or any other collaborative party will devote
sufficient resources to marketing the Company's products. Furthermore, there is
nothing to prevent Novartis, Bayer or Eisai or any other collaborative party
from pursuing alternative technologies or products that may compete with the
Company's products.
Highly Competitive Industry
The market in which the Company competes is intensely competitive. Heska's
competitors include companion animal health companies and major pharmaceutical
companies that have animal health divisions. Companies with a significant
presence in the animal health market, such as American Home Products, Bayer,
Merck & Co., Inc., Novartis, Pfizer Inc. and IDEXX Laboratories, Inc., have
developed or are developing products that do or would compete with the
Company's products. Novartis and Bayer are marketing partners of the Company,
and their agreements with the Company do not restrict their ability to develop
and market competing products. These competitors have substantially greater
financial, technical, research and other resources and larger, more established
marketing, sales, distribution and service organizations than the Company.
Moreover, such competitors may offer broader product lines and have greater
name recognition than the Company. Additionally, the market for companion
animal health care products is highly fragmented, with discount stores and
specialty pet stores accounting for a substantial percentage of such sales. As
Heska intends to distribute its products only through veterinarians, a
substantial segment of the potential market may not be reached, and the Company
may not be able to offer its products at prices which are competitive with
those of companies that distribute their products through retail channels.
There can be no assurance that the Company's competitors will not develop or
market technologies or products that are more effective or commercially
attractive than the Company's current or future products or that would render
the Company's technologies and products obsolete. Moreover, there can be no
assurance that the Company will have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully.
Uncertainty of Patent and Proprietary Technology Protection; License of
Technology of Third Parties
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology and
either to operate without infringing the proprietary rights of others or to
obtain rights to such technology. Heska has United States and foreign issued
patents and is currently prosecuting patent applications in the United States
and with certain foreign patent offices. There can be no assurance that any of
the Company's pending patent applications will result in the issuance of any
patents or that, if issued, any such patents will offer protection against
competitors with similar technology. There can be no assurance that any patents
issued to the Company will not be challenged, invalidated or circumvented in
the future or that the rights created thereunder will provide a competitive
advantage.
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The biotechnology and pharmaceutical industries have been characterized by
extensive litigation regarding patents and other intellectual property rights.
There can be no assurance that the Company will not in the future 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 ("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 both costly
and time consuming. Litigation may be necessary to enforce any patents issued
to the Company or its collaborative partners, to protect trade secrets or
know-how owned by the Company or its collaborative partners, or to determine
the enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference proceeding will result in substantial expense to the
Company and significant diversion of effort by the Company's technical and
management personnel. An adverse determination in litigation or interference
proceedings to which the Company may become a party could subject the Company
to significant liabilities to third parties. Further, either as the result of
such litigation or proceedings or otherwise, the Company may be required to
seek licenses from third parties which may not be available on commercially
reasonable terms, if at all.
The Company licenses technology from a number of third parties. The
majority of such license agreements impose due diligence or milestone
obligations and in some cases impose minimum royalty or sales obligations upon
the Company in order for the Company to maintain its rights thereunder. The
Company believes it is in compliance with the terms of each of these
agreements.
The Company's products may incorporate technologies that are the subject
of patents issued to, and patent applications filed by, others. As is typical
in its industry, from time to time the Company and its collaborators have
received and may in the future receive notices claiming infringement from third
parties as well as invitations to take licenses under third party patents. It
is the Company's policy when it receives such notices to conduct investigations
of the claims asserted. With respect to notices the Company has received to
date, the Company believes, after due investigation, that it has meritorious
defenses to the infringement claims asserted. Any legal action against the
Company or its collaborators may require the Company or its collaborators to
obtain a license in order to market or manufacture affected products or
services. However, there can be no assurance that the Company or its
collaborators will be able to obtain licenses for technology patented by others
on commercially reasonable terms, that they will be able to develop alternative
approaches if unable to obtain licenses, or that the current and future
licenses will be adequate for the operation of their businesses. The failure to
obtain necessary licenses or to identify and implement alternative approaches
could prevent the Company and its collaborators from commercializing certain of
their products under development and could have a material adverse effect on
the Company's business, financial condition or results of operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. There
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, that the Company can
meaningfully protect its rights to its trade secrets, or that the Company will
be capable of protecting its rights to its trade secrets.
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Limited Manufacturing Experience and Capacity; Reliance on Contract
Manufacturers
To be successful, the Company must manufacture, or contract for the
manufacture of, its current and future products in compliance with regulatory
requirements, in sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. In order to provide for
manufacturing of biological products, the Company acquired Diamond in April
1996 and certain assets of Center in July 1997. Significant work will be
required for the scaling up of each potential product prior to
commercialization, and there can be no assurance that such work can be
completed successfully or on a timely basis.
In addition to Diamond and Center, the Company intends to rely on contract
manufacturers for certain of its products. The Company currently has a supply
agreement with Atrix Laboratories ("Atrix") for its canine periodontal disease
therapeutic and a supply agreement with Quidel Corporation ("Quidel") for
certain manufacturing services relating to its point-of-care canine and feline
heartworm diagnostic tests. These agreements all require the manufacturing
partner to supply the Company's requirements, within certain parameters.
Certain of these partners do not have substantial manufacturing experience on a
commercial scale. There can be no assurance that these partners will be able to
manufacture products to regulatory standards, the Company's specifications or
in a cost-effective and timely manner. If any supplier were to be delayed in
scaling up commercial manufacturing, were to be unable to produce a sufficient
quantity of products to meet market demand, or were to request renegotiation of
contract prices, the Company's business would be materially and adversely
affected. While the Company typically retains the right to manufacture products
itself or contract with an alternative supplier in the event of the
manufacturer's breach, any transfer of production would necessarily involve
significant delays in production and additional expense to the Company to scale
up production at a new facility and to apply for regulatory licensure for the
production of products at that new facility. In addition, there can be no
assurance that the Company will be able to locate suitable manufacturing
partners for its products under development or alternative suppliers if present
arrangements are not satisfactory.
Government Regulation; No Assurance of Obtaining Regulatory Approvals
The development, manufacture and marketing of most of the Company's
products are subject to regulation by various governmental authorities,
consisting principally of the USDA and the FDA in the United States and various
regulatory agencies outside the United States. Delays in obtaining, or failure
to obtain any necessary regulatory approvals would have a material adverse
effect on the Company's future product sales and operations. Any acquisitions
of new products and technologies may subject the Company to additional
government regulation.
The Company's manufacturing facilities and those of any contract
manufacturers the Company may use are subject to the requirements of and
subject to periodic regulatory inspections by the FDA, USDA and other federal,
state and foreign regulatory agencies. There can be no assurance that the
Company or its contractors will satisfy such regulatory requirements, and any
failure to do so would have a material adverse effect on the Company's
business, financial condition or results of operations.
There can be no assurance that the Company will not incur significant
costs to comply with laws and regulations in the future or that laws and
regulations will not have a material adverse effect upon the Company's
business, financial condition or results of operation.
Future Capital Requirements; Uncertainty of Additional Funding
While the Company believes that its available cash, together with the
proceeds of its initial public offering, will be sufficient to satisfy its
funding needs for current operations, including the recent acquisition of
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Center, for the next twelve months, assuming no significant uses of cash in
acquisition activities, the Company has incurred negative cash flow from
operations since inception and does not expect to generate positive cash flow
to fund its operations for the next several years. Thus, the Company may need
to raise additional capital to fund its research and development programs, to
scale up manufacturing activities and to expand its sales and marketing force.
The Company's future liquidity and capital funding requirements will depend on
numerous factors, including the extent to which the Company's products under
development are successfully developed and gain market acceptance, the timing
of regulatory actions regarding the Company's potential products, the costs and
timing of expansion of sales, marketing and manufacturing activities,
procurement, enforcement and defense of patents important to the Company's
business, results of product trials and competition. There can be no assurance
that such additional capital will be available on terms acceptable to the
Company, if at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may include
restrictive covenants. If adequate funds are not available, the Company may be
required to curtail its operations significantly or to obtain funds through
entering into collaborative agreements or other arrangements on unfavorable
terms. The failure by the Company to raise capital on acceptable terms when
needed could have a material adverse effect on the Company's business,
financial condition or results of operations.
Dependence on Key Personnel
The Company is highly dependent on the efforts of its senior management
and scientific team, including its Chief Executive Officer and Chief Scientific
Officer. The loss of the services of any member of its senior management or
scientific staff may significantly delay or prevent the achievement of product
development and other business objectives. Because of the specialized
scientific nature of the Company's business, the Company is highly dependent on
its ability to attract and retain qualified scientific and technical personnel.
There is intense competition among major pharmaceutical and chemical companies,
specialized biotechnology firms and universities and other research
institutions for qualified personnel in the areas of the Company's activities.
Loss of the services of, or failure to recruit, key scientific and technical
personnel could adversely affect the Company's business, financial condition or
results of operations.
Potential Difficulties in Management of Growth; Identification and Integration
of Acquisitions
The Company anticipates additional growth in the number of its employees,
the scope of its operating and financial systems and the geographic area of its
operations as new products are developed and commercialized. This growth will
result in an increase in responsibilities for both existing and new management
personnel. The Company's ability to manage growth effectively will require it
to continue to implement and improve its operational, financial and management
information systems and to train, motivate and manage its employees. There can
be no assurance that the Company will be able to manage its expansion, and a
failure to do so could have a material adverse effect on the Company's
business, financial condition or results of operations.
In 1996, Heska consummated the acquisitions of Diamond and the canine
allergy business of Bioproducts DVM, Inc. The Company's recent acquisitions
include: the February 1997 purchase of Bloxham Laboratories Limited, a
veterinary diagnostic laboratory in the United Kingdom; the May 1997 purchase
of Astarix Institute, Inc., a development stage company which has discovered
certain compounds and associated technologies that have the potential for
treating allergic diseases in both humans and animals; and the July 1997
purchase of the allergy immunotherapy products business of Center Laboratories,
Incorporated, an FDA and USDA licensed manufacturer of allergy immunotherapy
products. Moreover, the Company anticipates using a portion of the proceeds
from the IPO to make additional acquisitions. Identifying and pursuing
acquisition opportunities, integrating acquired products and businesses and
managing growth requires a significant amount
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of management time and skill. There can be no assurance that the Company will
be effective in identifying and effecting attractive acquisitions, integrating
acquisitions or managing future growth. The failure to do so may have a
material adverse effect on the Company's business, financial condition or
results of operations.
Potential Product Liability; Limited Insurance Coverage
The testing, manufacturing and marketing of the Company's current products
as well as those currently under development entail an inherent risk of product
liability claims and associated adverse publicity. To date, the Company has not
experienced any material product liability claims, but any such claims arising
in the future could have a material adverse effect on the Company's business,
financial condition or results of operations. Potential product liability
claims may exceed the amount of the Company's insurance coverage or may be
excluded from coverage under the terms of the policy. There can be no assurance
that the Company's existing insurance can be renewed at a cost and level of
coverage comparable to that presently in effect, if at all. In the event that
the Company is held liable for a claim against which it is not indemnified or
for damages exceeding the limits of its insurance coverage or which results in
significant adverse publicity against the Company, such claim could have a
material adverse effect on the Company's business, financial condition or
results of operations.
Risk of Liability from Release of Hazardous Materials
The Company's products and development programs involve the controlled use
of hazardous and biohazardous materials, including chemicals, infectious
disease agents and various radioactive compounds. Although the Company believes
that its safety procedures for handling and disposing of such materials comply
with the standards prescribed by applicable local, state and federal
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any damages or fines that result and any
such liability could exceed the resources of the Company. The Company may incur
substantial costs to comply with environmental regulations as the Company
expands its manufacturing capacity.
Broad Discretion to Allocate Initial Public Offering Proceeds
The Company anticipates that the proceeds of its initial public offering
will be used to fund research and development efforts, to fund sales and
marketing capabilities, to expand and develop manufacturing operations and
capabilities, to fund acquisitions of businesses, technologies or products and
to finance working capital and general corporate requirements. The amounts
expended for each such purpose and the timing of such expenditures may vary
depending upon numerous factors. The Company will have broad discretion in
determining the amount and timing of expenditures and in allocating the
proceeds of its IPO. Such discretion will be particularly broad with respect to
that portion of the proceeds available for use for working capital and general
corporate purposes.
Pending Governmental Proceeding
The Company has been notified that the staff of the United States Federal
Trade Commission ("FTC") is conducting an investigation of Novartis, a
principal stockholder of Heska, with respect to Novartis' relationship with
Heska. The Company and Novartis have responded to the FTC requests for
information with respect to competition for feline heartworm prevention
products and canine and feline flea control products. The Company believes that
the FTC staff is investigating Novartis' actions in acquiring an equity
interest in Heska and representation on its board of directors and certain
rights to market Heska products to determine whether these actions violate
federal antitrust laws. At this time it is not known whether the investigation
will result in the
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initiation of formal proceedings before the FTC, or if such proceedings are
initiated, what relief will be sought or obtained. Such relief may include
limitation of Novartis' voting rights with respect to its Heska stock,
limitation of Novartis' representation on the Company's board of directors, an
orderly divestiture of Novartis' equity investment in Heska or reformation of
Novartis' collaborative agreements with the Company. There can be no assurance
that if the FTC were to initiate a proceeding and be successful, that such
relief would not have a material adverse effect on the Company's business,
operating results and financial condition.
Possible Volatility of Stock Price
The securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance
of particular companies. The market prices of the common stock of many
publicly-held biotechnology companies have in the past been, and can in the
future be, especially volatile. Announcements of technological innovations or
new products by the Company or its competitors, release of reports by
securities analysts, developments or disputes concerning patents or proprietary
rights, regulatory developments, changes in regulatory policies, economic and
other external factors, as well as quarterly fluctuations in the Company's
financial results, may have a significant impact on the market price of the
Common Stock.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) A Consent of Stockholders was solicited on April 18, 1997. A
Consent of Stockholders was solicited on June 2, 1997.
b) Not applicable.
c) The matters for which consents were solicited and the results
with respect to those matters were as follows:
APRIL 18, 1997 CONSENT
<TABLE>
<CAPTION>
COMMON STOCK VOTING AS A SEPARATE CLASS FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C> <C>
(1) Approval of Reincorporation of the
Company from California to Delaware 659,508 0 464,167
(2) Approval for the Company to enter
into Indemnity Agreements with its
Directors and certain of its Officers 659,508 0 464,167
PREFERRED STOCK VOTING TOGETHER AS A SEPARATE CLASS
(1) Approval of Reincorporation of the
Company from California to Delaware 9,914,476 0 599,523
(2) Approval for the Company to enter
into Indemnity Agreements with its
Directors and certain of its Officers 9,914,476 0 599,523
</TABLE>
JUNE 2, 1997 CONSENT
<TABLE>
<CAPTION>
COMMON STOCK AND PREFERRED STOCK VOTING
TOGETHER AS A SINGLE CLASS FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C> <C>
(1) To provide for the classification
of the Board of Directors into three
classes with staggered terms of office 10,587,738 0 1,718,252
(2) To provide that special meetings of
the stockholders may only be called
by the Chairman, the Chief Executive
Officer or the President of the Company
or by a resolution duly adopted by the
affirmative vote of a majority of the
directors 10,587,738 0 1,718,252
(3) To require approval of two thirds of the
total number of authorized directors or
stockholders holding two thirds of the
voting power of the Company to amend or
repeal the Bylaws 10,587,738 0 1,718,252
(4) To adopt the 1997 Employee Stock
Purchase Plan 10,587,738 0 1,718,252
</TABLE>
21
<PAGE> 24
d) Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
22
<PAGE> 25
HESKA CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HESKA CORPORATION
Date: August 14, 1997 By: /s/ William G. Skolout
---------------------------------
WILLIAM G. SKOLOUT
Chief Financial Officer
(on behalf of the Registrant and
as the Registrant's Principal
Financial and Accounting Officer)
23
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE REGISTRANT'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AS OF AND FOR THE
QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) INCLUDED IN THE
COMPANY'S REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,293
<SECURITIES> 3,341
<RECEIVABLES> 767
<ALLOWANCES> 0
<INVENTORY> 5,957
<CURRENT-ASSETS> 12,887
<PP&E> 14,001
<DEPRECIATION> (2,451)
<TOTAL-ASSETS> 30,255
<CURRENT-LIABILITIES> 8,924
<BONDS> 0
0
63,824
<COMMON> 4,498
<OTHER-SE> (53,179)
<TOTAL-LIABILITY-AND-EQUITY> 30,255
<SALES> 6,559
<TOTAL-REVENUES> 7,196
<CGS> 4,962
<TOTAL-COSTS> 4,962
<OTHER-EXPENSES> 23,013
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 363
<INCOME-PRETAX> (20,759)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,759)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,759)
<EPS-PRIMARY> (1.51)
<EPS-DILUTED> (1.51)
</TABLE>
