<PAGE> 1
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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 March 31, 2000
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
1613 PROSPECT PARKWAY
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.
[X] Yes [ ] No
The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding at May 12, 2000 was 33,720,156
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HESKA CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
<S> <C>
Consolidated Balance Sheets (Unaudited) as of March 31, 2000 and
December 31, 1999................................................. 3
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited) for the three months ended March 31, 2000 and 1999.... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
three months ended March 31, 2000 and 1999... .................... 5
Notes to Consolidated Financial Statements (Unaudited).............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... Not Applicable
Item 2. Changes in Securities and Use of Proceeds........................... 22
Item 3. Defaults Upon Senior Securities..................................... Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders................. Not Applicable
Item 5. Other Information................................................... Not Applicable
Item 6. Exhibits and Reports on Form 8-K.................................... 22
Exhibit Index............................................................... 23
Signatures.................................................................. 24
</TABLE>
2
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HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................. $ 3,881 $ 1,499
Marketable securities ................................................. 10,181 22,482
Accounts receivable, net .............................................. 13,139 9,652
Inventories, net ...................................................... 14,202 13,957
Other current assets .................................................. 1,186 1,027
--------- ---------
Total current assets ........................................ 42,589 48,617
Property and equipment, net ........................................................ 18,170 19,574
Intangible assets, net ............................................................. 1,286 1,629
Restricted marketable securities and other assets .................................. 1,638 1,348
--------- ---------
Total assets ................................................ $ 63,683 $ 71,168
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 6,694 $ 6,928
Accrued liabilities ................................................... 3,447 4,369
Deferred revenue ...................................................... 593 930
Current portion of capital lease obligations .......................... 516 604
Current portion of long-term debt ..................................... 7,888 7,552
--------- ---------
Total current liabilities ................................... 19,138 20,383
Capital lease obligations, less current portion .................................... 595 718
Long-term debt, less current portion ............................................... 3,958 4,428
Other long-term liabilities ........................................................ 200 200
--------- ---------
Total liabilities ........................................... 23,891 25,729
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 25,000,000 shares authorized;
none outstanding .................................................. -- --
Common stock, $.001 par value, 40,000,000 shares authorized;
33,710,765 and 33,436,669 shares issued and outstanding,
respectively ...................................................... 34 33
Additional paid-in capital ............................................ 199,296 199,156
Deferred compensation ................................................. (494) (648)
Stock subscription receivable from officers ........................... (126) (124)
Accumulated other comprehensive loss .................................. (386) (376)
Accumulated deficit ................................................... (158,532) (152,602)
--------- ---------
Total stockholders' equity .................................. 39,792 45,439
--------- ---------
Total liabilities and stockholders' equity .................. $ 63,683 $ 71,168
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
3
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HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Products, net ....................................................... $ 12,423 $ 11,010
Licenses and royalties .............................................. 1,700 --
Research and development ............................................ 240 41
-------- --------
Total revenues ................................................... 14,363 11,051
Cost of goods sold ..................................................... 8,422 7,709
-------- --------
5,941 3,342
-------- --------
Operating expenses:
Selling and marketing ............................................... 4,288 3,410
Research and development ............................................ 4,003 4,244
General and administrative .......................................... 2,819 2,736
Amortization of intangible assets and deferred compensation ......... 194 857
Restructuring expense ............................................... 435 --
-------- --------
Total operating expenses ......................................... 11,739 11,247
-------- --------
Loss from operations ................................................... (5,798) (7,905)
Other income (expense), net ............................................ (131) 22
-------- --------
Net loss ............................................................... $ (5,929) $ (7,883)
======== ========
Other comprehensive income (loss):
Foreign currency translation adjustments ............................ $ 27 $ (40)
Unrealized gain (loss) on marketable securities ..................... 51 (345)
-------- --------
Other comprehensive income (loss) ...................................... 78 (385)
-------- --------
Comprehensive loss ..................................................... $ (5,851) $ (8,268)
======== ========
Basic and diluted net loss per share ................................... $ (0.18) $ (0.30)
======== ========
Shares used to compute basic and diluted net loss per share ............ 33,602 26,605
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
4
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HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net cash used in operating activities ....................... $ (9,462) $ (9,193)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities .......................... 12,267 11,000
Proceeds from disposition of property and equipment .................. 165 262
Purchases of property and equipment .................................. (534) (1,344)
-------- --------
Net cash provided by investing activities ................... 11,898 9,918
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............................... 120 186
Proceeds from borrowings ............................................. 1,101 1,562
Repayments of debt and capital lease obligations ..................... (1,226) (2,649)
-------- --------
Net cash used in financing activities ....................... (5) (901)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ........................................... (49) (180)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................. 2,382 (356)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................................... 1,499 5,921
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD .......................................... $ 3,881 $ 5,565
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................................ $ 380 $ 525
</TABLE>
See accompanying notes to consolidated financial statements
5
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HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
Heska Corporation ("Heska" or the "Company") is primarily focused on
the discovery, development and marketing of companion animal health products. In
addition to manufacturing certain of Heska's companion animal health products,
the Company's primary manufacturing subsidiary, Diamond Animal Health, Inc.
("Diamond"), also manufactures bovine vaccine products and pharmaceutical
products that are marketed and distributed by third parties. In addition to
manufacturing veterinary allergy products for marketing and sale by Heska,
Heska's subsidiaries, Center Laboratories, Inc. ("Center") and CMG-Heska Allergy
Products S.A. ("CMG"), a Swiss corporation, also manufacture and sell human
allergy products. The Company also offers diagnostic services to veterinarians
at its Fort Collins, Colorado location.
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. 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 by acquiring Diamond, a
licensed pharmaceutical and biological manufacturing facility in Des Moines,
Iowa, hiring key employees and support staff, establishing marketing and sales
operations to support Heska products introduced in 1996, and designing and
implementing 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 1997, the Company
introduced additional products and expanded in the United States through the
acquisition of Center, a Food and Drug Administration ("FDA") and United States
Department of Agriculture ("USDA") licensed manufacturer of allergy
immunotherapy products located in Port Washington, New York, and internationally
through the acquisitions of Heska UK Limited ("Heska UK", formerly Bloxham
Laboratories Limited), a veterinary diagnostic laboratory in Teignmouth, England
and CMG (formerly Centre Medical des Grand'Places S.A.) in Fribourg,
Switzerland, which manufactures and markets allergy diagnostic products for use
in veterinary and human medicine, primarily in Europe. Each of the Company's
acquisitions during this period 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. In July 1997, the Company established a new subsidiary, Heska AG,
located near Basel, Switzerland, for the purpose of managing its European
operations.
During the first quarter of 1998 the Company acquired Heska Waukesha
(formerly Sensor Devices, Inc.), a manufacturer and marketer of patient
monitoring devices used in both animal health and human applications. The
operations of Heska Waukesha were combined with existing operations in Fort
Collins, Colorado and Des Moines, Iowa during the fourth quarter of 1999. The
Heska Waukesha facility was closed in December 1999.
In the fourth quarter of 1999, the Company announced its intent to sell
Heska UK. The transaction was completed in March 2000.
The Company has incurred net losses since its inception and anticipates
that it will continue to incur additional net losses in the near term as it
introduces new products, expands its sales and marketing capabilities and
continues its research and development activities. Cumulative net losses from
inception of the Company in 1988 through March 31, 2000 have totaled $158.5
million.
6
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The Company's ability to achieve profitable operations will depend
primarily upon its ability to successfully market its products, commercialize
products that are currently under development, develop new products and
efficiently integrate acquired businesses. Most of the Company's products are
subject to long development and regulatory approval cycles and there can be no
guarantee that the Company will successfully develop, manufacture or market
these products. There can also be no guarantee that the Company will attain
profitability or, if achieved, will remain profitable on a quarterly or annual
basis in the future. Until the Company attains positive cash flow, the Company
may continue to finance operations with additional equity and debt financing.
There can be no guarantee that such financing will be available when required or
will be obtained under favorable terms.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 sheet as of March 31, 2000, the
statements of operations and comprehensive loss for the three months ended March
31, 2000 and 1999 and the statements of cash flows for the three months ended
March 31, 2000 and 1999 are unaudited but include, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) which the Company
considers necessary for a fair presentation of its 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 when accounted for under the
purchase method of accounting, and for all periods presented when accounted for
under the pooling-of-interests method of accounting. 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.
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, 1999, included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 23, 2000.
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, 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.
Inventories, net
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.
7
<PAGE> 8
Inventories, net of provisions, consist of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
Raw materials.............................. $ 2,955 $ 3,436
Work in process............................ 7,244 6,445
Finished goods............................. 4,003 4,076
-------- --------
$ 14,202 $ 13,957
======== ========
</TABLE>
Revenue Recognition
Product revenues are recognized at the time goods are shipped to the
customer, or at the time services are performed, with an appropriate provision
for returns and allowances.
License revenues under arrangements to sell product rights or
technology rights are recognized upon the sale and completion by the Company of
all obligations under the agreement. No royalty revenue has been recognized to
date. Royalties will be recognized as products are sold to customers.
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 of advance payments
received during the current year until research activities are performed or
development milestones are completed.
In addition to its direct sales force and a contract sales force
specializing in equine products, the Company utilizes both distributors and
sales agency organizations to sell its products. Distributors purchase goods
from the Company, take title to those goods and resell them to their customers
in the distributors' territory. Sales agents maintain inventories of goods on
consignment from the Company and sell these goods on behalf of the Company to
customers in the sales agents' territory. The Company recognizes revenue at the
time goods are sold to the customers by the sales agents. Sales agents are paid
a fee for their services, which include maintaining product inventories, sales
activities, billing and collections. Fees earned by sales agents are netted
against revenues generated by these entities.
In December 1999, the Securities and Exchange Commission ("SEC") staff
released Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"). SAB
101 provides interpretive guidance on the recognition, presentation and
disclosure of revenue in financial statements. The accounting impact of SAB 101
is required to be determined no later than the Company's second fiscal quarter
of 2000. If the Company determines that its revenue recognition policies must
change to be in compliance with SAB 101, the implementation of SAB 101 will be
reflected as a cumulative effect of change in accounting principle as if SAB 101
had been implemented on January 1, 2000. The Company is currently reviewing SAB
101 to determine what impact, if any, the adoption of SAB 101 will have on its
financial position and results of operations.
Basic and Diluted Net Loss Per Share
The Company presents basic and diluted net loss per share in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, which establishes standards for computing and presenting basic and
diluted earnings per share. Also, the Company has adopted the guidance of SEC
Staff Accounting Bulletin No. 98 and related interpretations. Basic net loss per
common share is computed using the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed using the
sum of the weighted average number of shares of common stock outstanding and, if
not anti-dilutive, the effect of outstanding stock options and warrants
determined using the treasury stock method.
8
<PAGE> 9
Foreign Currency Translation
The functional currencies of the Company's international subsidiaries
are the French Franc and the Swiss Franc. Assets and liabilities of the
Company's international subsidiaries are translated using the exchange rate in
effect at the balance sheet date. Revenue and expense accounts are translated
using an average of exchange rates in effect during the period. Cumulative
translation gains and losses, if material, 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 in current operations. To date, the
Company has not entered into any forward contracts or hedging transactions.
3. RESTRUCTURING EXPENSES
During the first quarter of fiscal 2000, the Company initiated a cost
reduction and restructuring plan at its Diamond subsidiary. The restructuring
resulted from the rationalization of Diamond's business including a reduction in
the size of its workforce and the Company's decision to vacate a leased
warehouse and distribution facility no longer needed after the Company's
decision to discontinue contract manufacturing of certain low margin human
healthcare products. The charge to operations of approximately $435,000 related
primarily to personnel severance costs for 12 individuals and the costs
associated with closing the leased facility, terminating the lease and
abandoning certain leasehold improvements. The facility was closed in April
2000.
In August 1999, the Company announced plans to consolidate its Heska
Waukesha operations with existing operations in Fort Collins, Colorado and Des
Moines, Iowa. This consolidation was based on the Company's determination that
significant operating efficiencies could be achieved through the combined
operations. The Company recognized a charge to operations of approximately $1.2
million for this consolidation. These expenses related primarily to personnel
severance costs for 40 individuals and the costs associated with facilities
being closed and excess equipment, primarily at the Company's Waukesha,
Wisconsin location. This facility was closed in December 1999.
Shown below is a reconciliation of restructuring costs for the quarter
ended March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
Payments/Charges
Balance at Additions for the For the Three Balance at
December 31, Three Months Ended Months Ended March 31,
1999 March 31, 2000 March 31, 2000 2000
------------ ------------------ --------------- -----------
<S> <C> <C> <C> <C>
Severance pay, benefits and relocation expenses..... $ 429 $ 121 $ (525) $ 25
Noncancellable leased facility closure costs........ 694 314 (504) 504
------ ----- ------- ----
Total.......................................... $1,123 $ 435 $(1,029) $529
====== ===== ======== ====
</TABLE>
The balances of $529,000 and $1.1 million are included in accrued
liabilities in the accompanying consolidated balance sheets as of March 31, 2000
and December 31, 1999, respectively.
4. MAJOR CUSTOMERS
One customer accounted for approximately 10% of total revenue during
the three months ended March 31, 2000. No customer accounted for more than 10%
of total revenue during the three months ended March 31, 1999.
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5. SEGMENT REPORTING
The Company has adopted the provisions of SFAS No. 131, Disclosures
About Segments of an Enterprise, which changes the way the Company reports
information about its operating segments.
The Company divides its operations into two reportable segments, Animal
Health, which includes the operations of Heska, Diamond, and Heska AG, and
Allergy Diagnostics and Treatment, which includes the operations of Center and
CMG.
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands). The "Other" column
includes the elimination of intercompany transactions and other items as noted.
<TABLE>
<CAPTION>
ALLERGY
ANIMAL DIAGNOSTICS
HEALTH AND TREATMENT OTHER TOTAL
---------- ------------- --------- -----------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 2000:
Revenues........................................ $ 13,360 $ 1,690 $ (687) $ 14,363
Operating loss.................................. (5,325) (38) (435) (a) (5,798)
Total assets.................................... 91,654 7,445 (35,416) 63,683
THREE MONTHS ENDED MARCH 31, 1999:
Revenues........................................ $ 10,031 $ 1,773 $ (753) $ 11,051
Operating loss.................................. (7,078) (74) (753) (7,905)
Total assets.................................... 117,337 7,749 (36,663) 88,423
</TABLE>
- -------------
(a) Includes restructuring expenses of $435,000 (See Note 3).
The Company manufactures and markets its products in two major
geographic areas, North America and Europe. The Company's primary manufacturing
facilities are located in North America. Revenues earned in North America are
attributable to Heska, Diamond and Center. Revenues earned in Europe are
primarily attributable to CMG and Heska AG. There have been no significant
exports from North America or Europe.
In the three months ended March 31, 2000 and 1999, European
subsidiaries purchased products from North America for sale to European
customers. Transfer prices to international subsidiaries are intended to allow
the North American companies to earn profit margins commensurate with their
sales and marketing efforts. Certain information by geographic area is shown in
the following table (in thousands). The "Other" column includes the elimination
of intercompany transactions.
<TABLE>
<CAPTION>
NORTH
AMERICA EUROPE OTHER TOTAL
------- ------ ----- -----
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 2000:
Revenues............................................ $ 14,209 $ 841 $ (687) $ 14,363
Operating loss...................................... (5,084) (279) (435)(a) (5,798)
Total assets........................................ 95,815 3,285 (35,417) 63,683
THREE MONTHS ENDED MARCH 31, 1999:
Revenues............................................ $ 10,798 $ 1,006 $ (753) $ 11,051
Operating loss...................................... (7,455) (450) -- (7,905)
Total assets........................................ 120,802 4,284 (36,663) 88,423
</TABLE>
- -------------
(a) Includes restructuring expenses of $435,000 (See Note 3).
10
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our actual
results and the timing of certain events could differ materially from the
results discussed in the forward-looking statements. When used in this
discussion the words "expects," "anticipates," "estimates" and similar
expressions are intended to identify forward-looking statements. Such
statements, which include statements concerning future revenue sources and
concentration, gross margins, research and development expenses, selling and
marketing expenses, general and administrative expenses, capital resources,
additional financings or borrowings and additional losses, are subject to risks
and uncertainties, including those set forth below under "Factors that May
Affect Results" that could cause actual results to differ materially from those
projected. These forward-looking statements speak only as of the date hereof. We
expressly disclaim any obligation or undertaking to release publicly any updates
or revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions, or circumstances on which any such statement is based.
OVERVIEW
We are primarily focused on the discovery, development and marketing of
companion animal health products. In addition to manufacturing certain of our
companion animal products, our primary manufacturing subsidiary, Diamond, also
manufactures bovine vaccine products and pharmaceutical products that are
marketed and distributed by third parties. In addition to manufacturing
veterinary allergy products for marketing and sale by us, our subsidiaries,
Center and CMG, also manufacture and sell human allergy products. We also offer
diagnostic services to veterinarians at our Fort Collins, Colorado location.
From our inception in 1988 until early 1996, our operating activities
related primarily to research and development activities, entering into
collaborative agreements, raising capital and recruiting personnel. Prior to
1996, we had not received any revenues from the sale of products. During 1996,
we grew from being primarily a research and development concern to a
fully-integrated research, development, manufacturing and marketing company. We
accomplished this by acquiring Diamond, a licensed pharmaceutical and biological
manufacturing facility in Des Moines, Iowa, hiring key employees and support
staff, establishing marketing and sales operations to support our products
introduced in 1996, and designing and implementing more sophisticated operating
and information systems. We also expanded the scope and level of our scientific
and business development activities, increasing the opportunities for new
products. In 1997, we introduced additional products and expanded in the United
States through the acquisition of Center, an FDA and USDA licensed manufacturer
of allergy immunotherapy products located in New York, and internationally
through the acquisitions of Heska UK, a veterinary diagnostic laboratory in
England and CMG in Switzerland, which manufactures and markets allergy
diagnostic products for use in veterinary and human medicine, primarily in
Europe. Each of our acquisitions during this period was accounted for under the
purchase method of accounting and accordingly, our financial statements reflect
the operations of these businesses only for the periods subsequent to the
acquisitions. In July 1997, we established a new subsidiary, Heska AG, located
near Basel, Switzerland, for the purpose of managing our European operations.
During the first quarter of 1998, we acquired a manufacturer and
marketer of patient monitoring devices. The financial results of this entity
have been consolidated with ours under the pooling-of-interests accounting
method for all periods presented. These operations were consolidated with our
existing operations in Fort Collins, Colorado and Des Moines, Iowa as of
December 31, 1999, and our facility in Waukesha, Wisconsin was closed.
In December 1999, we announced our intent to sell our subsidiary in the
United Kingdom, Heska UK. The sale was completed in March 2000.
11
<PAGE> 12
We have incurred net losses since our inception and anticipates that we
will continue to incur additional net losses in the near term as we introduce
new products, expand our sales and marketing capabilities and continue our
research and development activities. Cumulative net losses from our inception in
1988 through March 31, 2000 have totaled $158.5 million.
Our ability to achieve profitable operations will depend primarily upon
our ability to successfully market our products, commercialize products that are
currently under development and develop new products. Most of our products are
subject to long development and regulatory approval cycles and there can be no
assurance that we will successfully develop, manufacture or market these
products. There can also be no assurance that we will attain profitability or,
if achieved, will remain profitable on a quarterly or annual basis in the
future. Until we attain positive cash flow, we may continue 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. See the discussion later in this section titled "Factors That
May Affect Results" for a more in-depth explanation of risks faced by us.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
Total revenues, which include product, license and royalty and research
and development revenues, increased 30% to $14.4 million in the first quarter of
2000 compared to $11.1 million for the first quarter of 1999. Product revenues
increased 13% to $12.4 million in the first quarter of 2000 compared to $11.0
million for the first quarter of 1999. The growth in revenues during 2000 was
primarily due to sales of new products introduced
12
<PAGE> 13
during 1999, improved instrumentation sales, the sale of our canine periodontal
disease therapeutic product line and various licensing transactions.
During the quarter ended March 31, 2000, we recognized $1.7 million of
license and royalty revenue. These revenues were primarily attributable to the
sale of the PERIOceutic(TM) Gel product line and the licensing of certain
recombinant allergen technology. In connection with the product line sale, we
expect to receive royalty revenues in future periods with respect to product
sales.
Revenues from sponsored research and development increased to $240,000
in the first quarter of 2000 from $41,000 in the first quarter of 1999.
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 $8.4 million in the first quarter of 2000
compared to $7.7 million in the first quarter of 1999, and the resulting gross
profit from product sales for 2000 increased to $4.0 million from $3.3 million
in 1999. The improvement in gross profit as a percentage of product sales in the
first quarter of 2000 compared to 1999 reflects the increase in sales of our
proprietary products and the elimination of certain low-margin products during
1999.
Selling and marketing expenses increased to $4.3 million in the first
quarter of 2000 from $3.4 million in the first quarter of 1999. This increase
reflects primarily the expansion of our sales and marketing organization and
costs associated with the introduction and marketing of new products.
Research and development expenses decreased to $4.0 million in the
first quarter of 2000 from $4.2 million in the first quarter of 1999.
Fluctuations in research and development expenses are generally the result of
the number of research projects in progress.
General and administrative expenses increased slightly to $2.8 million
in the first quarter of 2000 from $2.7 million in the first quarter of 1999.
Amortization of intangible assets and deferred compensation decreased
to $194,000 in the first quarter of 2000 from $857,000 in 1999. The decrease in
amortization expense from 1999 is due primarily to the completed amortization of
certain intangible assets, and to the write-off of intangible assets related to
the sale of Heska UK and certain other intangible assets in 1999. Intangible
assets resulted primarily from our 1997 and 1996 business acquisitions and are
being amortized over lives of 2 to 10 years. The amortization of deferred
compensation resulted in a non-cash charge to operations in the first quarter of
2000 of $154,000 compared to $189,000 in the first quarter of 1999. In
connection with the grant of certain stock options in 1997 and 1996, we recorded
deferred compensation 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.
During the first quarter of fiscal 2000, we initiated a cost reduction
and restructuring plan at Diamond. The restructuring resulted from the
rationalization of Diamond's business including a reduction in the size of its
workforce and our decision to vacate a leased warehouse and distribution
facility no longer needed after our decision to discontinue contract
manufacturing of certain low margin human health care products. The charge to
operations of approximately $435,000 related primarily to personnel severance
costs for 12 individuals and the costs associated with closing the leased
facility, terminating the lease and abandoning certain leasehold improvements.
The facility was closed in April 2000.
Other income (expense), net decreased to net other expense of $131,000
for the three months ended March 31, 2000 compared to net other income of
$22,000 for the same period in 1999 primarily due to lower interest income as
cash has been used to fund current operations. This decrease in interest income
was partially offset by lower interest expense as we have repaid outstanding
debt.
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LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity at March 31, 2000 was our $14.1 million
in cash, cash equivalents and marketable securities. As additional sources of
liquidity, we and our subsidiaries have secured lines of credit and other
revolving debt facilities totaling approximately $2.7 million, against which
borrowings of approximately $1.8 million were outstanding at March 31, 2000.
These financing facilities are secured by assets of the respective subsidiaries
and by corporate guarantees of Heska. We expect to seek additional asset-based
borrowing facilities.
Cash used in operating activities was $9.5 million in the first quarter
of 2000, compared to $9.2 million in the first quarter of 1999. The increase of
$3.5 million in accounts receivable was mainly due to increased sales volume and
the license and royalty revenues which were recognized in March 2000. Accounts
payable and accrued liabilities decreased by $1.2 million in the first quarter
of 2000. Expenses which were recognized as a result of our Waukesha
restructuring in 1999 and paid in the first quarter of 2000 accounted for
$667,000 of the reduction in accrued liabilities during the first quarter of
2000.
Our investing activities provided cash of $11.9 million in the first
quarter of 2000, compared to $9.9 million in cash provided by investing
activities during the first quarter of 1999. Cash provided by investing
activities was primarily related to the sale of marketable securities to fund
our business operations. Expenditures for property and equipment totaled
$534,000 for the first quarter of 2000 compared to $1.3 million in the first
quarter of 1999. We have historically used capital equipment lease and debt
facilities to finance equipment purchases and, if possible, leasehold
improvements. We currently expect to spend approximately $2.0 million in 2000
for capital equipment, including expenditures for the upgrading of certain
manufacturing operations to improve efficiencies as well as various enhancements
to assure ongoing compliance with certain regulatory requirements.
Our financing activities used $5,000 in the first quarter of 2000
compared to $901,000 used in the first quarter of 1999. The higher usage of cash
in 1999 is primarily due to debt repayments in excess of new borrowings during
the first quarter of fiscal 1999.
Our primary short-term needs for capital, which are subject to change,
are for our continuing research and development efforts, our sales, marketing
and administrative activities, working capital associated with increased product
sales and capital expenditures relating to developing and expanding our
manufacturing operations. Our future liquidity and capital requirements will
depend on numerous factors, including the extent to which our present and future
products gain market acceptance, the extent to which products or technologies
under research or development are successfully developed, the timing of
regulatory actions regarding our products, the costs and timing of expansion of
sales, marketing and manufacturing activities, the cost, timing and business
management of current and potential acquisitions and contingent liabilities
associated with such acquisitions, the procurement and enforcement of patents
important to our business and the results of competition.
We believe that our available cash, cash from operations, available
borrowings and borrowings expected to be available under a corporate revolving
line of credit currently being negotiated will be sufficient to satisfy our
projected cash requirements for at least the next 12 months, assuming no
significant uses of cash in acquisition activities. Thereafter, if cash
generated from operations is insufficient to satisfy our cash requirements, we
will need to raise additional capital to continue our business operations. There
can be no assurance that such additional capital will be available on terms
acceptable to us, if at all. Furthermore, any additional equity financing would
likely be dilutive to stockholders and debt financing, if available, may include
restrictive covenants which may limit our operations and strategies.
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NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1999, we had a net operating loss carryforward of
approximately $127.5 million and approximately $2.7 million of research and
development 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 2019.
Our 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, we will be limited in the amount of NOL's incurred prior to the merger
that we may utilize to offset future taxable income. This limitation will total
approximately $4.7 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. We believe that this limitation may affect the eventual
utilization of our total NOL carryforwards.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") staff
released Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"). SAB
101 provides interpretive guidance on the recognition, presentation and
disclosure of revenue in financial statements. The accounting impact of SAB 101
is required to be determined no later than our second fiscal quarter of 2000. If
we determine that our revenue recognition policies must change to be in
compliance with SAB 101, the implementation of SAB 101 will be reflected as a
cumulative effect of change in accounting principle as if SAB 101 had been
implemented on January 1, 2000. We are currently reviewing SAB 101 to determine
what impact, if any, the adoption of SAB 101 will have on our financial position
and results of operations.
We do not expect the adoption of any standards recently issued by the
Financial Accounting Standards Board or the Securities and Exchange Commission
to have a material impact on our financial position or results of operations.
FACTORS THAT MAY AFFECT RESULTS
We have a history of losses and may never achieve profitability.
We have incurred net losses since our inception. At March 31, 2000, our
accumulated deficit was $158.5 million. We anticipate that we will continue to
incur additional operating losses in the near term. These losses have resulted
principally from expenses incurred in our research and development programs and
from general and administrative and sales and marketing expenses. We cannot
assure you that we will attain profitability or, if we do, that we will remain
profitable on a quarterly or annual basis in the future.
We have limited resources to devote to product development and
commercialization.
Our strategy is to develop a broad range of products addressing
companion animal healthcare. We believe that our revenue growth and
profitability, if any, will substantially depend upon our ability to:
o improve market acceptance of our current products;
o complete development of new products; and
o successfully introduce and commercialize new products.
We have introduced some of our products only recently and many of our
products are still under development. 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 our
other product candidates. If we fail to develop new products and bring them to
market, our business could be substantially harmed.
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We may experience difficulty in commercializing our products.
Because several of our current products, as well as a number of products
under development, are novel, we may need to expend substantial efforts in order
to educate our customers about the uses of our products and to convince them of
the need for our products. We cannot assure you that any of our products will
achieve satisfactory market acceptance or that we will successfully
commercialize them on a timely basis, or at all. If any of our products do not
achieve a significant level of market acceptance, our business could be
substantially harmed.
We must obtain costly regulatory approvals in order to bring our products to
market.
Many of the products we develop and market are subject to regulation by
one or more of the USDA, FDA, EPA and foreign regulatory authorities. The
development and regulatory approval activities necessary to bring new products
to market are time-consuming and costly. We have experienced in the past, and
may experience in the future, difficulties that could delay or prevent us from
obtaining the regulatory approvals necessary to introduce new products or to
market them. We cannot assure you that the USDA, FDA, EPA or foreign regulatory
authorities will issue regulatory clearance or new product approvals on a timely
basis, or at all. Any acquisitions of new products and technologies may subject
us to additional government regulation. If we do not secure the necessary
regulatory approvals for our products, our business could be substantially
harmed.
Factors beyond our control may cause our operating results to fluctuate and many
of our expenses are fixed.
We believe that our future operating results will fluctuate on a
quarterly basis due to a variety of factors, including:
o the introduction of new products by us or by our competitors;
o market acceptance of our current or new products;
o regulatory and other delays in product development;
o product recalls;
o competition and pricing pressures from competitive products;
o manufacturing delays;
o shipment problems;
o product seasonality; and
o changes in the mix of products sold.
We have high operating expenses for personnel, new product development
and marketing. Many of these expenses are fixed in the short term. If any of the
factors listed above cause our revenues to decline, our operating results could
be substantially harmed.
We may need to seek additional financing in the future.
We have incurred negative cash flow from operations since inception. We
do not expect to generate positive cash flow sufficient to fund our operations
in the near term. We believe that our available cash, cash from operations,
available borrowings and borrowings expected to be available under a corporate
revolving line of credit currently being negotiated will be sufficient to
satisfy our projected cash requirements for at least the next 12 months,
assuming no significant uses of cash in acquisition activities. Thus, we may
need to raise additional capital to fund our research and development,
manufacturing, sales and marketing activities. Our future liquidity and capital
requirements will depend on numerous factors, including:
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o the extent to which our present and future products gain market
acceptance;
o the extent to which we successfully develop products from
technologies under research or development;
o the timing of regulatory actions concerning our products;
o the costs and timing of expansions of our sales, marketing and
manufacturing activities;
o the cost, timing and business management of recent and potential
acquisitions and contingent liabilities associated with
acquisitions;
o the procurement and enforcement of important patents, and
o the results of competition.
We cannot assure you that additional capital will be available on
acceptable terms, if at all. Furthermore, any additional equity financing would
likely be dilutive to stockholders, and debt financing, if available, may
include restrictive covenants which may limit our currently planned operations
and strategies. If adequate funds are not available, we may be required to
curtail our operations significantly or to obtain funds by entering into
collaborative agreements or other arrangements on unfavorable terms. If we fail
to raise capital on acceptable terms when we need to, our business could be
substantially harmed.
A small number of large customers account for a large percentage of our
revenues.
We currently derive a substantial portion of our revenues from Diamond,
which manufactures certain of our products and products for other companies in
the animal health industry. Revenues from one Diamond customer comprised
approximately 10% of total revenues in the first quarter of 2000. No customer
accounted for more than 10% of total revenue during the three months ended March
31, 1999.
We have limited experience in marketing our products.
The market for companion animal healthcare products is highly
fragmented, with discount stores and specialty pet stores accounting for a
substantial percentage of sales. Because we sell our companion animal health
products only to veterinarians, we may fail to reach a substantial segment of
the potential market, and we may not be able to offer our products at prices
which are competitive with those of companies that distribute their products
through retail channels. We currently market our products to veterinarians
through a direct sales force and through third parties. To be successful, we
will have to continue to develop and train our direct sales force or rely on
marketing partnerships or other arrangements with third parties to market,
distribute and sell our products. We cannot assure you that we will successfully
develop and maintain marketing, distribution or sales capabilities, or that we
will be able to make arrangements with third parties to perform these activities
on satisfactory terms. If we fail to develop a successful marketing strategy,
our business could be substantially harmed.
We operate in a highly competitive industry.
The market in which we operate is intensely competitive. Our
competitors include independent 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,
Merial Ltd., Novartis, Pfizer Inc., Schering Plough Corporation, Pharmacia &
Upjohn, Inc. and IDEXX Laboratories, Inc., have developed or are developing
products that compete with our products or would compete with them if developed.
These competitors may have substantially greater financial, technical, research
and other resources and larger, better-established marketing, sales,
distribution and service organizations than us. Our competitors offer broader
product lines and have greater name recognition than we do. We cannot assure you
that our competitors will not 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. Moreover,
we cannot assure you that we will have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully. If we fail to compete successfully, our business could be
substantially harmed.
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We have granted third parties substantial marketing rights to our products under
development.
We have granted marketing rights to certain products under development
to third parties, including Novartis, Bayer, Eisai and Ralston Purina. Novartis
has the right to manufacture and market throughout the world (except in
countries where Eisai has such rights) under the Novartis trade name any flea
control vaccine or feline heartworm vaccine we develop on or before December 31,
2005. We have retained the right to co-exclusively manufacture and market these
products throughout the world under our own trade names. Accordingly, Novartis
and we may become direct competitors, with each party sharing revenues on the
other's sales. We have also granted Novartis a right of first refusal pursuant
to which, prior to granting rights to any third party for any products or
technology we develop or acquire for either companion animal or food animal
applications, we must first offer Novartis such rights. In Japan, Novartis also
has the exclusive right, upon regulatory approval, to distribute our (a)
heartworm diagnostics, (b) trivalent and bivalent feline vaccines and (c)
certain other Heska products. Bayer has exclusive marketing rights to our canine
heartworm vaccine, except in countries where Eisai has such rights. Eisai has
exclusive rights in Japan and most countries in East Asia to market our feline
and canine heartworm vaccines, our feline and canine flea control vaccine and
our feline toxoplasmosis vaccine. In addition, we granted Ralston Purina the
exclusive rights to develop and commercialize our discoveries, know-how and
technologies in various pet food products.
Our agreements with our corporate marketing partners generally contain
no minimum purchase requirements in order for them to maintain their exclusive
or co-exclusive marketing rights. We cannot assure you that Novartis, Bayer,
Eisai or Ralston Purina or any other collaborative party will devote sufficient
resources to marketing our products. Furthermore, there is nothing to prevent
Novartis, Bayer, Eisai or Ralston Purina or any other collaborative party from
pursuing alternative technologies or products that may compete with our
products. If we fail to develop and maintain our own marketing capabilities, we
may find it necessary to continue to rely on potential or actual competitors for
third-party marketing assistance. Third party marketing assistance may not be
available in the future on reasonable terms, if at all.
We may face costly intellectual property disputes.
Our ability to compete effectively will depend in part on our ability
to develop and maintain proprietary aspects of our technology and either to
operate without infringing the proprietary rights of others or to obtain rights
to technology owned by third parties. We have United States and foreign-issued
patents and are currently prosecuting patent applications in the United States
and with various foreign patent offices. We cannot assure you that any of our
pending patent applications will result in the issuance of any patents or that
any issued patents will offer protection against competitors with similar
technology. We cannot assure you that any patents we receive will not be
challenged, invalidated or circumvented in the future or that the rights created
by those patents will provide a competitive advantage. We also rely on trade
secrets, technical know-how and continuing invention to develop and maintain our
competitive position. We cannot assure you that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets.
The biotechnology and pharmaceutical industries have been characterized
by extensive litigation relating to patents and other intellectual property
rights. In 1998, Synbiotics Corporation filed a lawsuit against us alleging
infringement of a Synbiotics patent relating to heartworm diagnostic technology
and this litigation remains ongoing. We cannot assure you that we will not
become subject to additional patent infringement claims and litigation in the
United States or other countries or interference proceedings conducted in the
United States Patent and Trademark Office to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO
interference proceedings, and related legal and administrative proceedings are
costly, time-consuming and distracting. We may also need to pursue litigation to
enforce any patents issued to us or our collaborative partners, to protect trade
secrets or know-how owned by us or our collaborative partners, or to determine
the enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference
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proceeding will 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, if at all.
We license technology from a number of third parties. The majority of
these license agreements impose due diligence or milestone obligations on us,
and in some cases impose minimum royalty and/or sales obligations on us, in
order for us to maintain our rights under these agreements. Our products may
incorporate technologies that are the subject of patents issued to, and patent
applications filed by, others. As is typical in our industry, from time to time
we and our collaborators have received, and may in the future receive, notices
from third parties claiming infringement and invitations to take licenses under
third-party patents. It is our policy that when we receive such notices, we
conduct investigations of the claims they assert. With respect to the notices we
have received to date, we believe, after due investigation, that we have
meritorious defenses to the infringement claims asserted. Any legal action
against us or our collaborators may require us or our collaborators to obtain
one or more licenses in order to market or manufacture affected products or
services. However, we cannot assure you that we or our collaborators will be
able to obtain licenses for technology patented by others on commercially
reasonable terms, that we 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 our businesses. Failure to obtain necessary
licenses or to identify and implement alternative approaches could prevent us
and our collaborators from commercializing certain of our products under
development and could substantially harm our business.
We have limited manufacturing experience and capacity and rely substantially on
third-party manufacturers.
To be successful, we must manufacture, or contract for the manufacture
of, our 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 increase our
manufacturing capacity, we acquired Diamond in April 1996 and certain assets of
Center in July 1997. We must complete significant improvements in our
manufacturing infrastructure in order to scale up for the manufacturing of our
new products. We cannot assure you that we can complete such work successfully
or on a timely basis.
We currently rely on third parties to manufacture those products we do
not manufacture at our Diamond or Center facilities. We currently have a supply
agreement with Quidel Corporation for certain manufacturing services relating to
our point-of-care diagnostic tests. Third parties also manufacture our patient
monitoring instruments and associated consumable products. We cannot assure you
that these partners will manufacture products to regulatory standards and our
specifications in a cost-effective and timely manner. If one or more of our
suppliers experiences delays in scaling up commercial manufacturing, fails to
produce a sufficient quantity of products to meet market demand, or requests
renegotiation of contract prices, our business could be substantially harmed.
While we typically retain the right to manufacture products ourselves or
contract with an alternative supplier in the event of a manufacturer's breach,
any transfer of production would cause significant production delays and
additional expense to us to scale up production at a new facility and to apply
for regulatory licensure at that new facility. In addition, we cannot assure you
that suitable manufacturing partners or alternative suppliers will be available
for our products under development if present arrangements are not satisfactory.
Our manufacturing facilities are subject to governmental regulation.
Our manufacturing facilities and those of any third-party manufacturers
we may use are subject to the requirements of and periodic regulatory
inspections by one or more of the FDA, USDA and other federal, state and foreign
regulatory agencies. We cannot assure you that we or our contractors will
continue to satisfy these regulatory requirements. Any failure to do so could
substantially harm our business, financial condition or results of operations.
We cannot assure you that we will not incur significant costs to comply with
laws and regulations in the future or that new laws and regulations will not
substantially harm our business.
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We depend on partners in our research and development activities.
For certain of our proposed products, we are dependent on collaborative
partners to successfully and timely perform research and development activities
on our behalf. We cannot assure you that these collaborative partners will
complete research and development activities on our behalf in a timely fashion,
or at all. If our collaborative partners fail to complete research and
development activities, or fail to complete them in a timely fashion, our
business could be substantially harmed.
We depend on key personnel for our future success.
Our future success is substantially dependent on the efforts of our
senior management and scientific team. The loss of the services of members of
our 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 our business, we depend substantially on our
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 our activities. If we lose the services
of, or fail to recruit, key scientific and technical personnel, our business
could be substantially harmed.
We must manage our growth effectively.
We anticipate that our business will grow as we develop and
commercialize new products, and that this growth will result in an increase in
responsibilities for both existing and new management personnel. In order to
manage growth effectively, we will need to continue to implement and improve our
operational, financial and management information systems, to train, motivate
and manage our current employees and to hire new employees. We cannot assure you
that we will be able to manage our expansion effectively. Failure to do so could
substantially harm our business.
We may face product liability litigation and the extent of our insurance
coverage is limited.
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. 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 cannot assure you that we will 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 limits of our insurance coverage or which results
in significant adverse publicity against us, our business could be substantially
harmed.
Side effects of our products may generate adverse publicity.
Following the introduction of a product, adverse side effects may be
discovered that make a product no longer commercially viable. Publicity
regarding such adverse effects could affect sales of our other products for an
indeterminate time period. We are dependent on the acceptance of our products by
both veterinarians and pet owners. If we fail to engender confidence in our
products and services, our ability to attain and sustain market acceptance of
our products could be substantially harmed.
We may be held liable for the release of hazardous materials.
Our products and development programs involve the controlled use of
hazardous and biohazardous materials, including chemicals, infectious disease
agents and various radioactive compounds. Although we believe that our safety
procedures for handling and disposing of such materials comply with the
standards prescribed by applicable local, state and federal regulations, we
cannot completely eliminate the risk of accidental
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contamination or injury from these materials. In the event of such an accident,
we could be held liable for any damages or fines that result. Our liability for
the release of hazardous materials could exceed our resources. We may incur
substantial costs to comply with environmental regulations as we expand our
manufacturing capacity.
We expect to experience volatility in our 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 securities of many publicly-held
biotechnology companies have in the past been, and can in the future be expected
to be, especially volatile. The market price of our common stock may fluctuate
substantially due to factors such as:
o announcements of technological innovations or new products by us or
by our competitors;
o releases of reports by securities analysts;
o developments or disputes concerning patents or proprietary rights;
o regulatory developments;
o changes in regulatory policies;
o economic and other external factors; and
o quarterly fluctuations in our financial results.
ITEM 3.
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 United States and foreign interest rates and changes
in foreign currency exchange rates as measured against the United States dollar.
These exposures are directly related to our normal operating and funding
activities. Historically and as of March 31, 2000, we have not used derivative
instruments or engaged in hedging activities.
Interest Rate Risk
The interest payable on certain of our lines of credit and other
borrowings is variable based on the United States prime rate and, therefore,
affected by changes in market interest rates. At March 31, 2000, approximately
$8.5 million was outstanding on these lines of credit and other borrowings with
a weighted average interest rate of 10.3%. The line of credit matures in
September 2001 and is subject to annual renewal. We manage interest rate risk by
investing excess funds principally in cash equivalents or marketable securities
which bear interest rates that reflect current market yields. Additionally, we
monitor interest rates and at March 31, 2000 had sufficient cash balances to pay
off the lines of credit should interest rates increase significantly. As a
result, we do not believe that reasonably possible near-term changes in interest
rates will result in a material effect on our future earnings, financial
position or cash flows.
Foreign Currency Risk
At March 31, 2000, we had wholly-owned subsidiaries located in
Switzerland and France. Sales from these operations are denominated in Swiss
Francs, French Francs or Euros, thereby creating exposures to changes in
exchange rates. The changes in the Swiss/U.S. exchange rate, French/U.S.
exchange rate or Euro/U.S. exchange rate may positively or negatively affect our
sales, gross margins and retained earnings. We do not believe that reasonably
possible near-term changes in exchange rates will result in a material effect on
future
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earnings, fair values or cash flows, and therefore, have chosen not to enter
into foreign currency hedging instruments. There can be no assurance that such
an approach will be successful, especially in the event of a significant and
sudden decline in the value of the Swiss Franc, French Franc or Euro.
PART II. OTHER INFORMATION
ITEM 2. SALES OF UNREGISTERED SECURITIES
(c) Between October 1999 and March 2000, the Registrant issued 1,691
shares of Common Stock to consultants in consideration of services rendered in
accordance with the terms of their consulting agreements between the Registrant
and the respective consultant. The Registrant relied upon the exemption provided
by Section 4(2) of the Act.
In January 2000, the Registrant issued 4,000 shares of Common Stock
to a product development services provider in consideration of the completion of
certain research projects. The Registrant relied upon the exemption provided by
Section 4(2) of the Act.
Where required, the recipients of the above-described securities
represented their intentions to acquire the securities for investment only and
not with a view of distribution thereof. Appropriate legends were affixed, where
required, to the stock certificates issued in such transactions. All recipients
had adequate access, through employment or other relationships, to information
about the Registrant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on Page 27
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 2000.
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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: May 12, 2000 By /s/ Ronald L. Hendrick
-----------------------------------------
RONALD L. HENDRICK
Executive Vice President and Chief
Financial Officer
(on behalf of the Registrant and as the
Registrant's Principal Financial and
Accounting Officer)
24
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
- ---------------
23
<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 MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) INCLUDED IN THE COMPANY'S
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,881
<SECURITIES> 10,181
<RECEIVABLES> 13,387
<ALLOWANCES> (248)
<INVENTORY> 14,202
<CURRENT-ASSETS> 42,589
<PP&E> 29,878
<DEPRECIATION> (11,708)
<TOTAL-ASSETS> 63,683
<CURRENT-LIABILITIES> 19,138
<BONDS> 0
0
0
<COMMON> 199,330
<OTHER-SE> (159,538)
<TOTAL-LIABILITY-AND-EQUITY> 63,683
<SALES> 12,423
<TOTAL-REVENUES> 14,363
<CGS> 8,422
<TOTAL-COSTS> 8,422
<OTHER-EXPENSES> 13,739
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (75)
<INCOME-PRETAX> (5,929)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,929)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,929)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
