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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, 2001
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 [I.R.S. Employer
jurisdiction 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
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days.
[ X ] Yes [ ] No
The number of shares of the Registrant's Common Stock, $.001 par
value, outstanding at
May 9, 2001 was 38,667,328
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HESKA CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets (Unaudited) as of
March 31, 2001 and December 31, 2000 3
Consolidated Statements of Operations
(Unaudited) for the three months ended
March 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the three months
ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Not Applicable
Item 2. Changes in Securities and Use of Proceeds 24
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 24
Exhibit Index 24
Signatures 25
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share data)
(unaudited)
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Current assets:
Cash and cash equivalents $ 4,709 $ 3,176
Marketable securities - 2,482
Accounts receivable, net 8,656 8,433
Inventories, net 9,079 8,716
Other current assets 612 742
-------- --------
Total current assets 23,056 23,549
Property and equipment, net 12,239 12,901
Intangible assets, net 1,462 1,457
Restricted marketable securities and other assets 1,144 1,253
-------- --------
Total assets $ 37,901 $ 39,160
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,361 $ 3,370
Accrued liabilities 3,046 4,258
Deferred revenue 361 467
Current portion of capital lease obligations 503 584
Current portion of long-term debt 1,199 1,562
-------- --------
Total current liabilities 8,470 10,241
Capital lease obligations, net of current portion 92 138
Long-term debt, net of current portion 2,595 2,670
Other long-term liabilities 996 1,011
-------- --------
Total liabilities 12,153 14,060
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 25,000,000
shares authorized; none outstanding - -
Common stock, $.001 par value, 75,000,000 shares
authorized; 38,656,945 and 34,072,640 shares
issued and outstanding, respectively 39 34
Additional paid-in capital 205,117 199,789
Accumulated other comprehensive income (363) (251)
Accumulated deficit (179,045) (174,472)
--------- ---------
Total stockholders' equity 25,748 25,100
--------- ---------
Total liabilities and stockholders'
equity $ 37,901 $ 39,160
========= ========
See accompanying notes to consolidated financial statements
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
---------------------
Revenues:
Products, net $ 10,314 $ 12,423
Research, development and other 613 1,940
-------- --------
Total revenues 10,927 14,363
Cost of products sold 6,214 8,422
-------- --------
4,713 5,941
-------- --------
Operating expenses:
Selling and marketing 3,558 4,288
Research and development 3,455 4,003
General and administrative 2,096 2,819
Amortization of intangible assets and deferred 68 194
compensation
Restructuring expense - 435
-------- --------
Total operating expenses 9,177 11,739
-------- --------
Loss from operations (4,464) (5,798)
Other income (expense), net (108) (131)
-------- --------
Net loss $ (4,572) $ (5,929)
======== ========
Basic and diluted net loss per share $ (0.12)$ (0.18)
======== ========
Shares used to compute basic and diluted net loss
per share 37,029 33,602
======== ========
See accompanying notes to consolidated financial statements
HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------- -------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net cash used in operating activities $ (5,323) $ (9,462)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 2,500 12,267
Proceeds from disposition of property and equipment - 165
Purchase of property and equipment (300) (534)
-------- --------
Net cash provided by investing activities 2,200 11,898
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5,332 120
Proceeds from borrowings - 1,101
Repayments of debt and capital lease obligations (567) (1,226)
-------- --------
Net cash provided (used in) by financing activities 4,765 (5)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (109) (49)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 1,533 2,382
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,176 1,499
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,709 $ 3,881
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 140 $ 380
See accompanying notes to consolidated financial statements
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
Heska Corporation ("Heska" or the "Company") is primarily focused on the
discovery, development, manufacturing 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"), manufactures food animal vaccine and pharmaceutical
products that are marketed and distributed by third parties. The Company also
offers diagnostic services to veterinarians at its Fort Collins, Colorado and
CMG-Heska Allergy Products S.A. ("CMG"), a Swiss corporation, locations.
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 new Heska products, 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 respective 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
financial results of Heska Waukesha have been consolidated with those of the
Company under the pooling-of-interests accounting method for all periods
presented.
During 1999 and 2000, the Company restructured and refocused its business.
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 March 2000, the Company
sold Heska UK. The Company recorded a loss on disposition of approximately $1.0
million during 1999 for this sale. In June 2000, the Company sold Center. The
Company recognized a gain on the sale of approximately $151,000.
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, 2001 have totaled $179.0
million.
The Company's primary short-term needs for capital, which are subject to
change, are for its continuing research and development efforts, its sales,
marketing and administrative activities, working capital associated with
increased product sales and capital expenditures relating to our manufacturing
operations. 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 and develop
new products. 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.
The Company believes that its available cash, cash equivalents and
marketable securities, together with cash from operations, available borrowings
and borrowings expected to be available under its revolving line of credit
facility will be sufficient to satisfy projected cash requirements into 2002,
although it may raise additional funds at or before such time. Thereafter, if
cash generated from operations is insufficient to satisfy its cash requirements,
the Company will need to raise additional capital to continue its business
operations. If necessary, the Company expects to raise these additional funds
through one or more of the following: (1) sale of additional securities; (2)
sale of various assets; (3) licensing of technology; and (4) sale of various
products or marketing rights. If the Company cannot raise the additional funds
through these options on acceptable terms or with the necessary timing,
management could also reduce discretionary spending to decrease the Company's
cash burn rate and extend the currently available cash, cash equivalents,
marketable securities and available borrowings.
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, 2001, the statements of
operations and comprehensive loss for the three months ended March 31, 2001 and
2000 and the statements of cash flows for the three months ended March 31, 2001
and 2000 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, 2000, included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 27, 2001.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Inventories consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Raw materials $ 2,625 $ 2,596
Work in process 3,362 2,904
Finished goods 3,723 3,822
Less reserves for losses (631) (606)
--------- ----------
$ 9,079 $ 8,716
========= ==========
Revenue Recognition
Product revenues are recognized at the time goods are shipped to the
customer 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. Royalties are recognized as products are
sold to customers.
The Company recognizes revenue from sponsored research and development over
the life of the contract as research activities are performed. The revenue
recognized is the lesser of revenue earned under a percentage of completion
method based on total expected revenues or actual non-refundable cash received
to date under the agreement.
In addition to its direct sales force, 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.
Basic and Diluted Net Loss Per Share
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. At
December 31, 2000 and March 31, 2001, securities that have been excluded
from diluted net loss per share because they would be anti-dilutive are
outstanding options to purchase 3,964,668 and 4,299,754 shares, respectively,
of the Company's common stock and warrants to purchase 1,165,000 shares of
the Company's common stock as of each date.
Foreign Currency Translation
The functional currency of the Company's international subsidiaries is
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 are included in accumulated other comprehensive income in the
consolidated balance sheets. Exchange gains and losses arising from
transactions denominated in foreign currencies (i.e., transaction gains
and losses) are recognized in current operations.
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.
As of March 31, 2001, the Company had approximately $115,000 in
accrued liabilities for a leased facility closed at the end of fiscal 1999.
4. MAJOR CUSTOMERS
One customer accounted for approximately 10% of total revenue during the
three months ended March 31, 2001 and 2000. One customer accounted for
approximately 10% and 11% of total net accounts receivable at March 31, 2001
and December 31, 2000, respectively. The customer purchased vaccines
from Diamond.
5. SEGMENT REPORTING
The Company divides its operations into three reportable segments.
Companion Animal Health includes the operations of Heska, CMG and Heska AG.
Food Animal Health includes the operations of Diamond Animal Health.
Allergy Treatment includes the operations of Center, which was sold in
June 2000.
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.
COMPANION FOOD
ANIMAL ANIMAL ALLERGY
HEALTH HEALTH TREATMENT OTHER TOTAL
--------- --------- --------- ------- --------
THREE MONTHS ENDED MARCH 31, 2001:
Revenues $ 8,112 $ 3,362 $ - $ (547) $ 10,927
Operating income (loss) (4,555) 91 - - (4,464)
Total assets 51,080 17,744 - (30,923) 37,901
Capital expenditures 103 197 - - 300
Depreciation and amortization 565 397 - - 962
THREE MONTHS ENDED MARCH 31, 2000:
Revenues $ 9,172 $ 4,121 $ 1,757 $ (687) $ 14,363
Operating income (loss) (5,435) 25 47 (435)(a) (5,798)
Total assets 70,070 22,419 6,610 (35,416) 63,683
Capital expenditures 342 87 105 - 534
Depreciation and amortization 573 624 110 - 1,307
--------------
(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 (through June 2000). Revenues earned in Europe
are primarily attributable to Heska UK (through January 2000), CMG and Heska AG.
There have been no significant exports from North America or Europe.
During the three months ended March 31, 2001 and 2000, 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.
NORTH
AMERICA EUROPE OTHER TOTAL
--------- -------- ------- -------
THREE MONTHS ENDED MARCH 31, 2001:
Revenues $ 10,883 $ 591 $ (547) $ 10,927
Operating income (loss) (4,398) (66) - (4,464)
Total assets 66,505 2,320 (30,924) 37,901
Capital expenditures 332 (32) - 300
Depreciation and amortization 955 7 - 962
THREE MONTHS ENDED MARCH 31, 2000:
Revenues $ 14,209 $ 841 $ (687) $ 14,363
Operating income (loss) (5,084) (279) (435)(a) (5,798)
Total assets 95,815 3,285 (35,417) 63,683
Capital expenditures 491 43 - 534
Depreciation and amortization 1,290 17 - 1,307
--------------
(a) Includes restructuring expenses of $435,000 (See Note 3).
6. SALE OF COMMON STOCK
In February 2001, the Company sold 4,573,000 shares of common stock
through a private placement offering with net proceeds of approximately
$5.3 million and filed a registration statement covering resales of these
shares. The Company intends to keep the registration statement effective
until April 5, 2003, or such earlier date of the disposition of these
shares, subject to the Company's right to suspend the use of the
registration statement.
7. CREDIT FACILITY
In March 2001, the Company entered into an amendment to its
revolving line of credit facility. The Company's ability to borrow
under this agreement varies based upon available cash, eligible accounts
receivable and eligible inventory. The minimum liquidity (cash plus
excess borrowing base) required to be maintained has been reduced to
$3.0 million during 2001. As of March 31, 2001, the Company's available
borrowing capacity was approximately $7.1 million.
8. COMPREHENSIVE INCOME
Comprehensive income includes net income (loss) plus the results of
certain stockholders' equity changes not reflected in the Consolidated
Statements of Operations. Such changes include foreign currency
items and unrealized gains and losses on certain investments in
marketable securities. During the three months ended March 31, 2001, we
realized a loss of approximately $22,000 on the sale of marketable
securities. Total comprehensive income and the components of
comprehensive income follow (in thousands):
Three Months Ended
March 31,
-----------------------
2001 2000
-------- --------
Net loss per Consolidated Statements of Operations $ (4,572) $ (5,929)
Foreign currency translation adjustments 157 24
Changes in unrealized loss on
marketable securities (45) (34)
-------- --------
Comprehensive loss $ (4,460) $ (5,939)
======== ========
9. SUBSEQUENT EVENT
In April 2001, the Company entered into a series of forward
contracts for the purchase of Japanese yen to be used for the purchase
of inventory. The Company has adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
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," "believes," "continue,"
"could," "may," "will" 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 discover, develop, manufacture and market companion animal health
products. We have a sophisticated scientific effort devoted to applying
biotechnology to create a broad range of pharmaceutical, vaccine and diagnostic
products for the large and growing companion animal health market. In addition
to our pharmaceutical, vaccine and diagnostic products, we also sell veterinary
diagnostic and patient monitoring instruments and offer diagnostic services in
the United States and Europe to veterinarians. Our primary manufacturing
subsidiary, Diamond Animal Health, Inc., or Diamond, manufactures some of our
companion animal products and food animal vaccine and pharmaceutical products,
which are marketed and distributed by third parties.
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 13 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.
We sold our subsidiary in the United Kingdom, Heska UK, in March 2000. In
June 2000, we completed the sale of Center.
We have incurred net losses since our inception and anticipate 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 inception in 1988
through March 31, 2001 have totaled $179.0 million.
Our ability to achieve profitable operations will depend primarily upon our
ability to successfully market our existing 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 we
may not successfully develop, manufacture or market these products. We also may
not attain profitability or, if achieved, may not 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.
Such financing may not be available when required or may not 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, 2001 and 2000
Total revenues, which include product, research and development
and other revenues, decreased 24% to $10.9 million in the first quarter of 2001
compared to $14.4 million for the first quarter of 2000. Product revenues
decreased 17% to $10.3 million in the first quarter of 2001 compared to $12.4
million for the first quarter of 2000. The total reported revenue for first
quarter 2000 included approximately $1.8 million from businesses sold in
fiscal 2000 and approximately $1.3 million attributable to the sale of
worldwide rights to our PERIOceutic (TM) Gel product. No similar sales
occurred during the quarter ended March 31, 2001.
Revenue from our continuing core business (excluding sold businesses
and discontinued product lines) declided by 2.6% in the first quarter of
2001 compared to the same quarter of the prior year. Gross profit margins
on products sold improved by more than seven full percentage points over
the first quarter of the prior year, as the sales mix contained a larger
percentage of high margin Heska proprietary products. In addition, total
operating expenses declined by more than $2.5 million from first quarter
2000 levels. Our net loss was reduced by $1.4 million for the first
quarter of 2001 as compared to the same quarter in 2000.
Total reported product revenues are derived from the three components
of our continuing core business, plus revenues from sold businesses and
discontinued products. These revenue components are as follows:
PHARMACEUTICALS, VACCINES AND DIAGNOSTIC PRODUCTS (PVD). This
group of products includes our heartworm diagnostic products, equine
influenza vaccine, allergy products, feline vaccines and other such products
for the companion animal health market. During the first quarter of 2001,
PVD product revenue increased approximately 20% over the comparable quarter
of 2000, to $4.0 million.
VETERINARY MEDICAL INSTRUMENTATION PRODUCTS. This group of
products includes all of our veterinary medical instrumentation, as well as
the reagents, consumables, parts and accessories for these instruments which
are for the companion animal health market. During the first quarter of
2001, medical instrumentation product revenue declined by approximately 3%
from the comparable quarter of 2000, to $3.6 million. This decline was
attributable to a large non-recurring sale of veterinary medical
instruments in Europe during the first quarter of 2000 in conjunction with
the sale of our Heska UK business.
DIAMOND ANIMAL HEALTH PRODUCTS. Revenue reported from this group
of products is comprised principally of vaccines and other biological
products for cattle and other non-companion animals. In addition, Diamond
also manufactures some of our PVD products and serves as our primary product
distribution center. During the first quarter of 2001, Diamond's product
revenue declined by approximately 23% from the comparable quarter of 2000,
to $2.8 million. The decline in first quarter revenue at Diamond was
principally due to delays in obtaining certain raw materials needed to
meet sales projections.
SOLD BUSINESSES AND DISCONTINUED PRODUCTS. During 2000, we
engaged in a number of activities to restructure our business, including the
sale of Heska UK, effective January 31, 2000 and the sale of Center
Laboratories, effective June 23, 2000. Our total reported product revenue
in 2000 includes the revenue from these sold businesses prior to the dates
of sale. The revenue attributable to these sold businesses in the first
quarter of 2000 was approximately $1.8 million.
Cost of products sold totaled $6.2 million in the first quarter of 2001
compared to $8.4 million in the first quarter of 2000. Gross profit as a
percentage of product sales increased to 39.8% in the first quarter of 2001
compared to 32.2% in the same quarter last year. The improvement in gross
profit as a percentage of product sales in the first quarter of 2001 compared to
2000 reflects the increase in sales of our proprietary PVD products. We
expect gross profit as a percentage of product sales to continue to improve
as we increase the sales of our higher margin proprietary PVD products.
Selling and marketing expenses decreased to $3.6 million in the first
quarter of 2001 from $4.3 million in the first quarter of 2000. This decrease
reflects primarily the costs associated with the expansion of our sales and
marketing organization and costs associated with the introduction and marketing
of new products in the first quarter of 2000, as well as the sale of Center
Laboratories and Heska UK. We expect selling and marketing expense as a
percentage of total sales to decrease in the future as we continue to increase
sales from our continuing core business.
Research and development expenses decreased to $3.5 million in the first
quarter of 2001 from $4.0 million in the first quarter of 2000. Fluctuations in
research and development expenses are generally the result of the number of
research projects in progress. We expect research and development expense as a
percentage of total sales to decrease in the future as we continue to increase
sales from our continuing core business.
General and administrative expenses decreased to $2.1 million in the first
quarter of 2001 from $2.8 million in the first quarter of 2000. This decrease
is due to tighter expense control at all locations and the sale of Center
Laboratories and Heska UK in 2000. We expect general and administrative
expense as a percentage of total sales to decrease in the future as we continue
to increase sales from our continuing core business.
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.
For the quarter ended March 31, 2001, our net loss declined to
$4.6 million from $5.9 million in the first quarter of the prior year. This
represents a 23% improvement over results reported in the prior year.
The net loss per common share in the first quarter of 2001 improved by
33% to $0.12, compared with a net loss per common share of $0.18 in the first
quarter of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity at March 31, 2001 was our $4.7 million in
cash, cash equivalents and marketable securities and our asset-based revolving
line of credit. Our credit facility requires us to maintain various financial
covenants including monthly minimum book net worth, minimum quarterly net
income and minimum cash balances or liquidity levels. In March 2001, we
negotiated new covenants under this line of credit. At March 31, 2001, our
available borrowing capacity was approximately $7.1 million. In
February 2001, we sold 4,573,000 shares of our common stock through a private
placement offering and received net proceeds of $5.3 million.
Cash used in operating activities was $5.3 million in the first quarter of
2001, compared to $9.5 million in the first quarter of 2000. The decrease in
cash used in operating activities is attributable primarily to the decrease
of $1.4 million in our net loss for the first quarter of 2001 compared to the
prior year and, an increase in the prior year's first quarter accounts
receivable balance of $3.9 million offset by a decrease in the accounts
payable balance of $1.3 million during the 2001 first quarter.
Our investing activities provided cash of $2.2 million in the first quarter
of 2001, compared to $11.9 million in cash provided by investing activities
during the first quarter of 2000. Cash provided by investing activities was
primarily related to the sale of marketable securities to fund our business
operations. Expenditures for property and equipment were approximately
$300,000 for the first quarter of 2001 compared to approximately $500,000 in
the first quarter of 2000. 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 $1.2
million in 2001 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 provided $4.8 million in the first quarter of 2001
compared to $5,000 used in the first quarter of 2000. This 2001 cash was
provided by our sale of 4,573,000 shares of our common stock in a private
placement in February 2001 with net proceeds to us of approximately $5.3
million.
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 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 equivalents and marketable
securities, together with cash from operations, available borrowings and
borrowings we expect to be available under our revolving line of credit facility
will be sufficient to satisfy our projected cash requirements into 2002,
although we may raise additional funds at or before such time. If necessary, we
expect to raise these additional funds through one or more of the following:
(1) sale of additional securities; (2) sale of various assets; (3) licensing of
technology; and (4) sale of various products or marketing rights. If we cannot
raise the additional funds through these options on acceptable terms or with the
necessary timing, management could also reduce discretionary spending to
decrease our cash burn rate and extend the currently available cash, cash
equivalents, marketable securities and available borrowings. See "Factors that
May Affect Results."
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 2000, we had a net operating loss carryforward, or NOL,
of approximately $154.6 million and approximately $3.1 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 2020.
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 research and
development tax credits to offset taxes payable. We believe that this limitation
may affect the eventual utilization of our total NOL carryforwards.
RECENT ACCOUNTING PRONOUNCEMENTS
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 in 1988 and, as of March
31, 2001, we had an accumulated deficit of $179.0 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. Even if we achieve profitability, we may not be able to sustain or
increase profitability on a quarterly or annual basis.
We may need additional capital in the future.
We have incurred negative cash flow from operations since inception in
1988. We do not expect to generate positive cash flow sufficient to fund our
operations in the near term. Moreover, based on our current projections, we may
need to raise additional capital in the future. If necessary, we expect to
raise this additional capital through one or more of the following:
* sale of additional securities;
* sale of various assets;
* licensing of technology; and
* sale of various products or marketing rights.
Additional capital may not be available on acceptable terms, if at all.
Furthermore, any additional equity financing would likely be dilutive to
stockholders, and additional 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 and reduce discretionary spending to extend the
currently available cash resources, or to obtain funds by entering into
collaborative agreements or other arrangements on unfavorable terms. If we fail
to generate adequate funding on acceptable terms when we need to, our business
could be substantially harmed.
We have limited resources to devote to product development and
commercialization. If we are not able to devote resources to product
development and commercialization, we may not be able to develop our products.
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:
* improve market acceptance of our current products;
* complete development of new products; and
* 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 ability to generate revenues will decrease.
In addition, our products may not achieve satisfactory market acceptance,
and we may not successfully commercialize them on a timely basis, or at all. If
our products do not achieve a significant level of market acceptance, demand for
our products will not develop as expected and it is unlikely that we ever will
become profitable.
We must obtain and maintain costly regulatory approvals in order to market our
products.
Many of the products we develop and market are subject to extensive
regulation by one or more of the United States Department of Agriculture, or
USDA, the Food and Drug Administration, or FDA, the Environmental Protection
Agency, or EPA, and foreign regulatory authorities. These regulations govern,
among other things, the development, testing, manufacturing, labeling, storage,
premarket approval, advertising, promotion, sale and distribution of our
products. Satisfaction of these requirements can take several years and time
needed to satisfy them may vary substantially, based on the type, complexity and
novelty of the product. The effect of government regulation may be to delay or
to prevent marketing of our products for a considerable period of time and to
impose costly procedures upon our activities. We have experienced in the past,
and may experience in the future, difficulties that could delay or prevent us
from obtaining the regulatory approval or license necessary to introduce or
market our products. Regulatory approval of our products may also impose
limitations on the indicated or intended uses for which our products may be
marketed.
Among the conditions for regulatory approval is the requirement that our
manufacturing facilities or those of our third party manufacturers conform to
current Good Manufacturing Practices. The FDA and foreign regulatory
authorities strictly enforce Good Manufacturing Practices requirements through
periodic inspections. We can provide no assurance that any regulatory authority
will determine that our manufacturing facilities or those of our third party
manufacturers will conform to Good Manufacturing Practices requirements.
Failure to comply with applicable regulatory requirements can result in
sanctions being imposed on us or the manufacturers of our products, including
warning letters, product recalls or seizures, injunctions, refusal to permit
products to be imported into or exported out of the United States, refusals of
regulatory authorities to grant approval or to allow us to enter into government
supply contracts, withdrawals of previously approved marketing applications,
civil fines and criminal prosecutions.
Factors beyond our control may cause our operating results to fluctuate, and
since many of our expenses are fixed, this fluctuation could cause our stock
price to decline.
We believe that our future operating results will fluctuate on a quarterly
basis due to a variety of factors, including:
* the introduction of new products by us or by our competitors;
* market acceptance of our current or new products;
* regulatory and other delays in product development;
* product recalls;
* competition and pricing pressures from competitive products;
* manufacturing delays;
* shipment problems;
* product seasonality; and
* 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.
Our operating results in some quarters may not meet the expectations of
stock market analysts and investors. In that case, our stock price probably
would decline.
We must maintain various financial and other covenants under our revolving line
of credit agreement.
Under our revolving line of credit agreement with Wells Fargo Business
Credit, Inc., we are required to comply with various financial and non-financial
covenants, and we have made various representations and warranties. Among the
financial covenants are requirements for monthly minimum book net worth, minimum
quarterly net income and minimum cash balances or liquidity levels. Failure to
comply with any of the covenants, representations or warranties would negatively
impact our ability to borrow under the agreement. Our inability to borrow to
fund our operations could materially harm our business.
A small number of large customers account for a large percentage of our
revenues, and the loss of any of them could harm our operating results.
We currently derive a substantial portion of our revenues from sales by our
subsidiary Diamond, which manufactures various of our products and products for
other companies in the animal health industry. Revenues from one Diamond
customer, AgriLabs, comprised approximately 10% of our total revenues for the
three months ended March 31, 2001 and 2000, respectively. If we are not
successful in maintaining our relationships with our customers and obtaining
new customers, our business and results of operations will suffer.
We operate in a highly competitive industry, which could render our products
obsolete or substantially limit the volume of products that we sell. This would
limit our ability to compete and achieve profitability.
We compete with 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, IDEXX Laboratories, Inc., Intervet International B.V., Merial
Ltd., Novartis, Pfizer Inc., Pharmacia Animal Health and Schering Plough
Corporation, 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. In addition, IDEXX, which has products that compete with
our heartworm diagnostic products, prohibits its distributors from selling
competitors' products, including ours. Our competitors frequently offer broader
product lines and have greater name recognition than we do. Our competitors may
develop or market technologies or products that are more effective or
commercially attractive than our current or future products, or that would
render our technologies and products obsolete. Further, additional competition
could come from new entrants to the animal healthcare market. Moreover, we may
not have the financial resources, technical expertise or marketing, distribution
or support capabilities to compete successfully. If we fail to compete
successfully, our ability to achieve profitability will be limited.
We have limited experience in marketing our products, and may be unable to
commercialize 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 may not successfully develop and maintain marketing,
distribution or sales capabilities, and we may not 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 ability to commercialize
our products and generate revenues will decrease.
We have granted third parties substantial marketing rights to our products under
development. If our current third party marketing agreements are not
successful, or if we are unable to develop our own marketing capabilities or
enter into additional marketing agreements in the future, we may not be able to
develop and commercialize our 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. Novartis, Eisai or Ralston Purina or any other
collaborative party may not devote sufficient resources to marketing our
products. Furthermore, there is nothing to prevent Novartis, 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. If any of these events occur, we may not be able
to develop and commercialize our products and our revenues will decline.
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 countries. Our pending patent applications may not
result in the issuance of any patents or that any issued patents will offer
protection against competitors with similar technology. Patents we receive may
be challenged, invalidated or circumvented in the future or the rights created
by those patents may not provide a competitive advantage. We also rely on trade
secrets, technical know-how and continuing invention to develop and maintain our
competitive position. Others may 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 may 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 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 or our collaborators may not be able to obtain licenses
for technology patented by others on commercially reasonable terms, we may not
be able to develop alternative approaches if unable to obtain licenses, or
current and future licenses may not 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 our products under development and could substantially harm
our business.
We have limited manufacturing experience and capacity and rely substantially on
third party manufacturers. The loss of any third party manufacturers could
limit our ability to launch our products in a timely manner, or at all.
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.
We currently rely on third parties to manufacture those products we do not
manufacture at our Diamond facility. We currently have supply agreements with
Quidel Corporation for various manufacturing services relating to our point-of-
care diagnostic tests, with Centaq, Inc. for the manufacture of our own allergy
immunotherapy treatment products and with various manufacturers for the supply
of our veterinary diagnostic and patient monitoring instruments. Our
manufacturing strategy presents the following risks:
* Delays in the scale-up to quantities needed for product development could
delay regulatory submissions and commercialization of our products in
development;
* Our manufacturing facilities and those of some of our third party
manufacturers are subject to ongoing periodic unannounced inspection
by regulatory authorities, including the FDA, USDA and other federal
and state agency's for compliance with strictly enforced Good
Manufacturing Practices regulations and similar foreign standards,
and we do not have control over our third party manufacturers' compliance
with these regulations and standards;
* If we need to change to other commercial manufacturing contractors for
certain of our products, additional regulatory licenses or approvals must
be obtained for these contractors prior to our use. This would require
new testing and compliance inspections. Any new manufacturer would have
to be educated in, or develop substantially equivalen processes necessary
for the production of our products;
* If market demand for our products increases suddenly, our current
manufacturers might not be able to fulfill our commercial needs, which
would require us to seek new manufacturing arrangements and may result in
substantial delays in meeting market demand; and
* We may not have intellectual property rights, or may have to share
intellectual property rights, to any improvements in the manufacturing
processes or new manufacturing processes for our products.
Any of these factors could delay commercialization of our products under
development, interfere with current sales, entail higher costs and result in our
being unable to effectively sell our products.
Our agreements with various suppliers of the veterinary medical instruments
require us to meet minimum annual sales levels to maintain our position as the
exclusive distributor of these instruments. We may not meet these minimum sales
levels in the future, and maintain exclusivity over the distribution and sale of
these products. If we are not the exclusive distributor of these products,
competition may increase.
We depend on partners in our research and development activities. If our
current partnerships and collaborations are not successful, we may not be able
to develop our technologies or products.
For various of our proposed products, we are dependent on collaborative
partners to successfully and timely perform research and development activities
on our behalf. These collaborative partners may not 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 ability to develop technologies
and products will be impacted negatively and our revenues will decline.
We depend on key personnel for our future success. If we lose our key personnel
or are unable to attract and retain additional personnel, we may be unable to
achieve our goals.
Our future success is substantially dependent on the efforts of our senior
management and 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, the growth of
our business could be substantially impaired.
We may face product returns and product liability litigation and the extent of
our insurance coverage is limited. If we become subject to product liability
claims resulting from defects in our products, we may fail to achieve market
acceptance of our products and our business could be harmed.
The testing, manufacturing and marketing of our current products as well as
those currently under development entail an inherent risk of product liability
claims and associated adverse publicity. Following the introduction of a
product, adverse side effects may be discovered. Adverse publicity regarding
such effects could affect sales of our other products for an indeterminate time
period. To date, we have not experienced any material product liability claims,
but any claim arising in the future could substantially harm our business.
Potential product liability claims may exceed the amount of our insurance
coverage or may be excluded from coverage under the terms of the policy. We may
not be able to continue to obtain adequate insurance at a reasonable cost, if at
all. In the event that we are held liable for a claim against which we are not
indemnified or for damages exceeding the $10 million limit of our insurance
coverage or which results in significant adverse publicity against us, we may
lose revenue and fail to achieve market acceptance.
We may be held liable for the release of hazardous materials, which could result
in extensive costs which would harm our business.
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 contamination or injury from
these materials. In the event of such an accident, we could be held liable for
any fines, penalties, remediation costs or other damages that result. Our
liability for the release of hazardous materials could exceed our resources,
which could lead to a shut down of our operations. In addition, 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, which may affect our
ability to raise capital in the future or make it difficult for investors to
sell their shares.
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. For example, in the last twelve months our closing
stock price has ranged from a low of $0.59375 to a high of $4.50. Fluctuations
in the trading price or liquidity of our common stock may adversely affect our
ability to raise capital through future equity financings. Factors that may
have a significant impact on the market price and marketability of our common
stock include:
* announcements of technological innovations or new products by us or by
our competitors;
* our quarterly operating results;
* releases of reports by securities analysts;
* developments or disputes concerning patents or proprietary rights;
* regulatory developments;
* developments in our relationships with collaborative partners;
* changes in regulatory policies;
* litigation;
* economic and other external factors; and
* general market conditions.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted. If a securities class action suit is filed against us, we would
incur substantial legal fees and our management's attention and resources would
be diverted from operating our business in order to respond to the litigation.
If we fail to meet Nasdaq National Market listing requirements, our common stock
will be delisted and become illiquid.
Our common stock is currently listed on the Nasdaq National Market. Nasdaq
has requirements we must meet in order to remain listed on the Nasdaq National
Market. If we continue to experience losses from our operations or we are
unable to raise additional funds, we might not be able to maintain the standards
for continued quotation on the Nasdaq National Market, including a minimum bid
price requirement of $1.00. If the minimum bid price of our common stock were
to remain below $1.00 for 30 consecutive trading days, or if we were unable to
continue to meet Nasdaq's standards for any other reason, our common stock could
be delisted from the Nasdaq National Market.
If as a result of the application of these listing requirements, our common
stock were delisted from the Nasdaq National Market, our stock would become
harder to buy and sell. Further, our stock could be subject to what are known
as the "penny stock" rules. The penny stock rules place additional requirements
on broker-dealers who sell or make a market in such securities. Consequently,
if we were removed from the Nasdaq National Market, the ability or willingness
of broker-dealers to sell or make a market in our common stock might decline.
As a result, the ability for investors to resell shares of our common stock
could be adversely affected.
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. In April 2001, we entered into a series of forward contracts for
the purchase of Japanese yen to be used for the purchase of inventory. We
have adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and 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, 2001, approximately $2.8 million
was outstanding on these borrowings with a weighted average interest rate of
9.25%. 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. We completed an interest rate risk sensitivity analysis
of these borrowings based on an assumed 1% increase in interest rates. If
market rates increase by 1% during the three months ended June 30, 2001, we
would experience an increase in interest expense of approximately $7,000
based on the outstanding borrowing balances at March 31, 2001.
Foreign Currency Risk
At March 31, 2001, we had wholly-owned subsidiaries located in
Switzerland. Sales from these operations are denominated in Swiss Francs or
Euros, thereby creating exposures to changes in exchange rates. The changes in
the Swiss/U.S. exchange rate or Euro/U.S. exchange rate may positively or
negatively affect our sales, gross margins and retained earnings. We completed
a foreign currency exchange rate risk sensitivity analysis on an assumed 1%
change in foreign currency exchange rates. If the foreign currency exchange
rates change by 1% during the three months ended June 30, 2001, we would
experience an increase/decrease in our foreign currency gain/loss of
approximately $70,000 based on the investment in foreign subsidiaries as of
and for the three months ended March 31, 2001.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 6, 2001, we issued 4,573,000 shares of common stock for an
aggregate purchase price of approximately $5.7 million to a group of
institutional investors, including our existing stockholders. The issuance
of shares described above was made in reliance on the exemptions from
registration set forth in Section 4(2) of the Securities Act of 1933 ("the
Act"), as amended. We made no public solicitation in connection with the
issuance of the above mentioned securities. We relied on representation
from the recipients of the securities that they purchased the securities
for investment only and not with a view to any distribution thereof and
that they were aware of our business affairs and financial condition and
had sufficient information to reach an informed and knowledgeable decision
regarding their acquisition of the securities.
In February 2001, we issued 4,681 shares of common stock to a
consultant in consideration of services rendered in accordance with the
terms of his consulting agreement. We relied upon the exemption provided
by Section 4(2) of the Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
See Exhibit Index on page 24.
(b) Reports on Form 8-K
On February 7, 2001, we filed a report on Form 8-K in connection
with the sale of 4,573,000 shares of our common stock through a private
placement.
EXHIBIT INDEX
Exhibit
Number Description of Document
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10.39(a) First Amendment To Second Amended and Restated Credit and
- ---------- Security Agreement
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 10,2001 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)