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 September 30, 2009
|
|||
OR
|
|||
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
|
||
For
the transition period from _________________ to
_______________________
|
|||
Commission
file number: 000-22427
|
|||
HESKA
CORPORATION
|
|||
(Exact
name of registrant as specified in its charter)
|
|||
Delaware
|
77-0192527
|
||
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification Number)
|
||
3760
Rocky Mountain Avenue
Loveland,
Colorado
|
80538
|
||
(Address
of principal executive offices)
|
(Zip
Code)
|
||
Registrant's
telephone number, including area code: (970) 493-7272
|
|||
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
|
|||
Yes
x
No o
|
|||
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
|
|||
Yes
o No
o
|
|||
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company
as defined in Rule 12b-2 of the Exchange Act. See the
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check
one):
|
|||
Large
accelerated filer o
|
Accelerated
filer x
|
||
Non-accelerated
filer o (Do
not check if a small reporting company)
|
Smaller
reporting company o
|
||
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|
|||
Yes
o No
x
|
|||
The
number of shares of the Registrant's Common Stock outstanding at
October 27, 2009 was 52,122,944.
|
|||
Page
|
|||
PART
I - FINANCIAL INFORMATION
|
|||
Item
1.
|
Financial
Statements:
|
||
|
2
|
||
|
3
|
||
|
4
|
||
5
|
|||
Item
2.
|
10
|
||
Item
3.
|
19
|
||
Item
4.
|
20
|
||
PART
II - OTHER INFORMATION
|
|||
Item
1.
|
21
|
||
Item
1A.
|
21
|
||
Item
2.
|
32
|
||
Item
3.
|
32
|
||
Item
4.
|
33
|
||
Item
5.
|
33
|
||
Item
6.
|
33
|
||
34
|
|||
ASSETS
|
|||||||||
December
31,
2008
|
September
30,
2009
|
||||||||
Current
assets:
|
|||||||||
Cash
and cash equivalents
|
$
|
4,705
|
$
|
5,603
|
|||||
Accounts
receivable, net of allowance for doubtful accounts of
$209 and $163,
respectively
|
9,514
|
9,434
|
|||||||
Inventories,
net
|
15,249
|
12,849
|
|||||||
Deferred
tax asset, current
|
869
|
811
|
|||||||
Other
current assets
|
953
|
833
|
|||||||
Total
current assets
|
31,290
|
29,530
|
|||||||
Property
and equipment, net
|
8,509
|
6,785
|
|||||||
Goodwill
|
890
|
907
|
|||||||
Deferred
tax asset, net of current portion
|
29,749
|
28,770
|
|||||||
Total
assets
|
$
|
70,438
|
$
|
65,992
|
|||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||||
Current
liabilities:
|
|||||||||
Accounts
payable
|
$
|
3,904
|
$
|
3,643
|
|||||
Accrued
liabilities
|
3,128
|
3,565
|
|||||||
Accrued
restructuring
|
578
|
—
|
|||||||
Current
portion of deferred revenue
|
2,806
|
2,595
|
|||||||
Line
of credit
|
11,042
|
5,984
|
|||||||
Current
portion of long-term debt
|
770
|
573
|
|||||||
Total
current liabilities
|
22,228
|
16,360
|
|||||||
Long-term
debt, net of current portion
|
381
|
—
|
|||||||
Deferred
revenue, net of current portion, and other
|
5,306
|
4,995
|
|||||||
Total
liabilities
|
27,915
|
21,355
|
|||||||
Commitments
and contingencies
|
|||||||||
Stockholders'
equity:
|
|||||||||
Preferred
stock, $.001 par value, 25,000,000 shares authorized; none issued or
outstanding
|
—
|
—
|
|||||||
Common
stock, $.001 par value, 75,000,000 shares authorized; 52,010,928 and
52,122,944 shares issued and outstanding, respectively
|
52
|
52
|
|||||||
Additional
paid-in capital
|
216,463
|
216,744
|
|||||||
Accumulated
other comprehensive income
|
46
|
97
|
|||||||
Accumulated
deficit
|
(174,038
|
)
|
(172,256
|
)
|
|||||
Total
stockholders' equity
|
42,523
|
44,637
|
|||||||
Total
liabilities and stockholders' equity
|
$
|
70,438
|
$
|
65,992
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||
Revenue,
net:
|
||||||||||||||
Core
companion animal health
|
$
|
19,240
|
$
|
16,892
|
$
|
54,473
|
$
|
51,908
|
||||||
Other
vaccines, pharmaceuticals and products
|
2,446
|
2,658
|
11,746
|
6,412
|
||||||||||
Total
revenue, net
|
21,686
|
19,550
|
66,219
|
58,320
|
||||||||||
Cost
of revenue
|
13,490
|
12,130
|
41,716
|
36,496
|
||||||||||
Gross
profit
|
8,196
|
7,420
|
24,503
|
21,824
|
||||||||||
Operating
expenses:
|
||||||||||||||
Selling
and marketing
|
4,458
|
3,695
|
14,024
|
11,075
|
||||||||||
Research
and development
|
506
|
457
|
1,462
|
1,308
|
||||||||||
General
and administrative
|
2,134
|
2,109
|
6,756
|
6,255
|
||||||||||
Total
operating expenses
|
7,098
|
6,261
|
22,242
|
18,638
|
||||||||||
Operating
income
|
1,098
|
1,159
|
2,261
|
3,186
|
||||||||||
Interest
and other (income) expense, net
|
153
|
(13
|
)
|
500
|
193
|
|||||||||
Income
before income taxes
|
945
|
1,172
|
1,761
|
2,993
|
||||||||||
Income
tax expense
|
368
|
429
|
744
|
1,211
|
||||||||||
Net
income
|
$
|
577
|
$
|
743
|
$
|
1,017
|
$
|
1,782
|
||||||
Basic
net income per share
|
$
|
0.01
|
$
|
0.01
|
$
|
0.02
|
$
|
0.03
|
||||||
Diluted
net income per share
|
$
|
0.01
|
$
|
0.01
|
$
|
0.02
|
$
|
0.03
|
||||||
Weighted
average outstanding shares used to compute basic net
income per share
|
51,797
|
52,123
|
51,625
|
52,049
|
||||||||||
Weighted
average outstanding shares used to compute diluted net income per
share
|
52,580
|
52,192
|
53,774
|
52,060
|
Nine
Months Ended
September
30,
|
||||||
2008
|
2009
|
|||||
CASH
FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
|
||||||
Net
income
|
$
|
1,017
|
$
|
1,782
|
||
Adjustments
to reconcile net income to cash provided by (used in)
operating
activities:
|
||||||
Depreciation
and amortization
|
2,337
|
1,975
|
||||
Deferred
tax expense
|
654
|
1,038
|
||||
Stock-based
compensation
|
302
|
245
|
||||
Unrealized
loss on foreign currency translation
|
38
|
108
|
||||
Changes
in operating assets and liabilities:
|
||||||
Accounts
receivable
|
(55
|
)
|
80
|
|||
Inventories
|
823
|
2,326
|
||||
Other
current assets
|
43
|
106
|
||||
Accounts
payable
|
254
|
(261
|
)
|
|||
Accrued
liabilities
|
559
|
(165
|
)
|
|||
Deferred
revenue and other liabilities
|
(1,686
|
)
|
(498
|
)
|
||
Net
cash provided by (used in) operating activities
|
4,286
|
6,736
|
||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||
Purchase
of property and equipment
|
(528
|
)
|
(177
|
)
|
||
Net
cash provided by (used in) investing activities
|
(528
|
)
|
(177
|
)
|
||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||
Proceeds
from issuance of common stock
|
332
|
36
|
||||
Proceeds
from (repayments of) line of credit borrowings, net
|
(3,594
|
)
|
(5,058
|
)
|
||
Proceeds
from (repayments of) debt and capital lease obligations,
net
|
(582
|
)
|
(578
|
)
|
||
Net
cash provided by (used in) financing activities
|
(3,844
|
)
|
(5,600
|
)
|
||
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
(4
|
)
|
(61
|
)
|
||
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
(90
|
)
|
898
|
|||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
5,524
|
4,705
|
||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
5,434
|
$
|
5,603
|
||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||
Cash
paid for interest
|
$
|
528
|
$
|
350
|
||
Non-cash
transfer of inventory to property and equipment
|
$
|
539
|
$
|
71
|
December
31,
2008
|
September
30,
2009
|
|||||
Raw materials
|
$
|
6,893
|
$
|
5,989
|
||
Work in process
|
2,957
|
2,903
|
||||
Finished
goods
|
6,370
|
4,838
|
||||
Allowance for excess or obsolete inventory
|
(971
|
)
|
(881
|
)
|
||
$
|
15,249
|
$
|
12,849
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
||||||||||||
2008
|
2009
|
2008
|
2009
|
||||||||||
Risk-free
interest rate
|
2.14%
|
1.48%
|
2.61%
|
1.43%
|
|||||||||
Expected
lives
|
3.0
years
|
3.0
years
|
2.9
years
|
2.9
years
|
|||||||||
Expected
volatility
|
50%
|
69%
|
51%
|
67%
|
|||||||||
Expected dividend yield
|
0%
|
0%
|
0%
|
0%
|
Year
Ended
December
31, 2008
|
Nine
Months Ended
September
30, 2009
|
||||||||||||
Options
|
Weighted
Average
Exercise
Price
|
Options
|
Weighted
Average
Exercise
Price
|
||||||||||
Outstanding
at beginning of period
|
12,118,417
|
$
|
1.3979
|
12,835,269
|
$
|
1.2836
|
|||||||
Granted
at market
|
1,575,268
|
$
|
0.7694
|
325,000
|
$
|
0.4597
|
|||||||
Cancelled
|
(573,898
|
)
|
$
|
2.5005
|
(801,321
|
)
|
$
|
1.6242
|
|||||
Exercised
|
(284,518
|
)
|
$
|
0.8526
|
—
|
$
|
0.0000
|
||||||
Outstanding
at end of period
|
12,835,269
|
$
|
1.2836
|
12,358,948
|
$
|
1.2398
|
|||||||
Exercisable
at end of period
|
11,042,716
|
$
|
1.3360
|
11,046,705
|
$
|
1.2793
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||
Exercise
Prices
|
Number
of
Options
Outstanding
at
September
30,
2009
|
Weighted
Average
Remaining
Contractual
Life
in Years
|
Weighted
Average
Exercise
Price
|
Number
of
Options
Exercisable
at
September
30,
2009
|
Weighted
Average
Exercise
Price
|
|||||||||||||
$0.27
- $0.70
|
2,829,923
|
5.93
|
$
|
0.5344
|
1,975,173
|
$
|
0.5744
|
|||||||||||
$0.71
- $1.06
|
2,884,867
|
4.36
|
$
|
0.9279
|
2,869,867
|
$
|
0.9279
|
|||||||||||
$1.07
- $1.25
|
2,353,175
|
4.54
|
$
|
1.2156
|
2,353,175
|
$
|
1.2156
|
|||||||||||
$1.26
- $1.82
|
2,069,150
|
5.86
|
$
|
1.5873
|
2,043,108
|
$
|
1.5891
|
|||||||||||
$1.83
- $4.12
|
2,221,833
|
5.12
|
$
|
2.2455
|
1,805,382
|
$
|
2.3413
|
|||||||||||
$0.27
- $4.12
|
12,358,948
|
5.14
|
$
|
1.2398
|
11,046,705
|
$
|
1.2793
|
Core
Companion
Animal
Health
|
Other
Vaccines,
Pharmaceuticals
and
Products
|
Total
|
||||||||||
Nine
Months Ended
September
30, 2008:
|
||||||||||||
Total
revenue
|
$
|
54,473
|
$
|
11,746
|
$
|
66,219
|
||||||
Operating
income (loss)
|
(12
|
)
|
2,273
|
2,261
|
||||||||
Interest
expense
|
381
|
127
|
508
|
|||||||||
Total
assets
|
61,421
|
10,759
|
72,180
|
|||||||||
Net
assets
|
39,450
|
5,142
|
44,592
|
|||||||||
Capital
expenditures
|
192
|
336
|
528
|
|||||||||
Depreciation
and amortization
|
1,648
|
689
|
2,337
|
|||||||||
Nine
Months Ended
September
30, 2009:
|
||||||||||||
Total
revenue
|
$
|
51,908
|
$
|
6,412
|
$
|
58,320
|
||||||
Operating
income
|
3,126
|
60
|
3,186
|
|||||||||
Interest
expense
|
287
|
65
|
352
|
|||||||||
Total
assets
|
54,665
|
11,327
|
65,992
|
|||||||||
Net
assets
|
37,747
|
6,890
|
44,637
|
|||||||||
Capital
expenditures
|
170
|
7
|
177
|
|||||||||
Depreciation
and amortization
|
1,273
|
702
|
1,975
|
Core
Companion
Animal
Health
|
Other
Vaccines,
Pharmaceuticals
and
Products
|
Total
|
||||||||||
Three
Months Ended
September
30, 2008:
|
||||||||||||
Total
revenue
|
$
|
19,240
|
$
|
2,446
|
$
|
21,686
|
||||||
Operating
income
|
1,082
|
16
|
1,098
|
|||||||||
Interest
expense
|
93
|
33
|
126
|
|||||||||
Total
assets
|
61,421
|
10,759
|
72,180
|
|||||||||
Net
assets
|
39,450
|
5,142
|
44,592
|
|||||||||
Capital
expenditures
|
66
|
25
|
91
|
|||||||||
Depreciation
and amortization
|
521
|
230
|
751
|
|||||||||
Three
Months Ended
September
30, 2009:
|
||||||||||||
Total
revenue
|
$
|
16,892
|
$
|
2,658
|
$
|
19,550
|
||||||
Operating
income
|
774
|
385
|
1,159
|
|||||||||
Interest
expense
|
58
|
24
|
82
|
|||||||||
Total
assets
|
54,665
|
11,327
|
65,992
|
|||||||||
Net
assets
|
37,747
|
6,890
|
44,637
|
|||||||||
Capital
expenditures
|
49
|
2
|
51
|
|||||||||
Depreciation
and amortization
|
418
|
233
|
651
|
5.
|
COMPREHENSIVE
INCOME
|
·
|
Persuasive
evidence of an arrangement exists;
|
·
|
Delivery
has occurred or services rendered;
|
·
|
Price
is fixed or determinable; and
|
·
|
Collectability
is reasonably assured.
|
·
|
The loss of product rights
upon expiration or termination of an existing
agreement. Unless we are able to find an alternate
supply of a similar product, we would not be able to continue to offer our
customers the same breadth of products and our sales and operating results
would likely suffer. In the case of an instrument supplier, we
could also potentially suffer the loss of sales of consumable supplies,
which would be significant in cases where we have built a significant
installed base, further harming our sales prospects and
opportunities. Even if we were able to find an alternate supply
for a product to which we lost rights, we would likely face increased
competition from the product whose rights we lost being marketed by a
third party or the former supplier and it may take us additional time and
expense to gain the necessary approvals and launch an alternative
product.
|
·
|
Loss of
exclusivity. In the case of our veterinary diagnostic
instruments, if we are entitled to non-exclusive access to consumable
supplies for a defined period upon expiration of exclusive rights, we may
face increased competition from a third party with similar non-exclusive
access or our former supplier, which could cause us to lose customers
and/or significantly decrease our margins and could significantly affect
our financial results. In addition, current agreements, or
agreements we may negotiate in the future, with suppliers may require us
to meet minimum annual sales levels to maintain our position as the
exclusive distributor of these products. We may not meet these
minimum sales levels and maintain exclusivity over the distribution and
sale of these products. If we are not the exclusive distributor
of these products, competition may increase significantly, reducing our
revenues and/or decreasing our
margins.
|
·
|
High switching costs.
In our diagnostic instrument products we could face significant
competition and lose all or some of the consumable revenues from the
installed base of those instruments if we were to switch to a competitive
instrument. If we need to change to other commercial
manufacturing contractors for certain of our regulated products,
additional regulatory licenses or approvals must be obtained for these
contractors prior to our use. This would require new testing
and compliance inspections prior to sale thus resulting in potential
delays. Any new manufacturer would have to be educated in, or
develop substantially equivalent processes necessary for the production of
our products. We likely would have to train our sales force,
distribution network employees and customer support organization on the
new product and spend significant funds marketing the new product to our
customer base.
|
·
|
Inability to meet minimum
obligations. Current agreements, or agreements we may
negotiate in the future, may commit us to certain minimum purchase or
other spending obligations. It is possible we will not be able
to create the market demand to meet such obligations, which could create a
drain on our financial resources and liquidity. Some such
agreements may require minimum purchases and/or sales to maintain product
rights and we may be significantly harmed if we are unable to meet such
requirements and lose product
rights.
|
·
|
The involuntary or voluntary
discontinuation of a product line. Unless we are able to
find an alternate supply of a similar product in this or similar
circumstances with any product, we would not be able to continue to offer
our customers the same breadth of products and our sales would likely
suffer. Even if we are able to identify an alternate supply, it
may take us additional time and expense to gain the necessary approvals
and launch an alternative product, especially if the product is
discontinued unexpectedly. An example of such a situation arose
in 2006 when Dolphin Medical Inc. (a majority-owned subsidiary of OSI
Systems, Inc.) discontinued production of our VET/OX G2 DIGITAL Monitor as
part of an agreement with Masimo Corporation to settle a patent
dispute.
|
·
|
Inconsistent or inadequate
quality control. We may not be able to control or
adequately monitor the quality of products we receive from our
suppliers. Poor quality items could damage our reputation with
our customers.
|
·
|
Limited capacity or ability to
scale capacity. If market demand for our products
increases suddenly, our current suppliers might not be able to fulfill our
commercial needs, which would require us to seek new manufacturing
arrangements and may result in substantial delays in meeting market
demand. If we consistently generate more demand for a product
than a given supplier is capable of handling, it could lead to large
backorders and potentially lost sales to competitive products that are
readily available. This could require us to seek or fund new
sources of supply, which may be difficult to find unless it is under terms
that are less advantageous.
|
·
|
Regulatory
risk. Our manufacturing facility and those of some of
our third-party suppliers are subject to ongoing periodic unannounced
inspection by regulatory authorities, including the FDA, USDA and other
federal, state and foreign agencies for compliance with strictly enforced
Good Manufacturing Practices, regulations and similar foreign standards,
and we do not have control over our suppliers' compliance with these
regulations and standards. Violations could potentially lead to
interruptions in supply that could cause us to lose sales to readily
available competitive products.
|
·
|
Developmental
delays. We may experience delays in the scale-up
quantities needed for product development that could delay regulatory
submissions and commercialization of our products in development, causing
us to miss key opportunities.
|
·
|
Limited intellectual property
rights. We typically do not have intellectual property
rights, or may have to share intellectual property rights, to the products
themselves and any improvements to the manufacturing processes or new
manufacturing processes for our
products.
|
·
|
supply
of products from third-party suppliers or termination, cancellation or
expiration of such relationships, such as the recent decision by APOC to
cancel our contractual agreement as of November 1, 2009;
|
·
|
the
introduction of new products by our competitors or by
us;
|
·
|
competition
and pricing pressures from competitive
products;
|
·
|
our
ability to maintain relationships with independent third-party
distributors;
|
·
|
large
customers failing to purchase at historical levels, including changes in
independent third-party distributor purchasing patterns and inventory
levels;
|
·
|
fundamental
shifts in market demand;
|
·
|
manufacturing
delays;
|
·
|
shipment
problems;
|
·
|
information
technology problems, which may prevent us from conducting our business
effectively, or at all, and may also raise our
costs;
|
·
|
regulatory
and other delays in product
development;
|
·
|
product
recalls or other issues which may raise our
costs;
|
·
|
changes
in our reputation and/or market acceptance of our current or new products;
and
|
·
|
changes
in the mix of products sold.
|
·
|
stock
sales by large stockholders or by
insiders;
|
·
|
changes
in the outlook for our business, including any changes in our earnings
guidance;
|
·
|
our
quarterly operating results, including as compared to our revenue,
earnings or other guidance and in comparison to historical
results;
|
·
|
termination,
cancellation or expiration of our third-party supplier
relationships;
|
·
|
announcements
of technological innovations or new products by our competitors or by
us;
|
·
|
litigation;
|
·
|
regulatory
developments, including delays in product
introductions;
|
·
|
developments
or disputes concerning patents or proprietary
rights;
|
·
|
availability
of our revolving line of credit and compliance with debt
covenants;
|
·
|
releases
of reports by securities analysts;
|
·
|
changes
in regulatory policies;
|
·
|
economic
and other external factors; and
|
·
|
general
market conditions.
|
(a)
|
Exhibits
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as
amended.
|
|
31.2
|
Certification of Chief Financial
Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended.
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
Date:
|
October
28, 2009
|
By
|
/s/ Robert B.
Grieve
|
ROBERT
B. GRIEVE
|
|||
Chairman
of the Board and Chief Executive Officer
(on
behalf of the Registrant and as the Registrant's Principal Executive
Officer)
|
|||
Date:
|
October
28, 2009
|
By
|
/s/ Jason A.
Napolitano
|
JASON
A. NAPOLITANO
|
|||
Executive
Vice President and Chief Financial Officer
(on
behalf of the Registrant and as the Registrant's Principal Financial
Officer)
|