| [ X ] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
For the quarterly period ended September 30, 2004 |
OR | |
|
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to _______________________
Delaware |
77-0192527 |
|---|---|
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification Number) |
| 1613 Prospect Parkway | |
| Fort Collins, Colorado | 80525 |
| (Address of principal executive offices) | (Zip 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.
Yes [ X ] No [
]
Indicate by check mark whether the registrant
is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X
]
The number of shares of the Registrant’s Common Stock, $.001 par value, outstanding at November 12, 2004 was 49,171,029
| Page | |||||
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| PART I. FINANCIAL INFORMATION | |||||
| Item 1. | Financial Statements: |
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Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 2003 and September 30, 2004 |
2 | ||||
Condensed Consolidated Statements of Operations (Unaudited) for the three months and nine months ended September 30, 2003 and 2004 |
3 | ||||
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2003 and 2004 |
4 | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited) |
5 | ||||
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
11 | |||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
32 | |||
Item 4. |
Controls and Procedures |
32 | |||
PART II. OTHER INFORMATION |
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Item 1. |
Legal Proceedings |
34 | |||
Item 2. |
Changes in Securities and Use of Proceeds |
34 | |||
Item 3. |
Defaults Upon Senior Securities |
34 | |||
Item 4. |
Submission of Matters to a Vote of Security Holders |
34 | |||
Item 5. |
Other Information |
34 | |||
Item 6. |
Exhibits |
34 | |||
Signatures |
35 | ||||
ALLERCEPT, AVERT, E.R.D.-HEALTHSCREEN, E-SCREEN, FELINE ULTRANASAL, G2 DIGITAL, CBC-DIFF, HESKA, IMMUCHECK, PERIOCEUTIC, SOLO STEP, TRI-HEART, VET/IV and VET/OX are trademarks of Heska Corporation. i-STAT is a trademark of i-STAT Corporation. SPOTCHEM is a trademark of Arkray, Inc. This 10-Q also refers to trademarks and trade names of other organizations.
| December 31, 2003 |
September 30, 2004 |
|||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||
| Cash and cash equivalents | $ | 4,877 | $ | 5,275 | ||||||||||||||||||
|
Accounts receivable, net of allowance for doubtful accounts of $192 and $147, respectively |
12,673 | 9,934 | ||||||||||||||||||||
| Inventories, net of excess and obsolete allowance | 10,328 | 10,964 | ||||||||||||||||||||
| Other current assets | 839 | 1,869 | ||||||||||||||||||||
| Total current assets | 28,717 | 28,042 | ||||||||||||||||||||
| Property and equipment, net | 7,973 | 7,806 | ||||||||||||||||||||
| Goodwill and intangible assets, net | 1,993 | 2,344 | ||||||||||||||||||||
| Other assets | 213 | 217 | ||||||||||||||||||||
| Total assets | $ | 38,896 | $ | 38,409 | ||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Current Liabilities: | ||||||||||||||||||||||
| Accounts payable | $ | 6,186 | $ | 7,105 | ||||||||||||||||||
| Accrued liabilities | 3,386 | 2,989 | ||||||||||||||||||||
| Current portion of deferred revenue and customer deposits | 633 | 4,177 | ||||||||||||||||||||
| Line of credit | 7,528 | 9,384 | ||||||||||||||||||||
| Current portion of long-term debt | 783 | 857 | ||||||||||||||||||||
| Total current liabilities | 18,516 | 24,512 | ||||||||||||||||||||
| Long-term debt, net of current portion | 1,746 | 1,038 | ||||||||||||||||||||
| Deferred revenue, net of current portion, and other | 11,978 | 10,171 | ||||||||||||||||||||
| Total liabilities | 32,240 | 35,721 | ||||||||||||||||||||
| 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; 48,826,937 and 49,119,066 shares issued and outstanding, respectively |
49 | 49 | ||||||||||||||||||||
| Additional paid-in capital | 212,131 | 212,363 | ||||||||||||||||||||
| Deferred compensation | (165 | ) | (95 | ) | ||||||||||||||||||
| Accumulated other comprehensive loss | (68 | ) | (80 | ) | ||||||||||||||||||
| Accumulated deficit | (205,291 | ) | (209,549 | ) | ||||||||||||||||||
| Total stockholders’equity | 6,656 | 2,688 | ||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 38,896 | $ | 38,409 | ||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| Three Months
Ended September 30, |
Nine Months
Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2004 | 2003 | 2004 | |||||||||||
| Revenue, net: | ||||||||||||||
| Product revenue, net: | ||||||||||||||
| Core companion animal health | $ | 11,679 | $ | 12,479 | $ | 32,681 | $ | 39,870 | ||||||
| Other vaccines, pharmaceuticals and products | 3,733 | 2,984 | 10,102 | 9,378 | ||||||||||
|
Total product revenue, net of sales returns and allowances |
15,412 | 15,463 | 42,783 | 49,248 | ||||||||||
| Research, development and other | 299 | 476 | 955 | 1,228 | ||||||||||
| Total revenue, net | 15,711 | 15,939 | 43,738 | 50,476 | ||||||||||
Cost of products sold |
9,159 | 9,827 | 25,565 | 31,803 | ||||||||||
| 6,552 | 6,112 | 18,173 | 18,673 | |||||||||||
Operating expenses: |
||||||||||||||
| Selling and marketing | 4,218 | 3,598 | 11,831 | 11,838 | ||||||||||
| Research and development | 1,738 | 1,419 | 5,289 | 4,932 | ||||||||||
| General and administrative | 1,716 | 1,805 | 5,315 | 5,875 | ||||||||||
| Other operating expenses | -- | -- | 515 | -- | ||||||||||
| Total operating expenses | 7,672 | 6,822 | 22,950 | 22,645 | ||||||||||
| Loss from operations | (1,120 | ) | (710 | ) | (4,777 | ) | (3,972 | ) | ||||||
| Other income (expense), net | (82 | ) | (166 | ) | (101 | ) | (286 | ) | ||||||
| Net loss | $ | (1,202 | ) | $ | (876 | ) | $ | (4,878 | ) | $ | (4,258 | ) | ||
Basic and diluted net loss per share |
$ | (0.02 | ) | $ | (0.02 | ) | $ | (0.10 | ) | $ | (0.09 | ) | ||
Shares used to compute basic and diluted net loss per share |
48,346 | 49,042 | 48,021 | 48,981 | ||||||||||
See accompanying notes to condensed consolidated financial statements.
| Nine Months Ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 | 2004 | |||||||
| CASH FLOWS USED IN OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (4,878 | ) | $ | (4,258 | ) | ||
Adjustments to reconcile net loss to cash used in operating activities: |
||||||||
| Depreciation and amortization | 1,387 | 1,029 | ||||||
| Amortization of intangible assets | 51 | 107 | ||||||
| Stock based compensation | 69 | 69 | ||||||
| (Gain) loss on sale of assets | 7 | (11 | ) | |||||
| Recovery of bad debts | (40 | ) | (46 | ) | ||||
| Provision for (recovery of) excess and obsolete inventory | (409 | ) | 129 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 485 | 2,785 | ||||||
| Inventories | (1,274 | ) | (765 | ) | ||||
| Other current assets | (116 | ) | (1,030 | ) | ||||
| Other long-term assets | (235 | ) | (4 | ) | ||||
| Accounts payable | 510 | 919 | ||||||
| Accrued liabilities | 62 | (397 | ) | |||||
| Deferred revenue and other long-term liabilities | 5,198 | 1,337 | ||||||
| Net cash provided by (used in) operating activities | 817 | (136 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from licensing of technology and product rights | -- | 400 | ||||||
| Proceeds from disposition of property, equipment and property rights | 235 | -- | ||||||
| Purchase of property and equipment and capitalized patent costs | (596 | ) | (1,310 | ) | ||||
| Net cash used in investing activities | (361 | ) | (910 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of common stock | 395 | 241 | ||||||
| Proceeds from (repayments of) line of credit borrowings, net | (279 | ) | 1,856 | |||||
| Proceeds from borrowings | 200 | -- | ||||||
| Repayments of debt and capital lease obligations | (666 | ) | (634 | ) | ||||
| Net cash provided by (used in) financing activities | (350 | ) | 1,463 | |||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | 55 | (19 | ) | |||||
| INCREASE IN CASH AND CASH EQUIVALENTS | 161 | 398 | ||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 6,026 | 4,877 | ||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 6,187 | $ | 5,275 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | $ | 347 | $ | 416 | ||||
See accompanying notes to condensed consolidated financial statements.
Heska Corporation (“Heska” or the “Company”) discovers, develops, manufactures, markets, sells, distributes and supports veterinary products. Heska’s core focus is on the canine and feline companion animal health markets. The Company has devoted substantial resources to the research and development of innovative products in these areas, where it strives to develop high value products for unmet needs in veterinary medicine.
Heska is comprised of two reportable segments, Core Companion Animal Health and Other Vaccines, Pharmaceuticals and Products. The Core Companion Animal Health segment includes diagnostic and monitoring instruments and supplies as well as single use diagnostic and other tests, vaccines and pharmaceuticals, primarily for canine and feline use. These products are sold directly by the Company as well as through independent third party distributors and other distribution relationships. The Other Vaccines, Pharmaceuticals and Products segment (“OVP”), previously reported as the Diamond Animal Health segment, includes private label vaccine and pharmaceutical production, primarily for cattle but also for other animals including small mammals, horses and fish. All OVP products are currently sold by third parties under third party labels.
The Company has incurred annual net losses since its inception and anticipates that it will continue to incur 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 September 30, 2004, have totaled $209.5 million. During the nine months ended September 30, 2004, the Company incurred a loss of approximately $4.3 million and used cash of approximately $136,000 in its operations.
The Company’s primary short-term needs for capital are based on its continuing research and development efforts, its sales, marketing and administrative activities, working capital associated with increased product sales and capital expenditures relating to maintaining and developing its manufacturing operations. The Company’s ability to achieve sustained profitable operations will depend primarily upon its ability to successfully market its products, commercialize products that are currently under development and develop new products. Many 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 also can be no guarantee that the Company will attain quarterly, annual, or sustained profitability in the future.
In September 2004, the Company received a $2 million prepayment from a customer toward product deliveries beginning as early as December 2004. This amount is reflected on the balance sheet as customer deposits.
At September 30, 2004, the Company was not in compliance with certain of its covenants under the credit facility agreement with Wells Fargo Business Credit, Inc. (“Wells Fargo”). On November 12, 2004, an amended agreement was signed which waived all covenant violations, modified the covenants for the remainder of 2004 and retroactively raised the interest rate on all Wells Fargo borrowings related to the credit facility to prime plus 3.5%. Based on our projections, we believe that we will be in compliance with the modified covenants through December 31, 2004. In accordance with the credit facility agreement, covenants for 2005 will be established based upon budgets that we submit to Wells Fargo Business Credit. We believe that the 2005 covenants will be established at levels such that we reasonably expect to be in compliance during 2005, although there can be no guarantee thereof.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are the responsibility of the Company’s management and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and rules and regulations of the Securities and Exchange Commission (the “SEC”). The condensed consolidated balance sheet as of September 30, 2004, the condensed consolidated statements of operations for the three months and nine months ended September 30, 2003 and 2004 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2003 and 2004 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. 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 complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the SEC.
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, 2003, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2004.
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