HESKA CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part II. Item 8 of this Form 10-K. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, and can generally be identified by our use of the words "scheduled," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions. Such statements, which include statements concerning future revenue sources and concentration, international market expansion, gross margin, selling and marketing expenses, remaining minimum performance obligations, research and development expenses, general and administrative expenses, capital resources, financings or borrowings and additional losses, are subject to risks and uncertainties, including, but not limited to, those discussed below and elsewhere in this Form 10-K, particularly in Item 1A. "Risk Factors," that could cause actual results to differ materially from those projected. The forward-looking statements set forth in this Form 10-K are as of the close of business onFebruary 27, 2023 , and we undertake no duty and do not intend to update this information, except as required by applicable securities laws. If we updated one or more forward looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. See "Statement Regarding Forward Looking Statements." OnJanuary 3, 2023 , the Company completed the acquisition ofMBio Diagnostics, Inc. , d/b/aLightDeck Diagnostics ("LightDeck") which represents a meaningful increase in our intellectual property portfolio as well as our manufacturing and research and development capabilities. Refer to Note 4 - Investments in Unconsolidated Affiliates and Note 19 - Subsequent Events to the consolidated financial statements included in Part II. Item 8 of this Annual Report on Form 10-K. A discussion of significant changes from the periods endingDecember 31, 2021 compared toDecember 31, 2020 can be found in Part II. Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . -34-
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Overview
We sell, manufacture, market and support diagnostic and specialty products and solutions for veterinary practitioners. Our portfolio includes POC diagnostic laboratory instruments and consumables including rapid assay diagnostic products; digital cytology services; POC digital imaging diagnostic products; local and cloud-based data services; PIMS and related software and support; reference laboratory testing; allergy testing and immunotherapy; heartworm preventive products; and vaccines. Our primary focus is on supporting companion animal veterinarians in providing care to their patients. Our business is composed of two operating and reportable segments:North America and International.North America consists ofthe United States ,Canada andMexico . International consists of geographies outside ofNorth America , primarily our operations inGermany ,Italy ,Spain ,France ,Switzerland ,Australia andMalaysia . The product groups described below are offered in both segments unless otherwise noted. POC Laboratory Instruments and Other Sales include outright instrument sales, revenue recognized from sales-type lease treatment, and other revenue sources, such as charges for repairs and reference laboratory sales. Revenue from our POC laboratory consumables, a recurring revenue stream, primarily involves placing an instrument under contract in the field and generating future revenue from testing consumables, such as cartridges and reagents, as that instrument is used. Instruments placed under subscription agreements are considered operating or sales-type leases, depending on the duration and other factors of the underlying agreement. A loss of, or disruption in, the supply of consumables we are selling to an installed base of instruments could substantially harm our business. The majority of our POC laboratory and other non-imaging instruments and consumables are supplied by third parties, who typically own the product rights and supply the product to us under marketing and/or distribution agreements. Major products in this area include our instruments for chemistry, hematology, blood gas, urine fecal, and immunodiagnostic testing and their affiliated operating consumable as well as our rapid assay diagnostic tests and digital cytology services. More recently, the Company has developed and/or acquired product rights pertaining to our urine fecal and immunodiagnostic platforms. Radiography is the largest product offering in POC Imaging and Informatics, which includes digital and computed radiography, ultrasound instruments, and diagnostic data and support. Radiography solutions typically consist of a combination of hardware and software placed with a customer, often combined with an ongoing service and support contract. Our experience has been that most of the revenue is generated at the time of sale, in contrast to the POC diagnostic laboratory placements discussed above where ongoing consumable revenue is often a larger component of economic value as a given instrument is used. In 2022, the Company acquired VetZ, a provider of PIMS and other clinical practice-related applications, which are primarily offered in our International segment. Pharmaceuticals, Vaccines and Diagnostic ("PVD") revenue primarily includes pharmaceuticals and biologicals as well as research and development, licensing and royalty revenue. Since items in this area are often single use by their nature, our typical aim is to build customer satisfaction and loyalty for each product, generate repeat annual sales from existing customers and expand our customer base in the future. Products in this area are both supplied by third parties and provided by us. Major products and services in this area include heartworm preventives and allergy test kits, allergy immunotherapy and testing. Other Vaccines and Pharmaceuticals ("OVP") revenue is generated in ourUSDA , FDA and DEA licensed production facility inDes Moines, Iowa . We view this facility as an asset which could allow us to control our cost of goods on any pharmaceuticals and vaccines that we may commercialize in the future. We have increased integration of this facility with our operations elsewhere. For example, virtually all of ourU.S. inventory, excluding our imaging products, is stored at this facility and related fulfillment logistics are -35- --------------------------------------------------------------------------------
managed there. Our OVP revenue includes vaccines and pharmaceuticals produced
for third parties. OVP is attributable only to the
Our products are ultimately sold primarily to or through veterinarians. The acceptance of our products by veterinarians is critical to our success. These products are sold directly to end users by us as well as through distribution relationships, such as the sale of kits to conduct blood testing to third-party veterinary diagnostic laboratories and sales to independent third-party distributors. Revenue from direct sales and distribution relationships represented 78% and 22%, respectively, of revenue for the year endedDecember 31, 2022 and 72% and 28%, respectively, for both the years endedDecember 31, 2021 andDecember 31, 2020 .
Effects of Certain Industry and Economic Factors and Trends on Results of Operations
Industry Trends - We continue to see demand for companion animal healthcare, which supported solid growth for POC diagnostic products and services compared to very strong prior year. We have a healthy liquidity position with cash of$156.6 million as ofDecember 31, 2022 . We continue to be active in mergers and acquisitions and other pursuits that support our growth in the companion animal healthcare space. Supply Chain and Logistics - Due to our dependence on global suppliers, manufacturers and shipping routes, we are experiencing intermittent delays in receiving supply, increased shipping costs and some targeted increase in materials cost. Because our long-term subscription programs, the commercial program of our largest revenue category, POC laboratory instruments and consumables, include annual price adjustments at a greater of 4% or the consumer price index, we are able to mitigate some of these costs in this highly inflationary environment. Further, we have worked closely with our suppliers to evaluate and identify products with long-lead time parts and provided advanced purchase notification and have secured products in advance to further mitigate supply disruption.
Inflation, Foreign Currency, Interest Rate Risk Impact - Refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk of this form 10-K.
Critical Accounting Estimates
Note 1 - Operations and Summary of Significant Accounting Policies to the consolidated financial statements included in Part II. Item 8 of this Annual Report on Form 10-K describes the significant accounting policies used in preparation of these consolidated financial statements. We believe the following critical accounting estimates and assumptions may have a material impact on reported financial condition and operating performance and involve significant levels of judgment to account for highly uncertain matters or are susceptible to significant change. In each of these areas, management makes estimates based on historical results, current trends and future projections. Therefore, these are considered to be our critical accounting policies and estimates.
Business Combinations
We account for transactions that represent business combinations under the
acquisition method of accounting, which requires us to allocate the total
consideration paid for each acquisition to the assets we acquire and liabilities
we assume based on their fair values as of the date of acquisition, including
identifiable intangible assets. The allocation of the purchase price utilizes
significant estimates in determining the fair values of identifiable assets
acquired and liabilities assumed, especially with respect to intangible
assets. We may refine our estimates and make adjustments to the assets acquired
and liabilities assumed over a measurement period, not to exceed one year.
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The Company has financial liabilities resulting from our business combinations,
including contingent consideration arrangements and notes payable. We estimate
the fair value of these financial liabilities using Level 3 inputs that require
the use of numerous assumptions and a probability-weighted outcome analysis,
which may change based on the occurrence of future events and lead to increased
or decreased operating income in future periods. Estimating the fair value at an
acquisition date and in subsequent periods involves significant judgments,
including projecting the future financial and product development performance of
the acquired businesses. The Company will update its assumptions each reporting
period based on new developments and record such amounts at fair value based on
the revised assumptions. Changes in the fair value of these financial
liabilities are recorded in the Consolidated Statements of Loss within general
and administrative expenses.
Valuation of
A significant portion of the purchase price for acquired businesses is generally assigned to intangible assets. Intangible assets other than goodwill are initially valued at fair value. If a quoted price in an active market for the identical asset is not readily available at the measurement date, the fair value of the intangible asset is estimated based on discounted cash flows using market participant assumptions, which are assumptions that are not specific to Heska. The selection of appropriate valuation methodologies and the estimation of discounted cash flows require significant assumptions about the timing and amounts of future cash flows, risks, appropriate discount rates, and the useful lives of intangible assets. When material, we utilize independent valuation experts to advise and assist us in determining the fair values of the identified intangible assets acquired in connection with a business acquisition and in determining appropriate amortization methods and periods for those intangible assets.Goodwill is initially valued based on the excess of the purchase price of a business combination over the fair value of acquired net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. We assess goodwill for impairment annually, at the reporting unit level, in the fourth quarter and whenever events or circumstances indicate impairment may exist. In evaluating goodwill for impairment, we have the option to first assess the qualitative factors to determine whether it is more-likely-than-not that the estimated fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the comparison of the estimated fair value of the reporting unit to the carrying value. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, we determine that is it more-likely-than-not that the estimated fair value of a reporting is less than its carrying amount, we would then estimate the fair value of the reporting unit and compare it to the carrying value. If the carrying value exceeds the estimated fair value we would recognize an impairment for the difference; otherwise, no further impairment test would be required. In contrast, we can opt to bypass the qualitative assessment for any reporting unit in any period and proceed directly to quantitative analysis. Doing so does not preclude us from performing the qualitative assessment in any subsequent period. As part of our goodwill testing process, we evaluate factors specific to a reporting unit as well as industry and macroeconomic factors that are reasonably likely to have a material impact on the fair value of a reporting unit. Examples of the factors considered in assessing the fair value of a reporting unit include: the results of the most recent impairment test, the competitive environment, the regulatory environment, anticipated changes in product or labor costs, revenue growth trends, the consistency of operating margins and cash flows and current and long-range financial forecasts. The long-range financial forecasts of the reporting units, which are based upon management's long-term view of our markets, are used by senior management and the Board of Directors to evaluate operating performance. -37- -------------------------------------------------------------------------------- In the fourth quarter we elected to bypass the qualitative approach and instead proceeded directly to assessing the fair value of all of our reporting units and comparing the fair value of each reporting unit to the carrying value to determine if any impairment exists. We estimate the fair values of the reporting units using an income approach based on discounted forecasted cash flows. The income approach involves making significant assumptions about the extent and timing of future cash flows, revenue growth rates, which incorporate the continued growth of some of the existing products as well as success rates of newly launched or future launches of products, and discount rates. Model assumptions are based on our projections and best estimates, using appropriate and customary market participant assumptions. Changes in forecasted cash flows or the discount rate would affect the estimated fair values of our reporting units and could result in a goodwill impairment loss in a future period. We also utilize a market approach utilizing the guideline public company method or guideline transaction method, or both, which incorporate subjectivity of management in determining appropriate comparable companies and transactions. Finally, the weighting of each approach is highly subjective and could result in an impairment in a future period. No impairment existed based on the analysis. We performed qualitative assessments in the fourth quarters of 2021 and 2020 and determined that no indications of impairment existed. We assess the realizability of intangible assets other than goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an impairment review is triggered, we evaluate the carrying value of intangible assets based on estimated undiscounted future cash flows over the remaining useful life of the primary asset of the asset group and compare that value to the carrying value of the asset group. The cash flows that are used contain our best estimates, using appropriate and customary assumptions and projections at the time. If the net carrying value of an intangible asset exceeds the related estimated undiscounted future cash flows, an impairment to adjust the intangible asset to its fair value would be reported as a non-cash charge to earnings. If necessary, we would calculate the fair value of an intangible asset using the present value of the estimated future cash flows to be generated by the intangible asset, and applying a risk-adjusted discount rate. We had a$0.2 million impairment of our intangible assets during the year endedDecember 31, 2022 . We had no impairments of our intangible assets during the years endedDecember 31, 2021 , and 2020.
These valuations require the use of management's assumptions, which would not reflect unanticipated events and circumstances that may occur.
Share-Based Compensation Expense
We utilize share-based compensation arrangements as part of our long-term
incentive plan. Our share-based compensation programs provide for grants of many
types of awards, but we currently grant stock options, including performance
stock options, restricted stock awards, and restricted stock units, along with
the issuance of employee stock purchase rights. The total fair value of future
awards may vary significantly from past awards based on a number of factors,
including our share-based award practices. Therefore, share-based compensation
expense is likely to fluctuate, possibly significantly, from year to year.
The majority of our currently issued restricted stock awards, restricted stock
units, and performance stock options are tied to Company and market-related
performance metrics and generally include a time vesting component. We also
grant stock options and restricted stock awards tied to time vesting to
employees and directors. All significant inputs into the determination of
expense as well as the related expense are discussed further in Note 12 -
Capital Stock to the consolidated financial statements included in Part II. Item
8 of this Annual Report on Form 10-K.
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--------------------------------------------------------------------------------Performance-Based Stock Compensation Awards
We grant restricted stock awards, restricted stock units, and performance stock options subject to performance vesting criteria, in addition to service, to our executive officers and other key employees. This type of grant consists of the right to receive shares of, or options to purchase, common stock, subject to achievement of time-based criteria and certain Company or market performance-related goals over a specified period, as established by the Compensation Committee of our Board of Directors. We recognize any related share-based compensation expense ratably over the requisite service period based on the probability assessment on the outcome of the performance condition related to company performance metrics. The fair value used in our expense recognition method is measured based on the number of shares granted and the closing market price of our common stock on the date of grant for restricted stock awards and units and the Black-Scholes model for performance stock options. The amount of share-based compensation expense recognized in any one period can vary based on the attainment or expected attainment of the performance goals. If such performance goals are not ultimately met, no compensation expense is recognized and any previously recognized compensation expense is reversed. We recognize any related share-based compensation expense ratably over the service period based on the most probable outcome of the performance condition related to market performance metrics. For awards related to market performance, the fair value used in our expense recognition method is measured based on the number of shares granted, and a Monte Carlo simulation model, which incorporates the probability of the achievement of the market-related performance goals as part of the grant date fair value. If such performance goals are not ultimately met, the expense is not reversed.
Recent Accounting Pronouncements
From time to time, the FASB or other standard setting bodies issue new accounting pronouncements. Updates to the FASB ASC are communicated through issuance of an ASU. Unless otherwise discussed, we believe that recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Consolidated Financial Statements upon adoption.
To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 1 - Operations and Summary of Significant Accounting Policies to the consolidated financial statements included in Part II. Item 8 of this Annual Report on Form 10-K.
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--------------------------------------------------------------------------------Results of Operations
Our analysis presented below is organized to provide the information we believe will facilitate an understanding of our historical performance and relevant trends going forward. This discussion should be read in conjunction with our consolidated financial statements, including the notes thereto, in Part II. Item 8 of this Annual Report on Form 10-K.
The following table sets forth, for the periods indicated, certain data derived from our Consolidated Statements of Loss (in thousands):
Year Ended December 31,
2022 2021
Revenue, net $ 257,307 $ 253,739
Gross profit 111,167 105,794
Operating expenses 131,465 106,787
Operating loss (20,298) (993)
Interest and other expense, net 1,536 2,448
Loss before income taxes and equity in losses of unconsolidated affiliates
(21,834) (3,441)
Income tax benefit (3,410) (3,573)
Net (loss) income before equity in losses of unconsolidated affiliates
(18,424) 132
Equity in losses of unconsolidated affiliates (1,465) (1,280)
Net loss attributable to Heska Corporation $
(19,889)
Diluted loss per share attributable to
$ 1.58 $ 1.61 Adjusted EBITDA (2)$ 27,203 $ 29,739 Net margin (2) (7.2) % 0.1 % Adjusted EBITDA margin (2) 10.6 % 11.7 % (1) Shares used in the diluted per share calculation for diluted loss per share attributable toHeska Corporation are (in thousands) 10,343 for the year endedDecember 31, 2022 and 10,015 for the year endedDecember 31, 2021 . Shares used in the diluted per share calculation for non-GAAP net income per diluted share are (in thousands): 10,523 for the year endedDecember 31, 2022 compared to 10,407 for the year endedDecember 31, 2021 . (2) See "Non-GAAP Financial Measures" for a reconciliation of Adjusted EBITDA to net income, Non-GAAP net income per diluted share to Diluted loss per share attributable toHeska Corporation , and Adjusted EBITDA margin to Net margin, the closest comparable GAAP measures, for each of the periods presented.
Revenue
Total revenue increased 1.4% to$257.3 million in 2022 compared to$253.7 million in 2021. The increase in revenue is driven primarily by the acquisition of VetZ, which was completed onJanuary 3, 2022 , and which contributed$12.2 million for the year endedDecember 31, 2022 that was not included in the prior year period. Revenue growth was also driven by the global launch of Element AIM, increased capital lease placements globally and higher consumable sales mainly due to increased selling prices, particularly inNorth America . These were partially offset by a 11.7% decline in PVD due to decreased demand for the heartworm preventive, Tri-Heart, as well as a$10.2 million foreign exchange impact, primarily due to the weakening of the Euro, impacting the POC product lines. -40-
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Gross Profit
Gross profit increased 5.1% to$111.2 million in 2022 compared to$105.8 million in 2021. Gross margin percent expanded to 43.2% in 2022 compared to 41.7% in 2021. The increase in both gross profit and gross margin percentage is driven by higher sales of consumables relative to total sales, which are our highest margin products, further strengthened by product rationalization and transition effort within our International segment and overall annual price increases. The acquisition of VetZ also favorably impacted gross profit and gross margin.
Operating Expenses
Selling and marketing expenses increased 5.2% to$47.7 million in 2022 compared to$45.3 million in 2021. The increase is driven by the acquisition of VetZ of$3.2 million , increased travel and trade show expenses due to relaxing COVID-19 restrictions, higher employee compensation costs, and higher non-recurring costs, partially offset by lower stock-based compensation of$2.2 million and favorable foreign exchange impacts. Research and development expenses increased to$19.8 million in 2022 from$7.0 million in 2021. The increase is primarily related to a$10.0 million payment for an exclusive global supply and licensing agreement to develop and commercialize the Heska Nu.Q® vet cancer screening test, a POC cancer monitoring and screening test. The remaining increase is due to investment in new products and technologies acquired over the prior 18 months. General and administrative expenses increased 17.5% to$64.1 million in 2022, compared to$54.5 million in 2021. The increase is driven by the$3.9 million provision for credit losses on a convertible note receivable, increased costs related to recent acquisitions and higher non-recurring items of$6.1 million , and increased cash and stock-based compensation costs, partially offset by lower incentive compensation and favorable foreign exchange impacts.
Interest and Other Expense, Net
Interest and other expense, net, was$1.5 million in 2022, compared to$2.4 million in 2021. The decrease was primarily driven by interest income earned in 2022 related to our investment in a money market fund that was not earned in 2021.
Income Tax (Benefit) Expense
In 2022, we had total income tax benefit of$3.4 million compared to a total income tax benefit in 2021 of$3.6 million . See Note 5 - Income Taxes to the consolidated financial statements included in Part II. Item 8 of this Annual Report on Form 10-K for additional information regarding our income taxes.
Net (Loss) Attributable to
Net loss attributable toHeska Corporation was$19.9 million in 2022, compared to net loss attributable toHeska Corporation of$1.1 million in 2021 driven by the$10 million licensing payment, the$3.9 million provision for credit losses on the convertible note receivable, increased cash compensation costs as well as non-recurring and recurring costs associated with recent acquisitions, partially offset by increases in revenue and gross profit. -41- --------------------------------------------------------------------------------
Adjusted EBITDA
Adjusted earnings before interest, taxes, depreciation, and amortization
("EBITDA") in 2022 was $27.2 million (10.6% adjusted EBITDA margin), compared to
$29.7 million (11.7% adjusted EBITDA margin) in 2021. The decrease is driven by
increased investments in growth and new technologies, such as the ongoing
development of a cloud-based PIMS and the new tr?Rapid™ portfolio, and higher
cash compensation costs, partially offset by increased revenue and gross profit.
See "Non-GAAP Financial Measures" for a reconciliation of adjusted EBITDA to net
income and adjusted EBITDA margin to net loss margin, the closest comparable
GAAP measures, for each of the periods presented.
Earnings Per Share
Diluted loss per share attributable to Heska was
Non-GAAP Earnings Per Share
Non-GAAP EPS was income of$1.58 per diluted share in 2022 compared to income of$1.61 per diluted share in 2021. The decrease is primarily due to increased operating expenses, excluding non-recurring and acquisition-related costs, partially offset by higher revenue and gross profit as discussed above. See "Non-GAAP Financial Measures" for a reconciliation of non-GAAP EPS to net (loss) income attributable to Heska per diluted share, the closest comparableU.S. GAAP measure, in each of the periods presented.
Non-GAAP Financial Measures
In addition to financial measures presented on the basis of accounting
principles generally accepted in the
These measures should be viewed as a supplement to, not substitute for, our results of operations presented underU.S. GAAP. The non-GAAP financial measures presented may not be comparable to similarly titled measures of other companies because they may not calculate their measures in the same manner. Management uses EBITDA, adjusted EBITDA, adjusted EBITDA margin and non-GAAP net income (loss) per diluted share as key profitability measures, which are included in our quarterly analyses of our operating results to our senior management team, our annual budget and related goal setting and other performance measurements. We believe these non-GAAP measures enhance our investors' understanding of our business performance and that not adjusting for the items included in the reconciliations below would hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses. -42- --------------------------------------------------------------------------------
The following tables reconcile our most directly comparable as-reported financial measures calculated in accordance with GAAP to our non-GAAP financial measures (in thousands, except percentages and per share amounts):
Year Ended
December 31,
2022 2021
Net (loss) income (1) $ (18,424) $ 132
Income tax (benefit) (3,410) (3,573)
Interest expense, net 613 2,404
Depreciation and amortization 13,966 13,555
EBITDA $ (7,255) $ 12,518 Acquisition-related and other non-recurring/extraordinary costs (2)
$ 19,919 $ 238 Stock-based compensation 16,004 18,263 Equity in losses of unconsolidated affiliates (1,465) (1,280) Adjusted EBITDA$ 27,203 $ 29,739 Net margin (3) (7.2) % 0.1 % Adjusted EBITDA margin (3) 10.6 % 11.7 %
(1) Net (loss) income used for reconciliation represents the "Net income (loss) before equity in losses of unconsolidated affiliates."
(2) To exclude the effect of acquisition related costs, non-recurring items and extraordinary charges not indicative of ongoing operations of$19.9 million for the year endedDecember 31, 2022 compared to$0.2 million for the year endedDecember 31, 2021 . These costs were incurred as a result of a$10.0 million licensing payment, the$3.9 million provision for credit losses for a convertible note receivable, the$1.0 million mark-to-market adjustment of the fair value of the embedded derivative on the convertible note receivable,$2.2 million related to the acquisitions of LightDeck and VetZ as well as other acquisition related and non-recurring charges, partially offset by a reduction in contingent consideration of$1.3 million for the year endedDecember 31, 2022 .
(3) Net margin and adjusted EBITDA margin are calculated as the ratio of net (loss) income and adjusted EBITDA, respectively, to revenue.
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Year Ended
December 31,
2022 2021
GAAP net loss attributable to Heska per diluted share $ (1.92) $ (0.11) Acquisition related and other non-recurring/extraordinary costs(1)
1.89 0.02
Amortization of acquired intangibles(2) 0.81 0.60
Purchase accounting adjustments related to inventory and fixed asset step-up(3)
0.22 0.03
Amortization of debt discount and issuance costs - 0.01
Stock-based compensation 1.52 1.75
Loss on equity investee transactions 0.14 0.12
Estimated income tax effect of non-GAAP adjustments(4) (1.08) (0.81)
Non-GAAP net income per diluted share $ 1.58 $ 1.61
Shares used in diluted per share calculations 10,523 10,407
(1) To exclude the effect of acquisition related costs, non-recurring items and
extraordinary charges not indicative of ongoing operations of $19.9 million for
the year ended December 31, 2022 compared to $0.2 million for the year ended
December 31, 2021 . These costs were incurred as a result of a $10.0 million
licensing payment, the $3.9 million provision for credit losses for a
convertible note receivable, the $1.0 million mark-to-market adjustment of the
fair value of the embedded derivative on the convertible note receivable, $2.2
million related to the acquisitions of LightDeck and VetZ as well as other
acquisition related and non-recurring charges, partially offset by a reduction
in contingent consideration of $1.3 million for the year ended December 31,
2022 .
(2) To exclude the effect of amortization of acquired intangibles of $8.6
million in the year ended December 31, 2022 , compared to $6.3 million in the
year ended December 31, 2021 . These costs were incurred as part of the purchase
accounting adjustments for recent acquisitions.
(3) To exclude the effect of purchase accounting adjustments for inventory step
up amortization and depreciation related to the step-up of fixed assets of $2.3
million for the year ended December 31, 2022 , compared to $0.3 million for the
year ended December 31, 2021 .
(4) Represents income tax expense utilizing an estimated effective tax rate that
adjusts for non-GAAP measures including: acquisition related, non-recurring and
extraordinary costs (excluding charges which are not deductible for tax of $0.3
million for the year ended December 31, 2022 compared to benefits of $1.0
million for the year ended December 31, 2021 ), amortization of acquired
intangibles, purchase accounting adjustments, amortization of debt discount and
issuance costs, and stock-based compensation. This incorporates the tax expense
related to stock-based compensation of $0.6 million for the year ended
December 31, 2022 compared to $1.6 million benefit for the year ended
December 31, 2021 . Adjusted effective tax rates are approximately 25% for the
years ended December 31, 2022 and December 31, 2021 .
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Analysis by Segment
The
The
The following sections and tables set forth, for the periods indicated, certain
data derived from our Consolidated Statements of (Loss) Income (in thousands).
North America Segment
Year Ended December 31, Change
2022 2021 Dollar Change % Change
POC Laboratory: $ 95,480 $ 86,841 $ 8,639 9.9 %
Instruments & Other 17,178 14,837 2,341 15.8 %
Consumables 78,302 72,004 6,298 8.7 %
POC Imaging & Informatics 27,335 29,512 (2,177) (7.4) %
PVD 22,020 24,939 (2,919) (11.7) %
OVP 16,927 17,606 (679) (3.9) %
Total North America revenue $ 161,762 $ 158,898 $ 2,864 1.8 %
North America Gross Profit $ 75,528 $ 74,426 $ 1,102 1.5 %
North America Gross Margin 46.7 % 46.8 %
North America Operating (Loss) Income
$ (16,447) NM North America Operating (Loss) Income Margin (9.8) % 0.4 %North America segment revenue increased 1.8% to$161.8 million for the year endedDecember 31, 2022 , compared to$158.9 million for the year endedDecember 31, 2021 driven by a 9.9% increase in POC laboratory instruments and consumables, in part as a result of continued rollout of Element AIM, as well as increased capital lease placements and favorable price on consumables due to annual price escalators. This is partially offset by an 11.7% decline in PVD due to lower demand for the heartworm preventive, Tri-Heart, and a 7.4% decline in POC imaging & informatics. Gross profit was$75.5 million compared to$74.4 million for the year endedDecember 31, 2022 and 2021, respectively. The increase in gross profit is primarily driven by increased revenue in the current year, specifically related to POC laboratory instruments and consumables. Gross margin was 46.7% for the year endedDecember 31, 2022 , compared to 46.8% in the year endedDecember 31, 2021 . The slight margin decline is driven by increased AIM instrument placements and unfavorable product mix, which offset consumable price increases. -45- --------------------------------------------------------------------------------North America operating loss was$15.8 million in the year endedDecember 31, 2022 compared to operating income of$0.7 million for the year endedDecember 31, 2021 . The loss in the year endedDecember 31, 2022 is driven by increased operating expenses, primarily due to higher acquisition related costs, non-recurring items and extraordinary charges not indicative of ongoing operations including a$10.0 million licensing payment, a$3.9 million provision for credit losses on a convertible note receivable, increased acquisition costs higher cash-based compensation expenses and increased travel, meals & trade show expenses due to easing COVID-19 restrictions. These are partially offset by increased revenue and gross profit as well as lower stock-based and incentive compensation. International Segment Year Ended December 31, Change 2022 2021 Dollar Change % Change POC Laboratory:$ 56,865 $ 61,017 $ (4,152) (6.8) % Instruments & Other 15,660 15,001 659 4.4 % Consumables 41,205 46,016 (4,811) (10.5) % POC Imaging & Informatics 35,209 28,492 6,717 23.6 % PVD 3,471 5,332 (1,861) (34.9) %Total International revenue$ 95,545 $ 94,841 $ 704 0.7 % International Gross Profit$ 35,639 $ 31,368 $ 4,271 13.6 % International Gross Margin 37.3 % 33.1 % International Operating Loss$ (4,501) $ (1,643) $ (2,858) (174.0) % International Operating Loss Margin (4.7) %
(1.7) %
International revenue was$95.5 million compared to$94.8 million for the year endedDecember 31, 2022 and 2021, respectively, driven by the acquisition of VetZ, which delivered$12.2 million that was not present in the prior year period, and the introduction of Element AIM, partially offset by$9.6 million of negative foreign currency impact. Gross profit was$35.6 million compared to$31.4 million for the year endedDecember 31, 2022 and 2021, respectively. Gross margin for the International segment was 37.3% for the year endedDecember 31, 2022 , compared to 33.1% for the year endedDecember 31, 2021 . The increase in gross profit and gross margin for both periods is driven by increased revenue, excluding foreign exchange impacts, as well as favorable product mix, particularly within POC laboratory consumables. The acquisition of VetZ also favorably impacted gross margin while the introduction of Element AIM in the International segment unfavorably impacted gross margin. International operating loss was$4.5 million for the year endedDecember 31, 2022 compared to a loss of$1.6 million for the year endedDecember 31, 2021 , driven primarily by increased operating expenses for the development of new PIMS technology, partially offset by increased revenue and gross profit.
Liquidity, Capital Resources and Financial Condition
We believe that adequate liquidity and cash generation is important to the execution of our strategic initiatives. Our ability to fund our operations, acquisitions, capital expenditures, and product development efforts may depend on our ability to access other forms of capital as well as our ability to generate cash from operating activities, which is subject to future operating performance, as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control, including but not limited to effects of the COVID-19 pandemic. Our primary source of liquidity is our available cash of$156.6 million . -46- --------------------------------------------------------------------------------
A summary of our cash from operating, investing and financing activities is as follows (in thousands):
December 31, Change
Dollar %
2022 2021 Change Change
Net cash (used in) provided by operating
activities $ (21,813) $ 6,247 $ (28,060) NM
Net cash used in investing activities (35,770) (35,001) (769) (2.2) %
Net cash (used in) provided by financing
activities (7,051) 166,404 (173,455) NM
Foreign exchange effect on cash and cash
equivalents (2,322) (410) (1,912) (466.3) %
(Decrease) increase in cash and cash equivalents (66,956) 137,240
(204,196) NM
Cash and cash equivalents, beginning of the 223,574 86,334 137,240 159.0 %
period
Cash and cash equivalents, end of the period
(29.9) %
For the year ended December 31, 2022 and the year ended December 31, 2021 , cash
flow used in operations was $21.8 million and cash flow provided by operations
was $6.2 million , respectively, which was primarily the result of (in
thousands):
December 31, Change
Dollar %
2022 2021 Change Change
Operating Activity: $ (19,889) $ (1,148) $ (18,741) (1,632.5) %
Non cash expenses and other adjustments 33,528 30,842 2,686 8.7 %
Change in accounts receivable (1,494) 2,193 (3,687) NM
Change in inventories, net (13,981) (14,905) 924 6.2 %
Change in lease receivables, net (9,078) (5,902) (3,176) (53.8) %
Change in other assets (1,887) (4,329) 2,442 56.4 %
Change in accounts payable 1,428 662 766 115.7 %
Change in other liabilities (10,440) (1,166) (9,274) (795.4) %
Net cash (used in) provided by operating
NM
activities
For the year ended
December 31, Change
Dollar %
2022 2021 Change Change
Acquisition of Biotech $ - $ (16,250) $ 16,250 NM
Acquisition of BiEssA, net of cash acquired - (4,513) 4,513 NM
Acquisition of Lacuna, net of cash acquired - (3,882) 3,882 NM
Acquisition of VetZ, net of cash acquired (28,956) - (28,956) NM
Promissory note receivable issuance (4,700) (9,000) 4,300 47.8 %
Purchases of property and equipment (2,114) (1,768) (346) (19.6) %
Proceeds from disposition of property and
equipment - 412 (412) NM
Net cash used in investing activities $ (35,770) $ (35,001) $ (769) (2.2) %
-47-
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For the year ended December 31, 2022 and the year ended December 31, 2021 , cash
flow used in financing activities was $7.1 million and cash flows provided by
financing activities was $166.4 million , respectively, which was the result of
(in thousands):
December 31, Change
Dollar %
2022 2021 Change Change
Proceeds from issuance of common stock
$ (166,039) (98.1) % Purchase of shares withheld for tax obligations (5,269) (1,629) (3,640) (223.4) % Payment of stock issuance costs - (314) 314 NM Notes Payable (4,770) - (4,770) NM Proceeds from line of credit borrowings - 7 (7) NM Repayments of line of credit borrowings (203) (890) 687 77.2 %
Net cash provided by financing activities
$ (173,455) NM We believe that our cash, cash equivalents and marketable securities balances, as well as the cash flows generated by our operations, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures, including selling and marketing team expansion, investment in key corporate functions, product development initiatives, and the build out of our new leased office space inLoveland, Colorado (see Part I. Item 2. Properties), for at least the next 12 months. Our belief may prove to be incorrect, however, and we could utilize our available financial resources sooner than we currently expect. For example, we actively seek opportunities that are consistent with our strategic direction, which may require additional capital. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in Part I. Item 1A, "Risk Factors". We may seek additional equity or debt financing in order to meet these future capital requirements, even in the absence of any acquisitions. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.
Effect of currency translation on cash
Net effect of foreign currency translations on cash changed$1.9 million to a$2.3 million negative impact in 2022, compared to a$0.4 million negative impact in 2021. The net effect of foreign currency translation on cash changed$1.2 million in 2021 from a$0.8 million positive impact in 2020. These effects are related to changes in exchange rates between theU.S. Dollar and the Swiss Franc, Euro, Canadian Dollar, Australian Dollar, and Malaysian Ringgit which are the functional currencies of our subsidiaries.
Material Cash Requirements
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provided financing, liquidity, market risk or credit risk support to the Company, or engages in leasing, hedging or research and development services with the Company.
Purchase obligations represent contractual agreements to purchase goods or services that are legally binding; specify a fixed, minimum or range of quantities; specify a fixed, minimum, variable, or indexed price provision; and specify approximate timing of the transaction.
-48-
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The following table presents certain future payments due by the Company as of
Less Than 1
Total Year 1 - 3 Years 3 - 5 Years After 5 Years
Purchase obligations $ 55,291 $ 27,361 $ 24,065 $ 3,865 $ -
Operating lease obligations 7,886 3,257 2,110 1,114 1,405
Finance lease obligations 460 168 236 56 -
Convertible senior notes (1) 86,250 - - 86,250 -
Future interest obligations (2) 11,994 3,234 6,469 2,291 -
Total $ 161,881 $ 34,020 $ 32,880 $ 93,576 $ 1,405
(1) Includes the principal amount of the convertible senior notes. Although the
notes mature in 2026, they can be converted into cash and shares of our common
stock prior to maturity if certain conditions are met. Any conversion prior to
maturity can result in repayments of the principal amounts sooner than the
scheduled repayments as indicated in the table. For additional information,
refer to Note 16 - Convertible Notes to the consolidated financial statements
included in Part II. Item 8 of this Annual Report on Form 10-K.
(2) Includes interest payments for both the convertible senior notes and other long term borrowings.
Net Operating Loss Carryforwards
As ofDecember 31, 2022 , we had a net operating loss carryforward ("NOL") and domestic research and development tax credit carryforward. See Note 5 - Income Taxes to the consolidated financial statements included in Part II. Item 8 of this Annual Report on Form 10-K for additional information regarding our carryforwards. -49-
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