Heska Corp (HSKA) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Heska Corporation's fourth-quarter and year-end 2011 earnings conference call on the 17th of February, 2012. (Operator Instructions). I will now hand the conference over to Mr. Brent Maas. Please go ahead, sir.

Thank you all for joining us today. My name is Brett Maas of Hayden IR, Heska's investor relations firm. We would like to welcome everyone to the call. On the call with us today is Heska's Corporation Chairman and Chief Executive Officer, Bob Grieve, and Jason Napolitano, Heska Chief Financial Officer.

We appreciate having the opportunity to review the results from the fourth quarter of 2011. Prior to discussing our results, I would like to remind you that during the course of this call we may make certain forward-looking statements regarding future events or future financial performance of the Company. We need to caution you that any such forward-looking statements are based on current beliefs and expectations that involve known and unknown risks and uncertainties, which may cause actual results or performance to be materially different than what is expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences are detailed in our press releases or in our annual, quarterly or other filings with the SEC. These forward-looking statements speak only as of today, and except as otherwise required by law, Heska does not intend to update any forward-looking statements to reflect events that occur after today's call.

I would like now to turn the call over to Bob Grieve, Heska's Chairman and CEO, to provide opening remarks. Bob?

Thank you, Brett. I also like to thank everyone for joining the call today.

This was another solid quarter for Heska, our sixth consecutive quarter of profitability in a quarter in which we continued to bill for expected acceleration in our growth and profitability in 2012.

With this in mind, we are continuing to invest in both our sales organization and our R&D efforts. These investments are key to the accelerated growth we expect. I'm very pleased with the progress we have made. Even as we invested in our organization, we increased our profitability for the full year and expanded our gross profit both quarter over quarter and year over year. We saw gross margin expansion as a result of a more favorable product mix. We also generated cash from operations enhanced as a result of absorbing the value of our NOLs.

For the fourth quarter, we increased our gross margin by 1.6 percentage points compared to last year. We also expanded our net income. We continue to demonstrate our ability to control operating expenses, even as we invest in the development of new products and an expanded sales force, both of which will help accelerate our growth over the next year.

Full-year results are equally compelling. For the full year of 2011, operating income increased over 800% compared to last year, and net income increased $2.1 million from $18,000. We have generated nearly $4.9 million in cash provided by operations over the course of 2011, helping us to completely pay off our line of credit during the second quarter. We have an extremely strong balance sheet with $1.21 in cash per basic share and $19.6 million in working capital. As a result, we now have more cash than we need to operate our business on a day-to-day basis.

In light of this strong debt free and cash positive balance sheet and our consistent profitability, the Board of Directors is actively considering alternatives for the most effective use of our cash. Our Board of Directors and senior management have been discussing the topic of returning cash to investors. perhaps in the form of either or both a quarterly dividends or a stock buyback program. We will continue to evaluate strategic acquisitions from time to time, and we wanted to make sure we are positioned to take advantage of synergistic fits when an opportunity presents itself. However, management and the board are highly selective when it comes to potential acquisitions, and we will be cautious in this regard.

Let me spend more time talking about the investments we are making in Heska. In the last few calls, we have discussed the composition of our sales team under its new leadership. I'm happy to report that we believe we have turned the corner with our sales force turnover, and today most positions are filled. Sales training is continuing apace, and new personnel are learning their territories. We expect to hit full stride with our direct field sales effort by mid-year this year.

In addition, many of our target inside sales positions have been filled. During the year we also expect to grow our field support staff in anticipation of the increased sales.

The talent we have assembled on the sales side, in addition to our outstanding long tenured salespeople, is truly impressive. All told, this represents a significant adjustment in our sales force, and we expect this will improve our execution, especially as we add innovative products to our portfolio. We expect productivity to ramp as new sales talent complete their training and gain familiarity with their accounts. I firmly believe Heska now has the most professional sales organization in our history. It takes a little time for new people to get fully up to speed on the products, territories and accounts, but I am pleased with the pace with which this progress is occurring.

We should see the benefit of this sales force expansion and enhancement in the form of accelerated sales as we move through 2012.

A second mission-critical initiative for Heska involves the development of new products, diversifying our product portfolio and giving our expanded and enhanced sales organization more products to sell to the customer base. I am pleased to point to our new sublingual or SLIT allergy therapy product offering, which was announced earlier this week.

Heska is a veterinary industry leader in allergy testing and treatment. Historically our treatment solutions have involved subcutaneous injections. While effective, this treatment modality can cause compliance problems with some pet owners. Pet owners may dislike administering needle injections, but the alternative is to schedule a continuous series of appointments with their veterinarian. This SLIT product involves sublingual or under the tongue therapeutic administration. We are excited to offer this relatively simple and convenient alternative to pet owners who are not comfortable with injections. We believe this product introduction will extend our leadership in the allergy business.

I would note we had originally planned to announce this exciting product prior to year-end 2011, but our licensor had some now resolved personal matters that created the delay. This delay had no material impact on our 2012 budget, forecast or guidance.

During 2011 we worked diligently and successfully to move our injectable allergy immunotherapy manufacturing to our Des Moines facility. The new SLIT product will also be manufactured in Des Moines. Controlling the manufacturing of both of these therapeutic products gives us much greater control over quality, timely fulfillment and the economic benefits of greater gross margin due to the absence of third-party manufacturing costs, as well as overhead absorption in Des Moines.

The new SLIT product is currently provided to select clinical trial participants with an expanded rollout to board-certified veterinarian dermatologists expected soon. Following full engagement of the key opinion leaders and veterinary specialists, we intend to make the product broadly available to general practice veterinarians.

In addition to gaining more share with our current products, we also remain committed to creating additional topline growth with new products. To that end, we are working on a number of new alliances and other opportunities to bring new products to the market. We expect to introduce up to four more products this year, and you can expect the first such announcement within the next two months.

In addition, we expect to launch at least two of these products from our alliance with Rapid Diagnostek.

We announced a strategic collaboration with Entegrion in mid-December. Entegrion's core expertise is in human blood-related disorders. As a result of this collaboration, we expect to explore unique technologies in the areas of coagulation and blood cell-based therapeutics for use in the veterinary market. This collaboration, as well as our Rapid Diagnostek alliance and others that we have or may form in the future, are intended to help us bring competitive products to market, all toward accelerating our growth and profitability.

In the last conference call, I spoke about our efforts to bundle our products with reference lab services as some of our competitors do successfully. Let me update that effort now.

We have occasionally worked with other parties to bundle reference lab services within clinic point of care analyzers. In recent weeks, we have been more formally engaged in developing relationships with multiple reference laboratory businesses to partner in these bundling deals. We have various arrangements of this type with a number of parties. We are excited about the potential and intend to expand these opportunities.

Each business relationship has different attributes suited to unique circumstances. In essence, we think this collaborative approach is far superior to any attempt to either acquire or build a reference laboratory business, primarily for the sake of competitive product bundling opportunities.

As you can understand, 2011 has been a pivotal year. We laid the foundation for growth both through creating new product opportunities, as well as restructuring and expanding our sales force. We managed expenses, increased our profitability and strengthened our balance sheet. We are well positioned to continue our momentum through 2012.

I would now like to turn this over to Jason. He will provide detailed information on our financial results and future financial expectations.

Thank you, Bob, and thanks to everyone who joined the call. Our revenue in the fourth quarter of 2011 was $15.5 million compared to $15 million in the fourth quarter of 2010. For the full-year 2011, our revenue was $70.1 million, an increase of 7% as compared to $65.5 million in 2010. In 2011 instruments and affiliated supplies represented 40% of our revenue. This can be broken into two revenue streams, the sale of consumables to our installed base of instruments, which represented 30% of 2011 revenue, and the sale of new hardware, which represented approximately 10% of 2011 revenue.

Major products in this area include our chemistry instruments and our hematology instruments. Other revenue from our Core Companion Animal Health segment, or CCA, represented 42% of our 2011 revenue. Major products in this area include our heartworm diagnostic tests, our heartworm preventive and our allergy line of products. The remaining 18% of our revenue was generated by our Other Vaccines, Pharmaceuticals and Products segment, or OVP, which I will discuss in more detail in a moment.

In 2011 67% of our Core Companion Animal Health revenue was generated by direct sales. The remaining 33% was through distribution relationships such as our corporate agreement with Schering-Plough Animal Health, a unit of Merck which I will refer to as Merck Animal Health, and discuss in more detail in a moment.

In the fourth quarter of 2011, Core Companion Animal Health revenue grew approximately 6% to $12.8 million from $12 million in the prior year period. Greater sales of our canine heartworm preventive and our instrument consumables were key factors in the increase. For full-year 2011, Core Companion Animal Health revenue was $57.5 million, an increase of 3.3% from $55.7 million in the prior year period. Key factors in the increase were greater sales of our instrument consumables, our canine heartworm preventive and international sales of our canine heartworm diagnostic tests, somewhat offset by lower revenue from our hematology instruments and our chemistry instruments.

Merck Animal Health has the exclusive right to market and sell our canine heartworm preventive in the United States. Revenue generated from this relationship contributed to CCA growth for both the quarter and the year.

Our first-quarter 2012 purchase orders from Merck Animal Health are locked in at this point and unfortunately are at a significantly lower level than they were in the first quarter of 2011. Merck Animal Health's current forecast for the balance of 2012 shows growth versus the last nine months of 2011, although the year as a whole is down from 2011, due to the first-quarter 2012 order level. We are hopeful that Merck Animal Health will be successful in order to a greater degree than forecast as we understand the heartworm preventive of a major competitor, Novartis, is currently not available in the market.

We have assumed Merck Animal Health orders to its current forecast in the guidance we will give later in the call.

In 2011 we have continued to place instruments and grow our sale of high-margin consumables to our install base of customers. The lower revenue generated with the placement of our hematology and chemistry instruments in 2011 compared to 2010 was impacted by the relatively high vacancy levels in our sales force, as well as weak overall economic conditions. While we have seen scant evidence of economic strength in our business, we have always said we anticipated the veterinary market to be a lagging indicator in this area, and we have been pleased with some of the economic statistics we have seen recently. We were anticipating a more robust economic environment for 2012 as compared to 2011.

In the three months ended December 31, 2011, our OVP segment revenue decreased approximately 9.1% to $2.8 million from $3 million in the prior year period. Lower sales of both bovine and other biologicals somewhat offset by cow vaccine sales to new customers were a factor in the decline. For full-year 2011, OVP revenue grew 28.5% to $12.6 million from $9.8 million in 2010. Greater sales of cattle vaccines to new customers, greater sales of cattle vaccines under our contract with AgriLabs, and greater sales of other cattle vaccines, somewhat offset by lower sales of both bovine and other biologicals, were key factors in the increase.

In the fourth quarter of 2011, our gross profit was $6.6 million compared with the gross profit of $6.1 million in the fourth quarter of 2010. Gross margin -- that is gross profit divided by total revenue -- was 42.5% in the fourth quarter of 2011, an increase of 1.6 percentage points from 40.9% in the prior year period.

We renegotiated a contractual provision regarding minimum purchases with the vendor and accordingly reversed the corresponding reserve taken earlier in the year in the fourth quarter of 2011. A shift in product mix to relatively higher margin products, somewhat offset by lower margins in our OVP segment where we did not have as great an absorption of planned overhead in the fourth quarter of 2011 as in 2010, was also a factor in the increase.

Gross profit for the full-year 2011 was $29.2 million or 41.7% gross margin, up from gross profit of $24.8 million or 37.9% gross margin in 2010. The largest factor in the increase was approximately $1.4 million in net costs for destroying product, replacement product and related reserves in our OVP segment regarding regulatory issues with certain of our cattle vaccines recognized in 2010 but not 2011.

Selling and marketing expenses were $3.9 million in the fourth quarter of 2011, an increase of 24% as compared to $3.1 million in the prior year period. Increased personnel costs and spending related to product marketing programs were factors in the increase.

For 2011 selling and marketing expenses were $15.2 million, a 3% increase from $14.7 million in the prior year period. Greater recruiting and relocation costs related to the expansion of our sales force and increased spending related to product marketing programs were factors in the increase.

Research and development expenses were $305,000 in the fourth quarter of 2011, a slight increase compared to $297,000 in the prior year period with increased compensation costs being a factor. For full-year 2012, research and development expenses were $1.7 million, up slightly from $1.6 million in the prior-year period. A factor in the increase was the payment to a third-party related to a product line we are collaborating to develop with that company.

In the fourth quarter of 2011, general and administrative expenses were $2 million, down slightly compared to the fourth quarter of 2010. In the fourth quarter of 2011, we received an arbitration judgment in the dispute with one of our former distributors to whom we gave notice of contract termination in January 2010 regarding matters including amounts past-due and counterclaims by our former distributor.

We were awarded a net judgment in excess of $1 million, which was received prior to the year-end 2011. Included in the amount ordered by the arbiter were over $628,000 in principal, which was credited against the affiliated receivable; $207,000 in interest, which we recognized on our interest and the other line; and $306,000 in reimbursed legal and other expenses, which were credited against our general and administrative expenses in the fourth quarter of 2011. The latter was a key factor in the decline in general and administrative expenses for the fourth quarter of 2011 as compared to the prior year period. This was somewhat offset by a greater management incentive plan expense in the fourth quarter of 2011 as compared to the prior year period.

2011 general and administrative expenses were $9.1 million, up from $8.1 million in the prior year period. The largest factor in the increase was the greater management incentive plan expense in 2011 as compared to 2010. Total operating expenses were $6.2 million or 39.9% of sales in the fourth-quarter 2011 compared with total operating expenses of $5.5 million or 36.4% of sales in the prior-year period.

In the fourth quarter of 2011, we reported operating income of $414,000, down from reported operating income of $688,000 in the fourth quarter of 2010. 2011 total operating expenses were $25.9 million or 37% of sales compared with total operating expenses of $24.4 million or 37.3% of sales in 2010. 2011 depreciation and amortization was $2.1 million, down from $2.3 million in 2010.

Lower depreciation on instrument units available for customer rental was a key factor in the decline. We expect depreciation and amortization to decline in 2012 as compared to 2011 for the same reason with $1.9 million in depreciation and amortization being a reasonable estimate based on our guidance to follow.

2011 operating income was $3.2 million, an increase of $2.9 million compared to the $358,000 in 2010. Interest and other income net was $218,000 in income in the fourth quarter of 2011, a $330,000 change from $112,000 of expense in the prior-year period. Interest and other income net was $117,000 in income in 2011, a $406,000 change from $289,000 of expense in 2010. The largest factor in the change in both cases was $207,000 in interest income from the arbitration judgment I have described, which occurred in the fourth quarter of 2011 but not in the prior-year periods.

In the fourth quarter of 2011, income before income taxes was $632,000 compared to pretax income of $576,000 in the fourth quarter of 2010. In 2011 income before income taxes was $3.4 million, up from $69,000 in 2010. At low profitability levels, the impact of non-tax-deductible expenses such as incentive stock option amortization can cause a significant increase in the GAAP effective income tax rate for a given year. This is what happened in 2010 when our GAAP reported effective income tax rate was 74%. By contrast, the impact of non-tax-deductible expenses was greatly reduced at higher levels of profitability such as we enjoyed in 2011. The lower effective income tax rate in the fourth quarter of 2011 is the primary reason total tax expense is lower in the fourth quarter of 2011 than in the fourth quarter of 2010. We have a negative current tax expense in the fourth quarter of 2011 as we adjusted our estimated 2011 tax payments related to state allocations and other factors in the fourth quarter of 2011.

I also note that deferred tax expense is far larger than current tax expense in the fourth quarter of 2010, the fourth quarter of 2011 and for 2011 as a whole.

It is important to remember that this is a non-cash accounting charge only and primarily relates to our large domestic net operating loss deferred tax asset position, but provides a tax shield from most federal income taxes we would otherwise pay.

Net income in the three months ended December 31, 2011, was $484,000 or $0.09 per diluted share. This compares with a net income of $272,000 or $0.05 per diluted share in the prior-year period. Our fourth-quarter 2011 net income is inclusive of $172,000 in deferred income tax expense or $0.03 per diluted share. 2011 net income was $2.1 million or $0.40 per diluted share. This compares with net income of $18,000 or just above $0.00 per diluted share in 2010.

Our 2011 net income is inclusive of a $1.1 million deferred income tax expense, which translates to approximately $0.20 per diluted share. Again, this is a non-cash accounting charge only, primarily related to our large domestic net operating loss deferred tax asset position, which provides a tax shield for most federal income taxes we would otherwise pay.

Turning to the balance sheet, we had $6.3 million in cash and working capital of $19.6 million as of December 31, 2011. This translates to $1.20 per basic share in cash. We continue to have zero debt at the end of the reporting period after fully repaying our line of credit during the second quarter of 2011.

Let's turn to the outlook for the first-quarter 2012. I want to remind investors our business remains a difficult one to project, in particular in times of economic uncertainty. Our guidance for the first quarter of 2012 is for revenue of approximately $18.9 million, including approximately $2.4 million in OVP revenue; gross margin of approximately 43%; a little less than $8 million in operating expenses; operating income of around $150,000; approximately $25,000 of interest and other expense; and net income of approximately $75,000. Based on yesterday's closing stock price and currently outstanding shares and stock options, which I will refer to as current diluted shares, this guidance translates into approximately $0.01 in earnings per diluted share.

For full-year 2012, our guidance is for revenue of approximately $85 million, including approximately $11.5 million in OVP revenue. Gross margin of approximately 44%, operating expense of a little over $31 million, operating income of approximately $6 million, $100,000 in interest and other expense, and net income of approximately $3.65 million. Based on current diluted shares, this guidance translates into approximately $0.67 in diluted earnings per-share.

I note that this net income figure is inclusive of approximately $1.95 million in deferred income tax expense, which, as I mentioned earlier, is a non-cash accounting charge primarily related to our large domestic deferred tax asset. Based on current diluted shares, this translates to approximately $0.36 per diluted share.

In summary, we are pleased to report our fourth-quarter and full-year 2011 results and are excited by our prospects for 2012. I would now like to turn the call back over to Bob.

Thank you, Jason. I would like to close our comments by making a few summary points about our financial performance. We reported year-over-year growth in revenue, gross profit, gross margin percentage and on the bottom line. Our balance sheet remains in great shape, no term debt, no balance on our line of credit, but ample cash and available borrowings to fund our operations and be opportunistic with potential M&A activity.

We have introduced one new product already in 2012, which we had expected to announce before the year-end 2011. In addition, we expect to launch up to four more before the end of 2012. We inspect cash from operations will continue to benefit from our NOL asset, specifically our guidance of $0.67 per diluted share in 2012 includes substantial non-cash expense.

On our last call, we described an outlook of significant revenue growth for 2012, an increase of nearly $15 million. We have now established this as our guidance for 2012. We expect around half that growth to come from new products, about one-third of that growth to come from consumable revenue growth, some of which will be driven from analyzer placements that occurred in the course of 2011. While there are opportunities for revenue growth in the international business through third-party relationships, as well as potential growth in the OVP business, we believe that the balance of the growth we have described a little more than 15% will come from our restructured and expanded sales force.

Based on shares and options currently outstanding and Thursday's closing stock price, this translates to approximately $0.67 per diluted share. As in 2011, we expect the bulk of income tax expense or a little under $2 million to be non-cash deferred tax expense, primarily related to our domestic net operating loss asset. Based on shares and options currently outstanding and Thursday's closing stock price, this translates to approximately $0.36 per diluted share.

During our last several calls, we have discussed management's focus on achieving trilling 12-month earnings to $1.00 a share, while we are simultaneously making underlying investments towards sustained long-term growth. We believe it is realistic that we will be able to meet this goal on a GAAP basis by the end of 2013. To do this, we need to grow our revenue. I am encouraged by the fact that we have had the most professional sales force we have ever had and a salesforce that continues to improve under capable leadership.

We have a renewed focus on R&D and product development, which had produced new products that help drive our growth. We believe our gross margin should continue to improve as we sell higher margin products, including a greater relevant volume of consumables for analyzers.

Increasingly, we are integrating our Des Moines manufacturing capacity into more of our key products, thus absorbing idle plant cost and contributing to improved consolidated gross margins. We also expect more leverage out of our current operating expense base overall, even including somewhat higher investments in R&D and sales and marketing. We firmly believe revenue growth and gross profit growth will significantly exceed expense growth, resulting in accelerating profitability.

By way of illustration, our guidance anticipates revenue growth of about 21% with EPS growth of over 67%. In summary, therefore, we are excited about the $1.00 per share target, and, of course, remember that I am describing an after-tax GAAP target, and that because of our NOL carryforward, we pay significantly less cash tax than the tax expense reflected in our financial statements.

I would remind listeners that our business remains a difficult one to project, and the current economic climate does not make that any easier.

Thanks for your attention today. We appreciate your continued interest in support of Heska. At this time I would like to turn this over for purposes of conducting our question and answer session.

(Operator Instructions). Walter Schenker, MAZ Partners.

Either a quick finger or the only question. Let me not make the question or sort of a question but a recommendation. I have been involved in small illiquid stocks for a long time and have heavily supported share buybacks. That being said, I believe the world has changed some, and as you and the Board review what to do with free cash, I believe that on a longer-term basis at least in the current tax environment, dividends play a much larger role in investor's perception even in the very small cap companies than they used to.

And so off the top of my head, for what it is worth, my suggestion would be -- and then I have a question -- that possibly you do a year-end special dividend, reflecting 2011 whenever you want, and then institute a meaningful quarterly dividend in 2012. You are clearly going to generate substantial cash. The stock, as we all know, is very illiquid, which normally does not bother me, but I don't think you are going to accomplish a lot by buying back stock at a price I would sort of support. But, at this point in many of the smaller companies I'm involved with, they have instituted cash dividends, and investors seem to be pretty responsive to it. And, again, at least in the current period from a tax standpoint, that is pretty efficient. So that is the comment, and it is a very strong comment from someone who has been doing this for many decades and owns a fairly broad range of small cap and microcap stocks. So --

We understand that and respect the views. Those comments will be definitely taken into consideration.

Good. And the second -- now for a question, in looking at the revenue projection because everything sort of falls out of that, it would seem that what I should feel best about is consumables because that is largely a lagging factor on analyzers.

I should secondly feel next most confident on the salesforce because you suffered in the past from new salesman and a lack of sales positions and, therefore, hopefully just having bodies will create more sales. And on new products, that is more a function of the ability to bring them in, introduce them to market and get them accepted. Is that a reasonable way to look at it?

Certainly. And I will go beyond that and say, as we announced those products and then timely announce them and you had better understand those products, you will, again, have more visibility on that impact and their impact on revenue growth, yes.

Okay. Obviously also the ability both to control SG&A and given the mix you are forecasting, gross margin and overhead should be not areas hopefully of surprise? That is sort of a double negative.

If I understand the double negative, I think we would concur with that observation.

Okay. Well, again, obviously a very cheap stock if you can make these numbers.

[Chris Armbruster].

You mentioned a little bit about the competitor bundling strategy. Could you talk a little bit more about what their strategy is and maybe the more specific opportunities you have to bundle your products?

Certainly. We have addressed this in prior calls, so perhaps I glossed over the detail. I would say that two of our competitors primarily have offered in clinics or point of care analyzer offerings and also offer reference laboratory services, somewhat different businesses arguably, or really different businesses arguably. We have taken to the strategy of discounting one or the other or both of those different product or service opportunities to bundle and create a strategic advantage.

So without going into any specifics because I don't read their marketing collaterals on a regular basis, you might imagine a situation where a sales rep can say, if you buy our analyzers, we will discount reference laboratory services or vice versa. So it has been our view that the reference laboratory business is quite different than the point of care business. It is also one where it is extremely competitive, very risky, very capital intensive, and our alternative to that competitive position that we have just described has been to collaborate with independent diagnostic laboratory businesses in different places around the United States. So, in effect, creating that same bundling opportunity through collaboration rather than through investment in capital risk and exposure.

And are you getting much traction with that strategy so far?

Yes, we are beginning to get traction with that strategy. We have not reached full potential, but, again, as we described I believe in our last call, we certainly intended to formalize those discussions and create more formal alliances, and we have done that in many instances, and we will be continuing to do that, and we are excited about the progress.

Okay. Good. I have in my notes in the last quarter conference call, you guided this quarter to $16.5 million in revenue and $0.01 in EPS. It looks like the revenues were a little light there. And then next year, you guided to $0.65, so it looks like you are keeping the revenue guidance the same but increasing your net income. Is there anything going on there with the revenue line that might be coming out a little bit softer than you expected?

I think our revenue and expense and profitability guidance was identical to the outlook that Bob gave on the last call. I think the only difference between the two is a slight tweaking of the tax rate, which is the difference between the $0.65 outlook Bob gave on the last call and the $0.67 we gave this call.

I see, okay. Last question how much of the portfolio of products at this point is something that you would consider proprietary? I think there has been some discussion about maybe a little bit of valuation disconnect that you guys are getting because of perceived notion that a lot of your products are not as proprietary as maybe some of your competitors. But what can you say to that as far as your mix of products?

I would say that we are in a position to really quantitate or measure exactly whose intellectual properties and how many have different of our products, but certainly not at this moment. It would be an interesting intellectual exercise I suppose. But I would say a couple of things in this regard.

First, we have just described licensing intellectual property into a business of allergy that we have treated virtually de novo years ago and have continued to prosper in that business. By licensing intellectual property to expand that business, you could argue that net less of that business is proprietary to Heska, but I don't think licensing IP is out of the ordinary for any manufacturer or anybody that is serious about introducing products.

I would also say that relative to discounts to competitors, I would say because of relative proprietary mix and so forth, I think that is an increasingly perhaps naive view when you consider both of our biggest competitors. In fact, they offer other companies product offerings and have collaborated in the creation of certain of their current analyzer offerings, for example.

So I don't think collaboration and expanding your brand and market share are negative to value. In fact, it accelerates product development, it keeps us on the cutting edge, and we have, again, a continuing mix of our own IP and know-how into many other things that we offer.

Okay. Thanks very much, and congratulations on the business momentum.

(Operator Instructions). Jonathan Block.

I apologize in advance. I was sort of jumping around on a couple of calls. But I think in the past you had talked about from a rapid assay perspective broadening the portfolio there a bit and maybe even having a technology that instead of a bunch of stand-alone rapid assays might allow you to pursue a multi-interlay platform. And did you provide an update there, and if not, can you tell us what is going on with that initiative?

I provided a brief update, but your question is a great prompt. And for everybody that has not been listening to us in the recent past, I will go back and talk about the Rapid Diagnostek alliance where we have got global companion animal health rights to a fast sitting technology that we are deep in the process of developing.

This is a very exciting handheld analyzer, microelectronics, microfluidics and the like, and will allow us to multiplex many different tasks. It is has got many of the attributes of an instrument business where you have got a handheld analyzer that is relatively inexpensive and a continuing flow of consumables virtually with disposable test formats. And what I did mention, by way of an update, is we expected of the up to four products, additional products we intend to announce this year, we anticipate that as many as two of those could come from this Rapid Diagnostek alliance. So we are making great progress there, and we are very excited.

Okay. Great. And then I know you have got a follow-up on the reference lab in terms of bundling, but just to take a different approach because I was a little confused. Is this something where are your guys have the ability to go in and if you want to get the equipment as a final push offer the services of a particular reference lab at some sort of a discounted price? Or is this a situation of some of these reference lab providers, the guys that don't have a point of care offering, coming to you, purchasing your equipment at a discounted price and then turning around and having them try to bundle essentially their reference lab offering? And I hope that makes sense if you can provide some color.

Sure. I think what I would have mentioned earlier or what I intended to mention at least in the narrative was that each of these relationships has its own unique attributes. But, in effect, without segregating each alliance or, frankly, disclosing them, I would say in effect what this provides us is a synthetic bundle, if you will, where a reference lab offering that does not have POC analyzers can call our sales rep in, we can work that particular customer together and create a deal that is economically beneficial to both businesses, as well as that customer. And, in some cases, we are going to be able to carry in reference lab services into places that are interested in our analyzers. So it is going to vary depending on the relationship, and each one has its own attributes, but I think you get the essence.

Okay. And maybe last question with respect to what you can and cannot say, just in terms of the industry, it seems when you roll up all the guys that have reported it, it is stable to modestly improving. I'm wondering if you would sign off on that and also any color you can give into we are now almost two months into the first quarter? I'm not asking for a month by month report, but has that more recent trend continued here in early 2012?

First, I would say at the risk of sounding flip, you probably know more about this than anybody in the industry, Jonathan. You are watching them doing the surveys. So I'm mindful of that. And I would say also we were encouraged yesterday with the [VC Antak] report where they are talking about same-store sales up 1.1%, the second consecutive quarter of same-store sales growth. That is exciting, and the 1.1% does not exactly blow your hair back, but it is positive. So that is a good thing.

And then, as Jason mentioned in his comments, there are a lot of different macroeconomic indicators that we take as encouraging. I would say the sense is we hit the bottom a while ago, that there is some light at the end of the tunnel, and we are encouraged by that. In the near term, say that the competitive environment in analyzers and analyzer placements continues to be challenging, but overall we are encouraged.

(Operator Instructions). Paul Packer.

Let's go back on the first person's question here about the special dividend, dividend, microcap, small-cap type of not trading, not much volume. Heska actually, if you ask me, has had a lot of volume on certain days in the last couple of months. I guess the first question is, it seems that you guys are definitely contemplating some type of buyback. Where has the Company been here? In terms of the dividend, special dividend, you guys are writing about both of these things. When are you going to make your minds up, and what are the criteria?

Again, there are multiple criteria, and there are multiple determinants, some of which are not completely under our control. But, again, these are in very active discussions with the Board, and as soon as we come to some conclusion, we will make a public announcement.

Did you just write into the press release just to appease shareholders then or --?

No, it is because we intend to be transparent and because this is actively being discussed between the Board and senior management right now. We don't have a specific conclusion, but it is not -- we would not put that in there. That would not be our style or consistent with our values to put it into appease someone but rather to be transparent.

I think it is a Board level call ultimately, and the goal that we are working through with the Board is to maximize shareholder value. We don't think that holding excess cash on the balance sheet for an extended period is likely to optimize shareholder value.

So from that comment right there, we should be assuming that you are leaning toward some type of special dividend dividend?

That was not intended to lean either way. It is really a Board level call in my mind.

Was there anything else?

No.

There appear to be no further questions. Please go ahead.

There are no further questions, operator, is that correct?

That is correct.

Okay. Then I would just then, once again, say thank you to everyone. In summary, I believe Heska is positioned for a record 2012, and we look forward to sharing our progress with you in the coming months. Thanks all of you for your interest in Heska and for taking the time to join us today. Goodbye.

Ladies and gentlemen, this concludes the Heska Corporation fourth-quarter and year-end 2011 earnings conference call. Thank you for participating. You may now disconnect.