Table of Contents
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-22427
HESKA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
3760 Rocky Mountain Avenue
Loveland, Colorado
(Address of principal executive offices)
77-0192527
(I.R.S. Employer
Identification Number)
80538
(Zip Code)
Registrant’s telephone number, including area code: (970) 493-7272
Securities registered pursuant to Section 12(b) of the Act:
Public Common Stock, $.01 par value
(Title of Class)
The Nasdaq Stock Market LLC
(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ☑
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 ☑ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company as defined in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a small reporting company)
Smaller Reporting Company ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ☑
The aggregate market value of voting common stock held by non-affiliates of the Registrant was approximately $31,299,307 as
of June 30, 2010 based upon the closing price on the Nasdaq Capital Market reported for such date. This calculation does not reflect a
determination that certain persons are affiliates of the Registrant for any other purpose.
5,234,100 shares of the Registrant’s Common Stock, $.01 par value, were outstanding at March 17, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11, 12, 13 and 14 of Part III incorporate by reference information from the Registrant’s Proxy
Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Registrant’s
2011 Annual Meeting of Stockholders.
TABLE OF CONTENTS
Page
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. (Removed and Reserved)
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
Exhibit 3(i)
Exhibit 3(ii)
Exhibit 3(iii)
Exhibit 10.1
Exhibit 10.8
Exhibit 10.9
Exhibit 10.32
Exhibit 10.41
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
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12
24
24
24
24
25
25
27
28
37
39
59
59
60
61
61
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61
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67
HESKA, ALLERCEPT, AVERT, E.R.D.-HEALTHSCREEN, E-SCREEN, FELINE ULTRANASAL, HEMATRUE, SOLO
STEP, THYROMED, VET/OX and VITALPATH are registered trademarks and CBC-DIFF, G2 DIGITAL and VET/IV are trademarks
of Heska Corporation. TRI-HEART is a registered trademark of Schering-Plough Animal Health Corporation (“SPAH”) in the United
States and is a registered trademark of Heska Corporation in other countries. ACCUTREND is a registered trademark of Roche
Diagnostics GmbH LLC. DRI-CHEM is a registered trademark of FUJIFILM Corporation. SPOTCHEM is a trademark of Arkray, Inc.
This Form 10-K also refers to trademarks and trade names of other organizations.
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Statement Regarding Forward Looking Statements
This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, any statements contained herein that
are not statements of current or historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words
such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions
are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to
certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ materially from those
expressed or forecasted in any such forward-looking statements as a result of certain factors, including those set forth in “Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in
this Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements.
Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard
thereto or any change in events, conditions or circumstances on which any such statement is based. These forward-looking statements
apply only as of the date of this Form 10-K or for statements incorporated by reference from the 2011 definitive proxy statement on
Schedule 14A, as of the date of the Schedule 14A.
Internet Site
Our Internet address is www.heska.com. Because we believe it provides useful information in a cost-effective manner to
interested investors, via a link on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are publicly available free of charge and we believe are available as soon as reasonably practical after we electronically file such
material with, or furnish it to, the Securities Exchange Commission. Information contained on our website is not a part of this annual
report on Form 10-K.
Item 1.
Business.
PART I
We develop, manufacture, market, sell and support veterinary products. Our core focus is on the canine and feline
companion animal health markets where we strive to provide high value products.
Our business is composed of two reportable segments, Core Companion Animal Health and Other Vaccines,
Pharmaceuticals and Products. The Core Companion Animal Health segment (“CCA”) includes diagnostic 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 to veterinarians by us as well as through distribution relationships. The Other Vaccines, Pharmaceuticals and Products
segment (“OVP”) includes private label vaccine and pharmaceutical production, primarily for cattle but also for other animals
including small mammals and fish. All OVP products are sold by third parties under third party labels. Please refer to Note 10 to our
audited consolidated financial statements filed herewith for financial information about each of our segments.
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Our principal executive offices are located at 3760 Rocky Mountain Avenue, Loveland, Colorado 80538, our telephone
number is (970) 493-7272 and our internet address is www.heska.com. We originally incorporated in California in 1988, and we
subsequently incorporated in Delaware in 1997.
Background
We were founded as Paravax, Inc. in 1988 and conducted research on vaccines to prevent infections by parasites. We
changed our name to Heska Corporation in 1995, completed our initial public offering in 1997 and continued to be a research and
development-focused company, devoting substantial resources to the research and development of innovative products for the
companion animal health market. In 2001 and 2002, we took steps to lower our expense base, largely in internal research and
development but also in other areas, and to rationalize and further focus our business. We have continued to concentrate our efforts on
operating improvements, such as enhancing the effectiveness of our sales and marketing efforts and pursuing cost efficiencies, and
seeking new product opportunities with third parties. In 2008, we underwent a restructuring primarily to reduce our operating costs.
Core Companion Animal Health Segment
We presently sell a variety of companion animal health products and services, among the most significant of which are the
following:
Veterinary Instruments
We offer a line of veterinary diagnostic and other instruments which are described below. We also market and sell
consumable supplies for these instruments. Our line of veterinary instruments includes the following:
•
•
Blood Chemistry. The DRI-CHEM 4000 Veterinary Chemistry Analyzer (the “DRI-CHEM 4000”) is a robust system
that uses dry slide technology for blood chemistry and electrolyte analysis and has the ability to run 22 tests at a time
with a single blood sample. Test slides are available as both pre-packaged panels as well as individual slides. The
instrument has an additional feature allowing simple, fully automated sample dilution and results calculations. We are
supplied this instrument and affiliated test slides and supplies under a contractual agreement with FUJIFILM
Corporation (“FUJIFILM”). The DRI-CHEM 7000 Veterinary Chemistry Analyzer (the “DRI-CHEM 7000”), which
we began to ship in December 2009, is a line extension of our chemistry offering with higher throughput, multiple
patient staging and a “STAT” feature which provides emergency sample flexibility in critical cases. The DRI-CHEM
7000 utilizes the same test slides as the DRI-CHEM 4000 and is manufactured by FUJIFILM. In addition, we continue
to service and support our previous chemistry instrument for which we are supplied affiliated test strips and supplies
under a contractual agreement with Arkray Global Business, Inc. (“Arkray”).
Hematology. The HEMATRUE Veterinary Hematology Analyzer is an easy-to-use blood analyzer that measures such
key parameters as white blood cell count, red blood cell count, platelet count and hemoglobin levels in animals. In
addition, we continue to service and support our previous hematology instrument, the HESKA CBC-DIFF Veterinary
Hematology System. We are supplied new instruments and affiliated reagents and supplies of these products under a
contractual agreement with Boule Medical AB (“Boule”).
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•
Blood Gases. We have historically sold handheld instruments to fulfill our customers’ needs in this area. In 2009, our
supplier of these instruments and affiliated cartridges and supplies informed us that they were cancelling our
contractual agreement as of November 1, 2009 and that they would no longer supply us with these products after that
date. In 2009, we signed an OEM contractual agreement with Roche Diagnostics Corporation (“Roche”) to supply us
with the VitalPath Blood Gas and Electrolyte Analyzer (“VitalPath”) and affiliated consumables. VitalPath delivers
accurate results for blood gases, electrolytes, hematocrit and 27 additional calculated parameters in 50 seconds. We
began to ship and install VitalPath units at customer locations in May 2010.
•
•
Lactate. The Accutrend Plus Lactate analyzer is a handheld, portable analyzer used to measure lactate. We are
supplied this instrument and affiliated consumables for veterinary use under a contractual agreement with Roche. We
announced the launch of this instrument in the first quarter of 2011.
IV Pumps. The VET/IV 2.2 infusion pump is a compact, affordable IV pump that allows veterinarians to easily
provide regulated infusion of fluids, drugs or nutritional products for their patients.
Point-of-Care Diagnostic Tests
Heartworm Diagnostic Products. Heartworm infections of dogs and cats are caused by the parasite Dirofilaria immitis. This
parasitic worm is transmitted in larval form to dogs and cats through the bite of an infected mosquito. Larvae develop into adult
worms that live in the pulmonary arteries and heart of the host, where they can cause serious cardiovascular, pulmonary, liver and
kidney disease. Our canine and feline heartworm diagnostic tests use monoclonal antibodies or a recombinant heartworm antigen,
respectively, to detect heartworm antigens or antibodies circulating in the blood of an infected animal.
We currently market and sell heartworm diagnostic tests for both dogs and cats. SOLO STEP CH for dogs and SOLO STEP
FH for cats are available in point-of-care, single use formats that can be used by veterinarians on site. We also offer SOLO STEP CH
Batch Test Strips, a rapid and simple point-of-care antigen detection test for dogs that allows veterinarians in larger practices to run
multiple samples at the same time. We obtain SOLO STEP CH, SOLO STEP FH and SOLO STEP Batch Test Strips under a
contractual agreement with Quidel Corporation (“Quidel”).
Veterinary Diagnostic Laboratory Products and Services
Allergy Diagnostic Products and Services. Allergy is common in companion animals, and it has been estimated to affect
approximately 10% to 15% of dogs. Clinical symptoms of allergy are variable, but are often manifested as persistent and serious skin
disease in dogs and cats. Clinical management of allergic disease is problematic, as there are a large number of allergens that may give
rise to these conditions. Although skin testing is often regarded as the most accurate diagnostic procedure, such tests can be painful,
subjective and inconvenient. The effectiveness of the immunotherapy that is prescribed to treat allergic disease is inherently limited by
inaccuracies in the diagnostic process.
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Our ALLERCEPT Definitive Allergen Panels provide the most accurate determination of which we are aware of the
specific allergens to which an animal, such as a dog, cat or horse, is reacting. The panels use a highly specific recombinant version of
the natural IgE receptor to test the serum of potentially allergic animals for IgE directed against a panel of known allergens. A typical
test panel consists primarily of various pollen, grass, mold, insect and mite allergens. The test results serve as the basis for prescription
ALLERCEPT Allergy Treatment Sets, discussed later in this document.
We sell kits to conduct blood testing using our ALLERCEPT Definitive Allergen Panels to third-party veterinary diagnostic
laboratories outside of the United States. We also sell products to screen for the presence of allergen-specific IgE to these customers
— we sell kits to conduct preliminary blood testing using products based on our ALLERCEPT Definitive Allergen Panels as well as a
similar test requiring less technical sophistication, our ALLERCEPT E-SCREEN Test. Animals testing positive for allergen-specific
IgE using these screening tests are candidates for further evaluation using our ALLERCEPT Definitive Allergen Panels.
We have veterinary diagnostic laboratories in Loveland, Colorado and Fribourg, Switzerland which both offer blood testing
using our ALLERCEPT Definitive Allergen Panels.
Other Products and Services. We sell E.R.D. Reagent Packs used to detect microalbuminuria, the most sensitive indicator
of renal damage, to VCA Antech, Inc. for use in its veterinary diagnostic laboratories.
Our Loveland veterinary diagnostic laboratory currently also offers testing using our canine and feline heartworm, renal
damage, immune status and flea bite allergy assays as well as other diagnostic services including polymerase chain reaction, or PCR,
based tests for certain infectious diseases. Our Loveland diagnostic laboratory is currently staffed by medical technologists
experienced in animal disease and several additional technical staff. We intend to continue to use our Loveland veterinary diagnostic
laboratory both as a stand-alone service center for our customers and as an adjunct to our product development efforts.
Pharmaceuticals and Supplements
Heartworm Prevention. We have an agreement with Schering-Plough Animal Health Corporation (“SPAH”), a unit of
Merck & Co., Inc., granting SPAH the distribution and marketing rights in the United States for TRI-HEART Plus Chewable Tablets,
our canine heartworm prevention product. TRI-HEART Plus Chewable Tablets (ivermectin/pyrantel) are indicated for use as a
monthly preventive treatment of canine heartworm infection and for treatment and control of ascarid and hookworm infections. We
manufacture TRI-HEART Plus Chewable Tablets at our Des Moines, Iowa production facility.
Nutritional Supplements. We sell a novel fatty acid supplement, HESKA F.A. Granules. The source of the fatty acids in this
product, flaxseed oil, leads to high omega-3:omega-6 ratios of fatty acids. Diets high in omega-3 fatty acids are believed to lead to
lower levels of inflammatory mediators. The HESKA F.A. Granules include vitamins and are formulated in a palatable flavor base that
makes the product convenient and easy to administer.
Hypothyroid Treatment. We sell a chewable thyroid supplement, THYROMED Chewable Tablets, for treatment of
hypothyroidism in dogs. Hypothyroidism is one of the most common endocrine disorders diagnosed in older dogs, treatment of which
requires a daily hormone supplement for the lifetime of the animal. THYROMED Chewable Tablets contain the active ingredient
Levothyroxine Sodium, which is a clinically proven replacement for the naturally occurring hormone secreted by the thyroid gland.
The chewable formulation makes this daily supplement convenient and easy to administer.
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Vaccines and other Biologicals
Allergy Treatment. Veterinarians who use our ALLERCEPT Definitive Allergen Panels often purchase ALLERCEPT
Allergy Treatment Sets for those animals with positive test results. These prescription immunotherapy treatment sets are formulated
specifically for each allergic animal and contain only the allergens to which the animal has significant levels of IgE antibodies. The
prescription formulations are administered in a series of injections, with doses increasing over several months, to ameliorate the
allergic condition of the animal. Immunotherapy is generally continued for an extended time. We offer canine, feline and equine
immunotherapy treatment products.
Feline Respiratory Disease. The use of injectable vaccines in cats has become controversial due to the frequency of
injection site-associated side effects. The most serious of these side effects are injection site sarcomas, tumors which, if untreated, are
nearly always fatal. While there is one competitive non-injectable two-way vaccine, all other competitive products are injectable
formulations.
We sell the FELINE ULTRANASAL FVRCP Vaccine, a three-way modified live vaccine combination to prevent disease
caused by the three most common respiratory viruses of cats: calicivirus, rhinotracheitis virus and panleukopenia virus. Our two-way
modified live vaccine combination, FELINE ULTRANASAL FVRC, prevents disease caused by calicivirus and rhinotracheitis. These
vaccines are administered without needle injection by dropping the liquid preparation into the nostrils of cats. Our vaccines avoid
injection site side effects, and we believe they are very efficacious.
Other Vaccines, Pharmaceuticals and Products Segment
We have developed our own line of bovine vaccines that are licensed by the United States Department of Agriculture
(“USDA”). We have a long-term agreement with a distributor, Agri Laboratories, Ltd., (“AgriLabs”), for the marketing and sale of
certain of these vaccines which are sold primarily under the TitaniumÒ and MasterGuardÒ brands — registered trademarks of
AgriLabs. AgriLabs has non-exclusive rights to sell these bovine vaccines in the United States, Africa and Mexico into
December 2015. We also manufacture other bovine products not covered under the agreement with AgriLabs.
We manufacture biological and pharmaceutical products for a number of other animal health companies. We manufacture
products for animals including small mammals. Our offerings range from providing complete turnkey services which include research,
licensing, production, labeling and packaging of products to providing any one of these services as needed by our customers as well as
validation support and distribution services.
Marketing, Sales and Customer Support
We estimate that there are approximately 53,000 veterinarians in the United States whose practices are devoted principally
to small animal medicine. Those veterinarians practice in approximately 24,000 clinics in the United States. In 2010, our products
were sold to approximately 12,800 such clinics in the United States. Veterinarians may obtain our products directly from us or
indirectly through others. All our Core Companion Animal Health products are ultimately sold to or through veterinarians. In many
cases, veterinarians will markup their costs to the end user. The acceptance of our products by veterinarians is critical to our success.
We currently market our Core Companion Animal Health products in the United States to veterinarians through an outside
field organization, a telephone sales force, independent third-party distributors, as well as through trade shows and print advertising
and through other distribution relationships, such as SPAH in the case of our heartworm preventive. Our outside field organization
currently consists of 36 individuals in various parts of the United States. Our inside sales force consists of 24 persons.
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We have a staff dedicated to customer and product support in our Core Companion Animal Health segment including
veterinarians, technical support specialists and service technicians. Individuals from our product development group may also be used
as a resource in responding to certain product inquiries.
Internationally, we market our Core Companion Animal Health products to veterinarians primarily through third-party
veterinary diagnostic laboratories, independent third-party distributors and Novartis Agro K.K., Tokyo (“Novartis Japan”). These
entities typically provide customer support. Novartis Japan exclusively markets and distributes SOLO STEP CH in Japan.
All OVP products are marketed and sold by third parties under third party labels.
We grant third parties rights to our intellectual property as well as our products, with our compensation often taking the
form of royalties and/or milestone payments.
Manufacturing
The majority of our revenue is from proprietary products manufactured by third parties. Third parties manufacture our
veterinary instruments, including affiliated consumables and supplies, as well as other products including our heartworm point-of-care
diagnostic tests, our allergy treatment products and our E.R.D.-HEALTHSCREEN Urine Tests. Our chemistry instruments and
affiliated supplies are manufactured under contract with FUJIFILM, and test strips and supplies affiliated with our previous chemistry
instrument are manufactured under contract with Arkray. Our hematology instruments and affiliated supplies are manufactured under
contract with Boule. Our heartworm point-of-care diagnostic tests are manufactured under a contract with Quidel. We manufacture
and supply Quidel with certain critical raw materials and perform the final packaging operations for these products. Our facility in Des
Moines, Iowa is a USDA, Food and Drug Administration (“FDA”), and Drug Enforcement Agency (“DEA”) licensed biological and
pharmaceutical manufacturing facility. This facility currently has the capacity to manufacture more than 50 million doses of vaccine
each year. We expect that we will manufacture most or all of our biological and pharmaceutical products at this facility, as well as
most or all of our recombinant proteins and other proprietary reagents for our diagnostic tests. We currently manufacture our canine
heartworm prevention product, our FELINE ULTRANASAL Vaccines and all our OVP segment products at this facility. Our OVP
segment’s customers purchase products in both finished and bulk format, and we perform all phases of manufacturing, including
growth of the active bacterial and viral agents, sterile filling, lyophilization and packaging at this facility. We manufacture our various
allergy diagnostic products at our Des Moines facility, our Loveland facility and our Fribourg facility. We believe the raw materials for
products we manufacture are available from several sources.
Product Development
We are committed to providing innovative products to address latent health needs of companion animals. We may obtain
such products from external sources, external collaboration or internal research and development.
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We are committed to identifying external product opportunities and creating business and technical collaborations that lead
to high value veterinary products. We believe that our active participation in scientific networks and our reputation for investing in
research enhances our ability to acquire external product opportunities. We have collaborated, and intend to continue to do so, with a
number of companies and universities. Examples of such collaborations include:
•
•
•
Quidel for the development of SOLO STEP CH Cassettes, SOLO STEP CH Batch Test Strips and SOLO STEP FH
Cassettes;
Boule for the development of veterinary applications for the HEMATRUE Veterinary Hematology Analyzer and
associated reagents; and
FUJIFILM for the development of veterinary applications for the DRI-CHEM 7000 Veterinary Chemistry Analyzer
and associated slides and supplies.
Internal research and development is managed on a case-by-case basis. We employ individuals with microbiology,
immunology, genetics, biochemistry, molecular biology, parasitology as well as veterinary expertise and will form multidisciplinary
product-associated teams as appropriate. We incurred expenses of $2.0 million, $1.7 million and $1.6 million in the years ended
December 31, 2008, 2009 and 2010, respectively, in support of our research and development activities.
Intellectual Property
We believe that patents, trademarks, copyrights and other proprietary rights are important to our business. We also rely
upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our
competitive position. The proprietary technologies of our OVP segment are primarily protected through trade secret protection of, for
example, our manufacturing processes in this area.
We actively seek patent protection both in the United States and abroad. Our issued and pending patent portfolios primarily
relate to heartworm control, flea control, allergy, infectious disease vaccines, diagnostic and detection tests, immunomodulators,
instrumentation, nutrition, pain control and vaccine delivery technologies. As of December 31, 2010, we owned, co-owned or had
rights to 193 issued U.S. patents and 10 pending U.S. patent applications expiring at various dates from February 2011 to
August 2024. Applications corresponding to pending U.S. applications have been or will be filed in other countries. Our
corresponding foreign patent portfolio as of December 31, 2010 included 127 issued patents and 24 pending applications in various
foreign countries expiring at various dates from November 2012 to July 2023.
We also have obtained exclusive and non-exclusive licenses for numerous other patents held by academic institutions and
biotechnology and pharmaceutical companies.
Seasonality
We expect to experience less seasonality than we have in the past due to factors including increased instrument consumable
revenue, which does not tend to be seasonal, and changes in the timing of certain product promotions. Although we believe our first
quarter revenue results will tend to be stronger than any other quarter, we do not anticipate a large seasonal effect on our consolidated
financial results.
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Government Regulation
Although the majority of our revenue is from the sale of unregulated items, many of our products or products that we may
develop are, or may be, subject to extensive regulation by governmental authorities in the United States, including the USDA and the
FDA, and by similar agencies in other countries. These regulations govern, among other things, the development, testing,
manufacturing, labeling, storage, pre-market approval, advertising, promotion, sale and distribution of our products. Satisfaction of
these requirements can take several years to achieve and the time needed to satisfy them may vary substantially, based on the type,
complexity and novelty of the product. Any product that we develop must receive all relevant regulatory approval or clearances, if
required, before it may be marketed in a particular country. The following summarizes the major U.S. government agencies that
regulate animal health products:
•
USDA. Vaccines and certain single use, point-of-care diagnostics are considered veterinary biologics and are therefore
regulated by the Center for Veterinary Biologics, or CVB, of the USDA. Industry data indicate that it takes
approximately four years and in excess of $1.0 million to license a conventional vaccine for animals from basic
research through licensing. In contrast to vaccines, single use, point-of-care diagnostics can typically be licensed by
the USDA in about two years, at considerably less cost. However, vaccines or diagnostics that use innovative
materials, such as those resulting from recombinant DNA technology, usually require additional time to license. The
USDA licensing process involves the submission of several data packages. These packages include information on
how the product will be manufactured, information on the efficacy and safety of the product in laboratory and target
animal studies and information on performance of the product in field conditions.
•
FDA. Pharmaceutical products, which typically include synthetic compounds, are approved and monitored by the
Center for Veterinary Medicine of the FDA. Industry data indicate that developing a new drug for animals requires
approximately 11 years from commencement of research to market introduction and costs approximately $5.5 million.
Of this time, approximately three years is spent in animal studies and the regulatory review process. However, unlike
human drugs, neither preclinical studies nor a sequential phase system of studies are required. Rather, for animal
drugs, studies for safety and efficacy may be conducted immediately in the species for which the drug is intended.
Thus, there is no required phased evaluation of drug performance, and the Center for Veterinary Medicine will review
data at appropriate times in the drug development process. In addition, the time and cost for developing companion
animal drugs may be significantly less than for drugs for livestock animals, as food safety issues relating to tissue
residue levels are not applicable.
•
EPA. Products that are applied topically to animals or to premises to control external parasites are regulated by the
Environmental Protection Agency, or EPA.
After we have received regulatory licensing or approval for our products, numerous regulatory requirements typically
apply. Among the conditions for certain regulatory approvals is the requirement that our manufacturing facilities or those of our third-
party manufacturers conform to current Good Manufacturing Practices or other manufacturing regulations, which include
requirements relating to quality control and quality assurance as well as maintenance of records and documentation. The USDA, FDA
and foreign regulatory authorities strictly enforce manufacturing regulatory requirements through periodic inspections and/or reports.
A number of our animal health products are not regulated. For example, certain products such as our E.R.D.-
HEALTHSCREEN Urine Tests and our ALLERCEPT panels, as well as other reference lab tests, are not regulated by either the
USDA or FDA. Similarly, none of our veterinary instruments requires regulatory approval to be marketed and sold in the United
States.
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We have pursued regulatory approval outside the United States based on market demographics of foreign countries. For
marketing outside the United States, we are subject to foreign regulatory requirements governing regulatory licensing and approval for
many of our products. Licensing and approval by comparable regulatory authorities of foreign countries must be obtained before we
can market products in those countries. Product licensing approval processes and requirements vary from country to country and the
time required for such approvals may differ substantially from that required in the United States. We cannot be certain that approval of
any of our products in one country will result in approvals in any other country. To date, we or our distributors have sought regulatory
approval for certain of our products in Canada, which is governed by the Canadian Food Inspection Agency, or CFIA; in Japan, which
is governed by the Japanese Ministry of Agriculture, Forestry and Fisheries, or MAFF; in Australia, which is governed by the
Australian Department of Agriculture, Fisheries and Forestry, or ADAFF; South Africa, which is governed by the Republic of South
Africa Department of Agriculture, or RSADA; and in certain other countries requiring such approval.
Core Companion Animal Health products previously discussed which have received regulatory approval in the United
States and/or elsewhere are summarized below.
Products
FELINE ULTRANASAL FVRC Vaccine
FELINE ULTRANASAL FVRCP Vaccine
SOLO STEP CH
SOLO STEP CH Batch Test Strips
SOLO STEP FH
TRI-HEART Plus Heartworm Preventive
Competition
Country
United States
Canada
South Africa
United States
Canada
South Africa
United States
EU
Canada
Japan
Australia
United States
Canada
United States
Australia
United States
Japan
South Korea
Regulated
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No-in most countries
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Agency
USDA
CFIA
RSADA
Status
Licensed
Licensed
Licensed
USDA
CFIA
RSADA
Licensed
Licensed
Licensed
USDA
Licensed
CFIA
MAFF
ADAFF
Licensed
Licensed
Licensed
USDA
CFIA
Licensed
Licensed
USDA
ADAFF
Licensed
Licensed
FDA
MAFF
NVRQS
Licensed
Licensed
Licensed
Our market is intensely competitive. Our competitors include independent animal health companies and major
pharmaceutical companies that have animal health divisions. We also compete with independent, third-party distributors, including
distributors who sell products under their own private labels. In the point-of-care diagnostic testing market, our major competitors
include IDEXX Laboratories, Inc. (“IDEXX”), Abaxis, Inc. (“Abaxis”) and Synbiotics Corporation (“Synbiotics”), a company
acquired by Pfizer Inc. (“Pfizer”) in January 2011. The products manufactured by our OVP segment for sale by third parties compete
with similar products offered by a number of other companies, some of which have substantially greater financial, technical, research
and other resources than us and may have more established marketing, sales, distribution and service organizations than our OVP
segment’s customers. Companies with a significant presence in the animal health market such as Bayer AG, CEVA Santé Animale,
Merck & Co., Inc., Merial Limited (a company owned by sanofi-aventis), Novartis AG, Pfizer, Vétoquinol S.A. and Virbac S.A. may
be marketing or developing products that compete with our products or would compete with them if successfully developed. These
and other competitors and potential competitors may have substantially greater financial, technical, research and other resources and
larger, more established marketing, sales, distribution and service organizations than we do. Our competitors may offer broader
product lines and have greater name recognition than we do.
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Environmental Regulation
In connection with our product development activities and manufacturing of our biological, pharmaceutical and diagnostic
and detection products, we are subject to federal, state and local laws, rules, regulations and policies governing the use, generation,
manufacture, storage, handling and disposal of certain materials, biological specimens and wastes. Although we believe that we have
complied with these laws, regulations and policies in all material respects and have not been required to take any significant action to
correct any noncompliance, we may be required to incur significant costs to comply with environmental and health and safety
regulations in the future. Although we believe that our safety procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be
eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed
our resources.
Employees
As of December 31, 2010, we and our subsidiaries employed 276 people, of whom 132 were focused in production and
technical and logistical services, including instrumentation service, 92 in sales, marketing and customer support, 44 in general
administrative services, such as accounting, and 8 in product development. We believe that our ability to attract and retain skilled
personnel is critical to our success. None of our employees is covered by a collective bargaining agreement, and we believe our
employee relations are good.
Where You Can Find Additional Information
You may review a copy of this annual report on Form 10-K, including exhibits and any schedule filed therewith, and obtain
copies of such materials at prescribed rates, at the Securities and Exchange Commission’s Public Reference Room in Room 1580, 100
F Street, NE, Washington, D.C. 20549-0102. You may obtain information on the operation of the Public Reference Room by calling
the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as
Heska Corporation, that file electronically with the Securities and Exchange Commission.
Executive Officers of the Registrant
Our executive officers and their ages as of March 18, 2011 are as follows:
Name
Robert B. Grieve, Ph.D.
Michael J. McGinley, Ph.D.
Jason A. Napolitano
Michael A. Bent
Nancy Wisnewski, Ph.D.
Age
59
50
42
56
48
Position
Chairman of the Board and Chief Executive Officer
President and Chief Operating Officer
Executive Vice President, Chief Financial Officer and Secretary
Vice President, Principal Accounting Officer and Controller
Vice President, Product Development and Technical Customer Service
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Robert B. Grieve, Ph.D., one of our founders, currently serves as Chief Executive Officer and Chairman of the Board.
Dr. Grieve was named Chief Executive Officer effective January 1, 1999, Vice Chairman effective March 1992 and Chairman of the
Board effective May 2000. Dr. Grieve also served as Chief Scientific Officer from December 1994 to January 1999 and Vice
President, Research and Development, from March 1992 to December 1994. He has been a member of our Board of Directors since
1990. He holds a Ph.D. degree from the University of Florida and M.S. and B.S. degrees from the University of Wyoming.
Michael J. McGinley, Ph.D. was appointed President and Chief Operating Officer effective January 1, 2009. He previously
served as Vice President, Global Operations from April through December 2008, Vice President, Operations and Technical Affairs and
General Manager, Heska Des Moines from January 2002 to April 2008 and in other positions beginning in June 1997. Prior to joining
Heska, Dr. McGinley held positions with Bayer Animal Health and Fort Dodge Laboratories. He holds Doctorate and M.S. degrees in
Immunobiology from Iowa State University and successfully completed the Advanced Management Program at the Harvard Business
School in 2008.
Jason A. Napolitano was appointed Executive Vice President and Chief Financial Officer in May 2002. He was appointed
our Secretary in February 2009. He also served as our Secretary from May 2002 to December 2006. Prior to joining us formally, he
was a financial consultant. From 1990 to 2001, Mr. Napolitano held various positions at Credit Suisse First Boston, an investment
bank, including Vice President in health care investment banking and Director in mergers and acquisitions. He holds a B.S. degree
from Yale University.
Michael A. Bent was appointed Vice President, Principal Accounting Officer and Controller in May 2002. From
September 1999 until April 2002, he was Corporate Controller. From November 1993 until September 1999, Mr. Bent was Director,
Accounting Operations at Coors Brewing Company. Mr. Bent holds a B.S. in accounting from the University of Wyoming. Mr. Bent is
a CPA in Colorado and Wyoming.
Nancy Wisnewski, Ph.D. was appointed Vice President, Product Development and Technical Customer Service in
December 2006. From January 2006 to November 2006, Dr. Wisnewski was Vice President, Research and Development. She served
as Senior Director, Research and Development from April 2001 until December 2005. Dr. Wisnewski held various positions in
Heska’s Research and Development organization between 1993 and 2001. She holds a Doctorate in Parasitology/Biochemistry from
the University of Notre Dame and a B.S. in Biology from Lafayette College.
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Item 1A. Risk Factors
Our future operating results may vary substantially from period to period due to a number of factors, many of which are
beyond our control. The following discussion highlights some of these factors and the possible impact of these factors on future results
of operations. The risks and uncertainties described below are not the only ones we face. Additional risks or uncertainties not presently
known to us or that we deem to be currently immaterial also may impair our business operations. If any of the following factors
actually occur, our business, financial condition or results of operations could be harmed. In that case, the price of our common stock
could decline and you could experience losses on your investment.
If the third parties to whom we granted substantial marketing rights for certain of our existing products or future
products under development are not successful in marketing those products, then our sales and financial position may suffer.
Our agreements with our corporate marketing partners generally contain no or small minimum purchase requirements in
order for them to maintain their exclusive or co-exclusive marketing rights. We are party to an agreement with Schering-Plough
Animal Health Corporation (“SPAH”) which grants SPAH exclusive distribution and marketing rights in the U.S. for our canine
heartworm preventive product, TRI-HEART Plus Chewable Tablets. Novartis Japan markets and distributes our SOLO STEP CH
heartworm test in Japan under an exclusive arrangement. AgriLabs has the non-exclusive right to sell certain of our bovine vaccines in
the United States, Africa and Mexico and currently generates all of our sales of those vaccines in those territories. One or more of
these marketing partners may not devote sufficient resources to marketing our products. For example, on March 9, 2009, Merck &
Co., Inc. (“Old Merck”) and Schering-Plough Corporation (“SGP”) announced plans to merge. SGP was the parent company of SPAH.
Old Merck and sanofi-aventis (“Sanofi”) each owned 50% of Merial Limited (“Merial”), a company which sells a canine heartworm
preventive (the “Existing Product”) competitive with ours. On July 30, 2009, Old Merck and Sanofi announced that they had entered
into an agreement under which Old Merck was to sell its interest in Merial to Sanofi and that Sanofi was to receive a call option
exercisable after the merger of Old Merck and SGP to essentially combine Merial with the animal health business of SGP (“SAH”),
including SPAH, in a new joint venture company (“Newco”) equally owned by Sanofi and the company created from the merger of
Old Merck and SGP. Old Merck subsequently completed its merger with SGP and the surviving parent entity was renamed Merck &
Co., Inc. (“Merck”). On March 9, 2010, Sanofi announced that it had exercised its option to combine Merial with SAH. In a
February 9, 2011 press release, Sanofi stated the closing of the transaction to create Newco is expected in the first half of 2011 and is
subject to execution of the final agreement, antitrust review in the U.S., Europe and other countries and other customary closing
conditions. In its Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange
Commission (“SEC”) on February 28, 2011, Merck stated that the closing of the transaction to create Newco is expected in the third
quarter of 2011, is subject to the execution of final agreements, regulatory review in the United States, Europe and other countries and
other customary closing conditions, and that its agreement with Sanofi provides if the transaction has not been completed by March
30, 2011 either party may terminate the proposed joint venture without paying a break-up fee or other penalty. Revenue from Merck
entities, including SPAH, represented 13% of our 2010 revenue. If Merck, SGP, SAH, SPAH, Newco or any related entity is required
to divest or cease operations related to our heartworm preventive in order to complete a merger or other combination, our sales could
decline significantly and our business could be damaged. Similarly, if SPAH personnel are distracted or experience turmoil as a result
of the merger between Merial and SAH, a future combination between SPAH and any other entity or for other reasons, our sales could
decline significantly. Furthermore, there may be nothing to prevent these partners from pursuing alternative technologies or products
that may compete with our products in current or future agreements. For example, we believe a unit of SAH has obtained FDA
approval for a canine heartworm preventive product with additional claims compared with our TRI-HEART Plus Chewable Tablets.
Should Merck, SGP, SAH, SPAH and/or Newco decide to emphasize sales and marketing efforts of this product and/or the Existing
Product rather than our TRI-HEART Plus Chewable Tablets or cancel our agreement regarding canine heartworm preventive
distribution and marketing, our sales could decline significantly. In the future, third-party marketing assistance may not be available on
reasonable terms, if at all. If any of these events occur, we may not be able to maintain our current market share or commercialize our
products and our sales will decline accordingly.
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We may be unable to successfully market and sell our products.
We may not successfully develop and maintain marketing and/or sales capabilities, and we may not be able to make
arrangements with third parties to perform these activities on satisfactory terms. If our marketing and sales strategy is unsuccessful,
our ability to sell our products will be negatively impacted and our revenues will decrease. The loss of distribution rights for products
or failure to gain access to new products may cause damage to our reputation and adversely affect our business and future prospects.
We believe the recent worldwide economic weakness has had a negative effect on our business, and this may continue in
the future. This is particularly notable in the sale of new instruments, which is a capital expenditure many, if not most, veterinarians
may choose to defer in times of perceived economic weakness. Even if the overall economy begins to grow in the future, there may be
a lag before veterinarians display confidence such growth will continue and return to historical capital expenditure purchasing
patterns. As the vast majority of cash flow to veterinarians ultimately is funded by pet owners without private insurance or government
support, our business may be more susceptible to severe economic downturns than other health care businesses which rely less on
individual consumers.
The market for companion animal healthcare products is highly fragmented. Because our Core Companion Animal Health
proprietary products are generally available only to veterinarians or by prescription and our medical instruments require technical
training to operate, we ultimately sell all our Core Companion Animal Health products to or through veterinarians. The acceptance of
our products by veterinarians is critical to our success. Changes in our ability to obtain or maintain such acceptance or changes in
veterinary medical practice could significantly decrease our anticipated sales.
We currently sell and market most of our Core Companion Animal Health products in the United States to veterinarians
through an outside field organization of approximately 36 individuals, an inside sales force of approximately 24 individuals,
independent third-party distributors, as well as through trade shows and print advertising. To be successful in these endeavors, we will
have to effectively market our products and continue to develop and train our direct sales force as well as the sales personnel of our
independent third-party distributors. In January 2010, we gave notice of contract termination to most domestic independent third-party
distributors who carried our full product line. Sales to distributors whose underlying contracts have been canceled since the beginning
of 2009 represented 1% of our 2010 revenue. We intend to compete with these distributors primarily through direct sales efforts going
forward. There can be no assurance we will be successful in competing with these or other distributors, that these distributors will not
damage our business, and/or that we will not lose sales and experience damage to our financial results as a result of the termination of
these agreements. We believe that one of our largest competitors, IDEXX, in effect prohibits its distributors from selling competitive
products, including our diagnostic instruments and heartworm diagnostic tests, which may hinder our ability to sell and market our
products if these distributors are increasingly successful.
The loss of significant customers could harm our operating results.
Revenue from Merck entities, including SPAH, represented approximately 13% of our total revenue for the twelve months
ended December 31, 2010 and 11% of our revenue for the twelve months ended December 31, 2009. Sales to no other single customer
accounted for more than 10% of our consolidated revenue for the twelve months ended December 31, 2010 and 2009. No single
customer accounted for more than 10% of our consolidated accounts receivable at December 31, 2010 and 2009. The loss of
significant customers who, for example, are historically large purchasers or who are considered leaders in their field could damage our
business and financial results.
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We operate in a highly competitive industry, which could render our products obsolete or substantially limit the volume
of products that we sell. This would limit our ability to compete and maintain sustained profitability.
The market in which we compete is intensely competitive. Our competitors include independent animal health companies
and major pharmaceutical companies that have animal health divisions. We also compete with independent, third-party distributors,
including distributors who sell products under their own private labels. In the point-of-care diagnostic testing market, our major
competitors include IDEXX, Abaxis and Synbiotics, a company acquired by Pfizer in January 2011. The products manufactured by
our OVP segment for sale by third parties compete with similar products offered by a number of other companies, some of which have
substantially greater financial, technical, research and other resources than us and may have more established marketing, sales,
distribution and service organizations than our OVP segment’s customers. Competitors may have facilities with similar capabilities to
our OVP segment, which they may operate and sell at a lower unit price to customers than our OVP segment does, which could cause
us to lose customers. Companies with a significant presence in the companion animal health market, such as Bayer AG, CEVA Santé
Animale, Eli Lilly and Company, Merck, Merial (a company owned by Sanofi), Novartis AG, Pfizer, Vétoquinol S.A. and Virbac S.A.
may be marketing or developing products that compete with our products or would compete with them if developed. These and other
competitors and potential competitors may have substantially greater financial, technical, research and other resources and larger,
more established marketing, sales and service organizations than we do. Our competitors may offer broader product lines and have
greater name recognition than we do. For example, if Pfizer is successful in integrating Synbiotics and devotes its significant
commercial and financial resources to growing Synbiotics’ market share, our sales could suffer significantly. Our competitors may
also develop or market technologies or products that are more effective or commercially attractive than our current or future products
or that would render our technologies and products obsolete. Further, additional competition could come from new entrants to the
animal health care market. Moreover, we may not have the financial resources, technical expertise or marketing, sales or support
capabilities to compete successfully. We believe that one of our largest competitors, IDEXX, in effect prohibits its distributors from
selling competitive products, including our diagnostic instruments and heartworm diagnostic tests. Another of our competitors,
Abaxis, recently launched a stand-alone canine heartworm diagnostic test competitive with ours and a heartworm diagnostic test
conducted as part of a chemistry profile on its chemistry analyzer.
If we fail to compete successfully, our ability to achieve sustained profitability will be limited and sustained profitability, or
profitability at all, may not be possible.
We rely substantially on third-party suppliers. The loss of products or delays in product availability from one or more
third-party suppliers could substantially harm our business.
To be successful, we must contract for the supply of, or manufacture ourselves, current and future products of appropriate
quantity, quality and cost. Such products must be available on a timely basis and be in compliance with any regulatory requirements.
Failure to do so could substantially harm our business.
We rely on third-party suppliers to manufacture those products we do not manufacture ourselves. Proprietary products
provided by these suppliers represent a majority of our revenue. We currently rely on these suppliers for our veterinary instruments
and consumable supplies for these instruments, for our point-of-care diagnostic and other tests, for the manufacture of our allergy
immunotherapy treatment products as well as for the manufacture of other products.
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The loss of access to products from one or more suppliers could have a significant, negative impact on our business. For
example, the largest of our suppliers (the “Canceling Supplier”) in 2009 provided us with their proprietary handheld diagnostic
instruments and affiliated proprietary cartridges and supplies (the “Canceled Products”). On May 1, 2009, the Canceling Supplier
informed us that they were canceling our contractual agreement as of November 1, 2009. Under our agreement with the Canceling
Supplier, our rights became non-exclusive upon receipt of such notice. We subsequently learned through a Form 8-K filing with the
SEC that Abaxis, one of our major competitors, had signed an agreement with the Canceling Supplier to distribute certain Canceled
Products into the animal health market and that such rights were to be exclusive outside of Japan on November 1, 2009.
Approximately 15% of our 2009 revenue was related to the proprietary products manufactured by the Canceling Supplier. We no
longer have access to the Canceled Products to sell to our installed base of customers and experienced a significant decline in revenue
and gross margin in 2010 as compared to 2009 related to Canceled Products as a result. There can be no assurance we will be able to
find an acceptable alternative product to the Canceled Products, that any such product could compete effectively against the Canceled
Products, directly or in a niche, or that any such product will be available in a timely or economic manner. Less than 1% of our 2010
revenue was from the Canceled Products.
Other major suppliers who sell us proprietary products which are responsible for more than 5% of our LTM revenue are
Arkray Global Business, Inc. (“Arkray”), Boule Medical AB, FUJIFILM Corporation and Quidel Corporation. None of these suppliers
sold us proprietary products which were responsible for more than 20% of 2010 revenue, although the proprietary products of two
were each responsible for more than 15% of 2010 revenue and the proprietary products of one other was responsible for more than
10% of 2010 revenue. We often purchase products from our suppliers under agreements that are of limited duration or potentially can
be terminated on an annual basis. In the case of our veterinary diagnostic instruments other than for lactate, we are typically entitled to
non-exclusive access to consumable supplies for a defined period upon expiration of exclusive rights, which could subject us to
competitive pressures in the period of non-exclusive access. Although we believe we will be able to maintain supply of our major
product offerings in the near future, there can be no assurance that our suppliers will meet their obligations under any agreements we
may have in place with them or that we will be able to compel them to do so. Risks of relying on suppliers include:
•
•
•
The loss of product rights upon expiration or termination of an existing agreement. Unless we are able to find an
alternate supply of a similar product, we would not be able to continue to offer our customers the same breadth of
products and our sales and operating results would likely suffer. In the case of an instrument supplier, we could also
potentially suffer the loss of sales of consumable supplies, which would be significant in cases where we have built a
significant installed base, further harming our sales prospects and opportunities. The Canceling Supplier eliminating
our access to the Canceled Products is an example of such a situation. Even if we were able to find an alternate supply
for a product to which we lost rights, we would likely face increased competition from the product whose rights we
lost being marketed by a third party or the former supplier and it may take us additional time and expense to gain the
necessary approvals and launch an alternative product.
Changes in economics. An underlying change in the economics with a supplier, such as a large price increase or new
requirement of large minimum purchase amounts, could have a significant, adverse affect on our business, particularly
if we are unable to identify and implement an alternative source of supply in a timely manner.
Loss of exclusivity. In the case of our veterinary diagnostic instruments, if we are entitled to non-exclusive access to
consumable supplies for a defined period upon expiration of exclusive rights, we may face increased competition from
a third party with similar non-exclusive access or our former supplier, which could cause us to lose customers and/or
significantly decrease our margins and could significantly affect our financial results. For example, a third-party has
gained access to chemistry instrument test strips and supplies for our previous chemistry instrument which are
manufactured by Arkray, has increased competition for these products with our customers and such competition may
cause us to lose customers and/or significantly decrease our margins in the future. In addition, current agreements, or
agreements we may negotiate in the future, with suppliers may require us to meet minimum annual sales levels to
maintain our position as the exclusive distributor of these products. We may not meet these minimum sales levels and
maintain exclusivity over the distribution and sale of these products. If we are not the exclusive distributor of these
products, competition may increase significantly, reducing our revenues and/or decreasing our margins.
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•
High switching costs. In our diagnostic instrument products we could face significant competition and lose all or some
of the consumable revenues from the installed base of those instruments if we were to switch to a competitive
instrument. If we need to change to other commercial manufacturing contractors for certain of our regulated products,
additional regulatory licenses or approvals must be obtained for these contractors prior to our use. This would require
new testing and compliance inspections prior to sale thus resulting in potential delays. Any new manufacturer would
have to be educated in, or develop substantially equivalent processes necessary for the production of our products. We
likely would have to train our sales force, distribution network employees and customer support organization on the
new product and spend significant funds marketing the new product to our customer base.
•
Inability to meet minimum obligations. Current agreements, or agreements we may negotiate in the future, may
commit us to certain minimum purchase or other spending obligations. It is possible we will not be able to create the
market demand to meet such obligations, which could create a drain on our financial resources and liquidity. Some
such agreements may require minimum purchases and/or sales to maintain product rights and we may be significantly
harmed if we are unable to meet such requirements and lose product rights.
•
•
•
•
The involuntary or voluntary discontinuation of a product line. Unless we are able to find an alternate supply of a
similar product in this or similar circumstances with any product, we would not be able to continue to offer our
customers the same breadth of products and our sales would likely suffer. Even if we are able to identify an alternate
supply, it may take us additional time and expense to gain the necessary approvals and launch an alternative product,
especially if the product is discontinued unexpectedly. An example of such a situation arose in 2006 when Dolphin
Medical Inc. (a majority-owned subsidiary of OSI Systems, Inc.) discontinued production of our VET/OX G2
DIGITAL Monitor as part of an agreement with Masimo Corporation to settle a patent dispute.
Inconsistent or inadequate quality control. We may not be able to control or adequately monitor the quality of
products we receive from our suppliers. Poor quality items could damage our reputation with our customers.
Limited capacity or ability to scale capacity. If market demand for our products increases suddenly, our current
suppliers might not be able to fulfill our commercial needs, which would require us to seek new manufacturing
arrangements and may result in substantial delays in meeting market demand. If we consistently generate more
demand for a product than a given supplier is capable of handling, it could lead to large backorders and potentially lost
sales to competitive products that are readily available. This could require us to seek or fund new sources of supply,
which may be difficult to find unless it is under terms that are less advantageous.
Regulatory risk. Our manufacturing facility and those of some of our third-party suppliers are subject to ongoing
periodic unannounced inspection by regulatory authorities, including the FDA, USDA and other federal, state and
foreign agencies for compliance with strictly enforced Good Manufacturing Practices, regulations and similar foreign
standards, and we do not have control over our suppliers’ compliance with these regulations and standards. Violations
could potentially lead to interruptions in supply that could cause us to lose sales to readily available competitive
products.
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•
•
Developmental delays. We may experience delays in the scale-up quantities needed for product development that
could delay regulatory submissions and commercialization of our products in development, causing us to miss key
opportunities.
Limited intellectual property rights. We typically do not have intellectual property rights, or may have to share
intellectual property rights, to the products themselves and any improvements to the manufacturing processes or new
manufacturing processes for our products.
Potential problems with suppliers such as those discussed above could substantially decrease sales, lead to higher costs,
and/or damage our reputation with our customers due to factors such as poor quality goods or delays in order fulfillment, resulting in
our being unable to sell our products effectively and substantially harm our business.
We may not be able to continue to achieve sustained profitability or increase profitability on a quarterly or annual basis.
Prior to 2005, we incurred net losses on an annual basis since our inception in 1988 and, as of December 31, 2010, we had
an accumulated deficit of $171.8 million. We have achieved only one quarter with income before income taxes greater than
$1.5 million. Accordingly, relatively small differences in our performance metrics may cause us to lose money in future periods. Our
ability to continue to be profitable in future periods will depend, in part, on our ability to increase sales in our Core Companion
Animal Health segment, including maintaining and growing our installed base of instruments and related consumables, to maintain or
increase gross margins and to limit the increase in our operating expenses to a reasonable level as well as avoid or effectively manage
any unanticipated issues. We may not be able to generate, sustain or increase profitability on a quarterly or annual basis. If we cannot
achieve or sustain profitability for an extended period, we may not be able to fund our expected cash needs, including the repayment
of debt as it comes due, or continue our operations.
Our future revenues depend on successful product development, commercialization and/or market acceptance, any of
which can be slower than we expect or may not occur.
The product development and regulatory approval process for many of our potential products is extensive and may take
substantially longer than we anticipate. Research projects may fail. New products that we may be developing for the veterinary
marketplace may not perform up to our expectations. Because we have limited resources to devote to product development and
commercialization, any delay in the development of one product or reallocation of resources to product development efforts that prove
unsuccessful may delay or jeopardize the development of other product candidates. If we fail to successfully develop new products
and bring them to market in a timely manner, our ability to generate additional revenue will decrease.
Even if we are successful in the development of a product or obtain rights to a product from a third-party supplier, we may
experience delays or shortfalls in commercialization and/or market acceptance of the product. For example, veterinarians may be slow
to adopt a product or there may be delays in producing large volumes of a product. The former is particularly likely where there is no
comparable product available or historical use of such a product. For example, while we believe our E.R.D.-HEALTHSCREEN urine
tests for dogs and cats, introduced in 2002 and 2003, respectively, represented a significant scientific breakthrough in companion
animal annual health examinations, these products have achieved significantly lower market acceptance than we anticipated. The
ultimate adoption of a new product by veterinarians, the rate of such adoption and the extent veterinarians choose to integrate such a
product into their practice are all important factors in the economic success of one of our new products and are factors that we do not
control to a large extent. If our products do not achieve a significant level of market acceptance, demand for our products will not
develop as expected and our revenues will be lower than we anticipate.
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Many of our expenses are fixed and if factors beyond our control cause our revenue to fluctuate, this fluctuation could
cause greater than expected losses, cash flow and liquidity shortfalls.
We believe that our future operating results will fluctuate on a quarterly basis due to a variety of factors which are generally
beyond our control, including:
•
•
•
•
•
•
•
•
•
•
•
•
supply of products from third-party suppliers or termination, cancelation or expiration of such relationships, such as
the recent decision by the Canceling Supplier to cancel our contractual agreement as of November 1, 2009;
competition and pricing pressures from competitive products;
the introduction of new products by our competitors or by us;
large customers failing to purchase at historical levels;
fundamental shifts in market demand;
manufacturing delays;
shipment problems;
information technology problems, which may prevent us from conducting our business effectively, or at all, and may
also raise our costs;
regulatory and other delays in product development;
product recalls or other issues which may raise our costs;
changes in our reputation and/or market acceptance of our current or new products; and
changes in the mix of products sold.
We have high operating expenses, including those related to personnel. Many of these expenses are fixed in the short term
and may increase over the course of the coming year. If any of the factors listed above cause our revenues to decline, our operating
results could be substantially harmed.
Obtaining and maintaining regulatory approvals in order to market our products may be costly and delay the marketing
and sales of our products. Failure to meet all regulatory requirements could cause significant losses from effected inventory and
the loss of market share.
Many of the products we develop, market or manufacture may subject us to extensive regulation by one or more of the
USDA, the FDA, the EPA and foreign and other regulatory authorities. These regulations govern, among other things, the
development, testing, manufacturing, labeling, storage, pre-market approval, advertising, promotion and sale of some of our products.
Satisfaction of these requirements can take several years and time needed to satisfy them may vary substantially, based on the type,
complexity and novelty of the product. The decision by a regulatory authority to regulate a currently non-regulated product or product
area could significantly impact our revenue and have a corresponding adverse impact on our financial performance and position while
we attempt to comply with the new regulation, if such compliance is possible at all.
The effect of government regulation may be to delay or to prevent marketing of our products for a considerable period of
time and to impose costly procedures upon our activities. We have experienced in the past, and may experience in the future,
difficulties that could delay or prevent us from obtaining the regulatory approval or license necessary to introduce or market our
products. Such delays in approval may cause us to forego a significant portion of a new product’s sales in its first year due to
seasonality and advanced booking periods associated with certain products. Regulatory approval of our products may also impose
limitations on the indicated or intended uses for which our products may be marketed. Difficulties in making established products to
all regulatory specifications may lead to significant losses related to effected inventory as well as market share. For instance, in 2010
we discovered we had produced a significant level of cattle vaccine product in our OVP segment which conformed to regulatory
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specifications for safety, potency and efficacy but not purity. We did not ship any related cattle vaccine product in the three months
ended June 30, 2010 as we investigated and worked to resolve the situation. In compliance with USDA regulations we destroyed any
product which did not meet regulatory specifications, and offered our customers replacement product for any product so destroyed.
The net cost of destroyed product, replacement product and related reserves was $1.4 million in 2010. There can be no assurance that
the ultimate cost will not exceed the level of the current reserve, that our efforts at remediation to ensure this or similar problems will
not recur in the future will be successful, or that the USDA will not suspend our ability to produce these, similar or other products for
an extended time at some point in the future.
Among the conditions for certain regulatory approvals is the requirement that our facilities and/or the facilities of our third-
party manufacturers conform to current Good Manufacturing Practices and other requirements. If any regulatory authority determines
that our manufacturing facilities or those of our third-party manufacturers do not conform to appropriate manufacturing requirements,
we or the manufacturers of our products may be subject to sanctions, including, but not limited to, warning letters, manufacturing
suspensions, product recalls or seizures, injunctions, refusal to permit products to be imported into or exported out of the United
States, refusals of regulatory authorities to grant approval or to allow us to enter into government supply contracts, withdrawals of
previously approved marketing applications, civil fines and criminal prosecutions. In addition, certain of our agreements may require
us to pay penalties if we are unable to supply products, including for failure to maintain regulatory approvals. Any of these events,
alone or in unison, could damage our business.
We have historically not consistently generated positive cash flow from operations, may need additional capital and any
required capital may not be available on reasonable terms or at all.
If our actual performance deviates from our operating plan, we may be required to raise additional capital in the future. If
necessary, we expect to raise these additional funds by the sale of equity securities or the issuance of new term debt secured by the
same assets as the term loans which were fully repaid in 2010. There is no guarantee that additional capital will be available from
these sources on reasonable terms, if at all, and certain of these sources may require approval by existing lenders. The public markets
may be unreceptive to equity financings and we may not be able to obtain additional private equity or debt financing. Any equity
financing would likely be dilutive to stockholders and additional debt financing, if available, may include restrictive covenants and
increased interest rates that would limit our currently planned operations and strategies. Additionally, funds we expect to be available
under our existing revolving line of credit may not be available and other lenders could refuse to provide us with additional debt
financing. We believe the credit markets are particularly restrictive and difficult to obtain funding in versus recent history.
Furthermore, even if additional capital is available, it may not be of the magnitude required to meet our needs under these or other
scenarios. If additional funds are required and are not available, it would likely have a material adverse effect on our business,
financial condition and our ability to continue as a going concern.
We may face costly legal disputes, including related to our intellectual property or technology or that of our suppliers or
collaborators.
We may face legal disputes related to our business. Even if meritless, these disputes may require significant expenditures on
our part and could entail a significant distraction to members of our management team or other key employees. We may have to use
legal means to collect payment for goods shipped to third parties. For example, we are currently involved in arbitration with two of
our former distributors to whom we gave notice of contract termination in January 2010 regarding matters including amounts past due,
for which we have recorded no specific reserves, and counterclaims made by both former distributors. A legal dispute leading to an
unfavorable ruling or settlement could have significant material adverse consequences on our business.
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We may become subject to additional patent infringement claims and litigation in the United States or other countries or
interference proceedings conducted in the United States Patent and Trademark Office, or USPTO, to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO interference proceedings and related legal and
administrative proceedings are likely to be costly, time-consuming and distracting. As is typical in our industry, from time to time we
and our collaborators and suppliers have received, and may in the future receive, notices from third parties claiming infringement and
invitations to take licenses under third-party patents. Any legal action against us or our collaborators or suppliers may require us or our
collaborators or suppliers to obtain one or more licenses in order to market or manufacture affected products or services. However, we
or our collaborators or suppliers may not be able to obtain licenses for technology patented by others on commercially reasonable
terms, or at all, may not be able to develop alternative approaches if unable to obtain licenses or current and future licenses may not be
adequate, any of which could substantially harm our business. An example of such a situation arose in 2006 when Dolphin Medical
Inc. (a majority-owned subsidiary of OSI Systems, Inc.) discontinued production of our VET/OX G2 DIGITAL Monitor as part of an
agreement with Masimo Corporation to settle a patent dispute.
We may also need to pursue litigation to enforce any patents issued to us or our collaborative partners, to protect trade
secrets or know-how owned by us or our collaborative partners, or to determine the enforceability, scope and validity of the
proprietary rights of others. Any litigation or interference proceeding will likely result in substantial expense to us and significant
diversion of the efforts of our technical and management personnel. Any adverse determination in litigation or interference
proceedings could subject us to significant liabilities to third parties. Further, as a result of litigation or other proceedings, we may be
required to seek licenses from third parties which may not be available on commercially reasonable terms, if at all.
We often depend on third parties for products we intend to introduce in the future. If our current relationships and
collaborations are not successful, we may not be able to introduce the products we intend to in the future.
We are often dependent on third parties and collaborative partners to successfully and timely perform research and
development activities to successfully develop new products. For example, we jointly developed point-of-care diagnostic products
with Quidel Corporation. In other cases, we have discussed Heska marketing in the veterinary market an instrument being developed
by a third party for use in the human health care market. In the future, one or more of these third parties or collaborative partners may
not complete research and development activities in a timely fashion, or at all. Even if these third parties are successful in their
research and development activities, we may not be able to come to an economic agreement with them. If these third parties or
collaborative partners fail to complete research and development activities, fail to complete them in a timely fashion, or if we are
unable to negotiate economic agreements with such third parties or collaborative partners, our ability to introduce new products will
be impacted negatively and our revenues may decline.
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Our Public Common Stock has certain transfer restrictions which could reduce trading liquidity from what it otherwise
would have been and have other undesired affects. Our recently completed 1-for-10 reverse stock split could also reduce liquidity
in our stock. In addition, our stock price has historically experienced high volatility, and could do so in the future.
On May 4, 2010, our shareholders approved an amendment (the “Amendment”) to our Restated Certificate of
Incorporation. The Amendment places restrictions on the transfer of our stock that could adversely affect our ability to use our
domestic net operating loss carryforward (“NOL”). In particular, the Amendment prevents the transfer of shares without the approval
of our Board of Directors if, as a consequence, an individual, entity or groups of individuals or entities would become a 5-percent
holder under Section 382 of the Internal Revenue Code of 1986, as amended, and the related Treasury regulations, and also prevents
any existing 5-percent holder from increasing his or her ownership position in the Company without the approval of our Board of
Directors. This may cause certain individuals or entities who may have otherwise been willing and able to bid on our stock to not do
so, reducing the class of potential acquirers and trading liquidity from what it otherwise might have been. The Amendment could also
have an adverse impact on the value of our stock if certain buyers who would otherwise have purchased our stock, including buyers
who may not be comfortable owning stock with transfer restrictions, do not purchase our stock as a result of the Amendment. In
addition, because some corporate takeovers occur through the acquirer’s purchase, in the public market or otherwise, of sufficient
shares to give it control of a company, any provision that restricts the transfer of shares can have the effect of preventing a takeover.
The Amendment could discourage or otherwise prevent accumulations of substantial blocks of shares in which our common
stockholders might receive a substantial premium above market value and might tend to insulate management and the Board of
Directors against the possibility of removal to a greater degree than had the Amendment not passed.
We completed a 1-for-10 reverse stock split effective December 30, 2010. The liquidity of our Public Common Stock could
be adversely affected by the reduced number of shares resulting from the reverse stock split. Our reverse stock split may have left
certain stockholders with one or more “odd lots”, which are stock holdings in fewer than 100 shares of Public Common Stock. These
odd lots may be more difficult to sell and may incur higher brokerage commissions when sold than shares of our Public Common
Stock in multiples of 100, reducing liquidity. Furthermore, due to the increased price per share following our 1-for-10 reverse stock
split, certain smaller investors may be unwilling or unable to purchase shares of our Public Common Stock, also reducing liquidity.
The securities markets have experienced significant price and volume fluctuations and the market prices of securities of
many microcap and smallcap companies have in the past been, and can in the future be expected to be, especially volatile. During the
twelve months ended December 31, 2010, our closing stock price has ranged from a low of $3.90 to a high of $9.70 when adjusted for
our December 30, 2010 reverse stock split . Fluctuations in the trading price or liquidity of our common stock may adversely affect
our ability to raise capital through future equity financings. Factors that may have a significant impact on the market price and
marketability of our common stock include:
•
•
•
•
•
•
•
•
•
•
•
•
stock sales by large stockholders or by insiders;
changes in the outlook for our business, including any changes in our earnings guidance;
our quarterly operating results, including as compared to our revenue, earnings or other guidance and in comparison to
historical results;
termination, cancellation or expiration of our third-party supplier relationships;
announcements of technological innovations or new products by our competitors or by us;
litigation;
regulatory developments, including delays in product introductions;
developments or disputes concerning patents or proprietary rights;
availability of our revolving line of credit and compliance with debt covenants;
releases of reports by securities analysts;
economic and other external factors; and
general market conditions.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has
often been instituted. If a securities class action suit is filed against us, it is likely we would incur substantial legal fees and our
management’s attention and resources would be diverted from operating our business in order to respond to the litigation.
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If we are unable to maintain various financial and other covenants required by our credit facility agreement we will be
unable to borrow any funds under the agreement and fund our operations.
Under our credit and security agreement with Wells Fargo Bank, National Association (“Wells Fargo”), we are required to
comply with various financial and non-financial covenants in order to borrow under the agreement. The availability of borrowings
under this agreement is essential to continue to fund our operations. Among the financial covenants is a requirement to maintain
minimum liquidity (cash plus excess borrowing base) of $1.5 million. Additional requirements include covenants for minimum capital
monthly and minimum net income quarterly. Although we believe we will be able to maintain compliance with all these covenants and
any covenants we may negotiate in the future, there can be no assurance thereof. We have not always been able to maintain
compliance with all covenants under our credit and security agreement with Wells Fargo in the past. Although Wells Fargo granted us
a waiver of non-compliance in each case, there can be no assurance we will be able to obtain similar waivers or other modifications if
needed in the future on economic terms, if at all. Failure to comply with any of the covenants, representations or warranties, or failure
to modify them to allow future compliance, could result in our being in default and could cause all outstanding borrowings under our
credit and security agreement to become immediately due and payable, or impact our ability to borrow under the agreement. In
addition, Wells Fargo has discretion in setting the advance rates which we may borrow against eligible assets. We intend to rely on
available borrowings under the credit and security agreement to fund our operations in the future. If we are unable to borrow funds
under this agreement, we will need to raise additional capital from other sources to continue our operations, which capital may not be
available on acceptable terms, or at all.
Our Public Common Stock is listed on the Nasdaq Capital Market and we may not be able to maintain that listing,
which may make it more difficult for you to sell your shares.
Our Public Common Stock is listed on the Nasdaq Capital Market. The Nasdaq has several quantitative and qualitative
requirements companies must comply with to maintain this listing, including a $1.00 minimum bid price. We completed a 1-for-10
reverse stock split effective December 30, 2010 in order to resolve an ongoing minimum bid price deficiency. While we believe we are
currently in compliance with all Nasdaq requirements, there can be no assurance we will continue to meet Nasdaq listing requirements
including the minimum bid price, that Nasdaq will interpret these requirements in the same manner we do if we believe we meet the
requirements, or that Nasdaq will not change such requirements or add new requirements to include requirements we do not meet in
the future. If we are delisted from the Nasdaq Capital Market, our common stock may be considered a penny stock under the
regulations of the SEC and would therefore be subject to rules that impose additional sales practice requirements on broker-dealers
who sell our securities. The additional burdens imposed upon broker-dealers may discourage broker-dealers from effecting
transactions in our common stock, which could severely limit market liquidity of the common stock and any stockholder’s ability to
sell our securities in the secondary market. This lack of liquidity would also likely make it more difficult for us to raise capital in the
future.
Interpretation of existing legislation, regulations and rules or implementation of future legislation, regulations and rules
could cause our costs to increase or could harm us in other ways.
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) has increased our required administrative actions and expenses as a
public company since its enactment. The general and administrative costs of complying with Sarbanes-Oxley will depend on how it is
interpreted over time. Of particular concern are the level of standards for internal control evaluation and reporting adopted under
Section 404 of Sarbanes-Oxley. If our regulators and/or auditors adopt or interpret more stringent standards than we anticipate, we
and/or our auditors may be unable to conclude that our internal controls over financial reporting are designed and operating
effectively, which could adversely affect investor confidence in our financial statements. Even if we and our auditors are able to
conclude that our internal controls over financial reporting are designed and operating effectively in such a circumstance, our general
and administrative costs are likely to increase. Similarly, we anticipate we will be required to comply with the SEC’s mandate to
provide interactive data using the eXtensible Business Reporting Language (“XBRL”) as an exhibit to certain SEC filings in 2011. We
anticipate compliance with this mandate will require a significant time investment, which may preclude some of our employees from
spending time on more productive matters. In addition, actions by other entities, such as enhanced rules to maintain our listing on the
Nasdaq Capital Market, could also increase our general and administrative costs or have other adverse effects on us, as could further
legislative, regulatory or rule-making action or more stringent interpretations of existing legislation, regulations and rules.
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Changes to financial accounting standards may affect our results of operations, cause us to change our business
practices or have a negative impact on us if we fail to track such changes.
We prepare our financial statements in conformance with United States generally accepted accounting principles, or GAAP.
These accounting principles are established by and are subject to interpretation by the SEC, the Financial Accounting Standards Board
and others who interpret and create accounting policies. A change in those policies can have a significant effect on our reported results
and may affect our reporting of transactions completed before a change is made effective. Such changes may adversely affect our
reported financial results, the way we conduct our business or have a negative impact on us if we fail to track such changes. For
example, we have found the Financial Standards Accounting Board’s (“FASB”) recent decision to codify the accounting standards has
made it more difficult to research complex accounting matters, increasing the risk we will fail to account consistent with the FASB
rules in the future.
We depend on key personnel for our future success. If we lose our key personnel or are unable to attract and retain
additional personnel, we may be unable to achieve our goals.
Our future success is substantially dependent on the efforts of our senior management and other key personnel. The loss of
the services of members of our senior management or other key personnel may significantly delay or prevent the achievement of our
business objectives. Although we have an employment agreement with many of these individuals, all are at-will employees, which
means that either the employee or Heska may terminate employment at any time without prior notice. If we lose the services of, or fail
to recruit, key personnel, the growth of our business could be substantially impaired. We do not maintain key person life insurance for
any of our senior management or key personnel.
We may face product returns and product liability litigation in excess of or not covered by our insurance coverage or
indemnities and/or warranties from our suppliers. If we become subject to product liability claims resulting from defects in our
products, we may fail to achieve market acceptance of our products and our sales could substantially decline.
The testing, manufacturing and marketing of our current products as well as those currently under development entail an
inherent risk of product liability claims and associated adverse publicity. Following the introduction of a product, adverse side effects
may be discovered. Adverse publicity regarding such effects could affect sales of our other products for an indeterminate time period.
To date, we have not experienced any material product liability claims, but any claim arising in the future could substantially harm our
business. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under
the terms of the policy. We may not be able to continue to obtain adequate insurance at a reasonable cost, if at all. In the event that we
are held liable for a claim against which we are not indemnified or for damages exceeding the $10 million limit of our insurance
coverage or which results in significant adverse publicity against us, we may lose revenue, be required to make substantial payments
which could exceed our financial capacity and/or lose or fail to achieve market acceptance.
We may be held liable for the release of hazardous materials, which could result in extensive clean up costs or otherwise
harm our business.
Certain of our products and development programs produced at our Des Moines, Iowa facility involve the controlled use of
hazardous and biohazardous materials, including chemicals and infectious disease agents. Although we believe that our safety
procedures for handling and disposing of such materials comply with the standards prescribed by applicable local, state and federal
regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident,
we could be held liable for any fines, penalties, remediation costs or other damages that result. Our liability for the release of
hazardous materials could exceed our resources, which could lead to a shutdown of our operations, significant remediation costs and
potential legal liability. In addition, we may incur substantial costs to comply with environmental regulations if we choose to expand
our manufacturing capacity.
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Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Properties.
Our principal administrative and research and development activities are located in Loveland, Colorado. We currently lease
approximately 60,000 square feet at a facility in Loveland, Colorado under an agreement which expires in 2023. Our principal
production facility located in Des Moines, Iowa, consists of 168,000 square feet of buildings on 34 acres of land, which we own. We
also own a 175-acre farm used principally for testing products, located in Carlisle, Iowa. Our European facility in Fribourg,
Switzerland is leased under an agreement which expires in 2015.
Item 3.
Legal Proceedings.
From time to time, we may be involved in litigation related to claims arising out of our operations. At December 31, 2010,
we had no material litigation pending.
Item 4.
Removed and Reserved.
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PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is quoted on the Nasdaq Capital Market under the symbol “HSKA.” The following table sets forth the
high and low sales prices for our common stock as reported by the Nasdaq Capital Market, adjusted for our 1-for-10 reverse stock split
effective December 30, 2010, for the periods indicated below:
2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2011
First Quarter (through March 17)
$
High
Low
$
3.90
5.90
5.80
6.30
8.20
9.30
6.80
5.30
7.22
1.70
2.40
3.20
3.60
5.20
5.50
4.10
4.00
4.65
As of March 17, 2011, there were approximately 260 holders of record of our common stock and approximately 3,700
beneficial stockholders. We have never declared or paid cash dividends on our capital stock and do not anticipate paying any cash
dividends in the near future. In addition, we are restricted from paying dividends, other than dividends payable solely in stock, under
the terms of our credit facility. We currently intend to retain future earnings, if any, for the development of our business.
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STOCK PRICE PERFORMANCE GRAPH
The following graph provides a comparison over the five-year period ended December 31, 2010 of the cumulative total
stockholder return from a $100 investment in the Company’s common stock with the Center for Research in Securities Prices Total
Return Index for Nasdaq Medical Devices, Instruments and Supplies, Manufacturers and Distributors Stocks (the “Nasdaq Medical
Devices Index”), the CRSP Total Return Index for Nasdaq Pharmaceutical Stocks (the “Nasdaq Pharmaceutical Index”) and the CRSP
Total Return Index for the Nasdaq Stock Market (U.S. and Foreign) (the “Nasdaq U.S. & Foreign Index”).
Comparison of Cumulative Total Return Among Heska Corporation,
the Nasdaq Medical Devices Index, the Nasdaq Pharmaceutical Index and the Nasdaq U.S. and
Foreign Index
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Table of Contents
Item 6.
Selected Consolidated Financial Data.
The following consolidated statement of operations and consolidated balance sheet data have been derived from our
consolidated financial statements. The information set forth below is not necessarily indicative of the results of future operations and
should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
the Consolidated Financial Statements and related Notes included as Items 7 and 8 in this Form 10-K. We completed a 1-for-10
reverse stock split effective December 30, 2010. Except as otherwise indicated, all related amounts reported below have been
retroactively adjusted for the effect of this reverse stock split.
2006
Year Ended December 31,
2007
2009
2008
(in thousands, except per share amounts)
2010
Consolidated Statement of
Operations Data:
Revenue:
Core companion animal health
Other vaccines, pharmaceuticals and
products
Total revenue, net
Cost of revenue
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring expenses
Other
Total operating expenses
Operating income (loss)
Interest and other expense, net
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
Shares used for basic net income (loss)
per share
Shares used for diluted net income
(loss) per share
Consolidated Balance Sheet Data:
Cash and cash equivalents
Total current assets
Total assets
Line of credit
Current portion of long-term debt and
capital leases
Total current liabilities
Long-term debt and capital leases
Long-term deferred revenue and other
Total stockholders’ equity
$
62,968
$
67,279
$
68,140
$
66,449
$
55,655
12,092
75,060
15,056
82,335
13,513
81,653
9,229
75,678
9,796
65,451
44,414
49,148
52,809
47,219
40,659
30,646
33,187
28,844
28,459
24,792
16,109
2,679
8,925
—
(47)
27,666
5,521
588
4,933
(29,875)
34,808
6.81
6.27
$
$
$
17,640
1,951
8,917
785
232
29,525
(681)
640
(1,321)
(471)
(850)
(0.17)
(0.17)
$
$
$
14,524
1,718
8,173
—
—
24,415
4,044
306
3,738
1,496
2,242
0.43
0.43
$
$
$
14,726
1,597
8,111
—
—
24,434
358
289
69
51
18
0.00
0.00
5,110
5,167
5,207
5,220
5,551
5,167
5,212
5,254
$
5,524
35,127
75,591
12,614
776
25,195
1,151
6,362
42,883
$
4,705
31,290
70,438
11,042
770
22,228
381
5,306
42,523
$
5,400
28,493
64,134
4,201
381
14,107
—
4,972
45,055
5,492
27,279
63,048
3,079
—
12,660
—
4,590
45,798
14,356
3,483
9,887
—
(155)
27,571
3,075
1,041
2,034
206
1,828
0.36
0.35
5,035
5,293
5,275
30,652
38,495
8,022
1,275
21,980
1,927
7,840
6,748
$
$
$
$
$
$
$
$
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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction
with “Selected Consolidated Financial Data” and the Consolidated Financial Statements and related Notes included in Items 6 and 8 of
this Form 10-K.
This discussion contains forward-looking statements that involve risks and uncertainties. Such statements, which include
statements concerning future revenue sources and concentration, gross profit margins, selling and marketing expenses, research and
development expenses, general and administrative expenses, capital resources, additional 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 on March 18, 2011, and we undertake no duty and do not intend
to update this information.
Overview
We develop, manufacture, market, sell and support veterinary products. Our business is comprised of two reportable
segments, Core Companion Animal Health, which represented 85% of our 2010 revenue, and Other Vaccines, Pharmaceuticals and
Products which represented 15% of our 2010 revenue.
The Core Companion Animal Health segment (“CCA”) includes diagnostic and other instruments and supplies as well as
single use diagnostic and other tests, pharmaceuticals and vaccines, primarily for canine and feline use.
Diagnostic and other instruments and supplies represented approximately 42% of our 2010 revenue. Many products in this
area involve placing an instrument in the field and generating future revenue from consumables, including items such as supplies and
service, as that instrument is used. Approximately 29% of our 2010 revenue resulted from the sale of such consumables to an installed
base of instruments and approximately 13% of our revenue was from new hardware. A loss of or disruption in supply of consumables
we are selling to an installed base of instruments could substantially harm our business. For example, the supplier of our handheld
blood analysis instruments informed us in May 2009 of the cancellation of our contractual agreement as of November 2009 and that
they would not supply us with any related instruments or consumables following cancellation. We had established a large installed
base of handheld blood analysis instruments and sales of instruments and affiliated consumables in this area represented 15% of our
2009 revenue. Accordingly, we experienced a significant decline in revenue and gross margin related to our handheld blood analysis
instruments in 2010 as compared to 2009. All of our diagnostic instruments and supplies are furnished to us by third parties, who
typically own the product rights and sell the product to us under marketing and/or distribution agreements. In many cases, we have
collaborated with a third party to adapt a human instrument for veterinary use. Major products in this area include our chemistry
instruments, our hematology instruments and our new blood gas instruments and their affiliated operating consumables. Revenue from
products in these three areas, including revenue from consumables, represented approximately 38% of our 2010 revenue.
Other CCA revenue, including single use diagnostic and other tests, pharmaceuticals and vaccines as well as research and
development, licensing and royalty revenue, represented approximately 43% of our 2010 revenue. Since items in this area are single
use by their nature, our 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 in this area include our heartworm diagnostic tests, our heartworm preventive, our allergy test kits, our allergy
immunotherapy and our allergy diagnostic tests. Combined revenue from heartworm-related products and allergy-related products
represented approximately 39% of our 2010 revenue.
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We consider the CCA segment to be our core business and devote most of our management time and other resources to
improving the prospects for this segment. Maintaining a continuing, reliable and economic supply of products we currently obtain
from third parties is critical to our success in this area. Virtually all of our sales and marketing expenses are in the Core Companion
Animal Health segment. The majority of our research and development spending is dedicated to this segment, as well. We strive to
provide high value products and advance the state of veterinary medicine.
All our CCA products are ultimately sold to or through veterinarians. In many cases, veterinarians will mark up their costs
to the end user. The acceptance of our products by veterinarians is critical to our success. CCA products are sold directly by us as well
as through distribution relationships, such as our corporate agreement with SPAH, the sale of kits to conduct blood testing to third-
party veterinary diagnostic laboratories and independent third-party distributors. Revenue from direct sales and distribution
relationships represented approximately 68% and 32% of Core Companion Animal Health 2010 revenue, respectively. In
January 2010, we gave notice of contract termination to most domestic independent third-party distributors who carried our full
product line and, accordingly, the percent of our revenue from distribution relationships declined in 2010 as compared to 2009.
We intend to increase profitability through a combination of revenue growth, gross margin improvement and expense
control. Accordingly, we closely monitor revenue growth trends in our CCA segment. Revenue in this segment decreased by
$10.8 million, or 16%, in 2010 as compared to 2009. The largest factor in this decline was lower sales of consumables for our
handheld blood analysis instruments which declined by $9.3 million in 2010 as compared to 2009, primarily due to the loss of supply
discussed above. In addition, we believe poor economic conditions over the past year have impacted our revenue growth as, for
example, veterinarians have delayed or deferred capital expenditures on new diagnostic instrumentation.
The Other Vaccines, Pharmaceuticals and Products segment (“OVP”) includes our 168,000 square foot USDA- and FDA-
licensed production facility in Des Moines, Iowa. We view this facility as an asset which will allow us to control our cost of goods on
any vaccines and pharmaceuticals that we may commercialize in the future. Virtually all our U.S. inventory is now stored at this
facility and most fulfillment logistics are managed there. CCA segment products manufactured at this facility are transferred at cost
and are not recorded as revenue for our OVP segment. We view OVP reported revenue as revenue primarily to cover the overhead
costs of the facility and to generate incremental cash flow to fund our CCA segment.
Our OVP segment includes private label vaccine and pharmaceutical production, primarily for cattle but also for other
animals such as small mammals. All OVP products are sold by third parties under third party labels.
We have developed our own line of bovine vaccines that are licensed by the USDA. We have a long-term, non-exclusive
agreement with a distributor, Agri Laboratories, Ltd., (“AgriLabs”), for the marketing and sale of certain of these vaccines which are
sold primarily under the TitaniumÒ and MasterGuardÒ brands which are registered trademarks of AgriLabs. This agreement generates
a significant portion of our OVP segment’s revenue. Our OVP segment also produces vaccines and pharmaceuticals for other third
parties.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon the consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation
of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the
reported amounts of revenue and expense during the periods. These estimates are based on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. We have identified those critical accounting policies used in
reporting our financial position and results of operations based upon a consideration of those accounting policies that involve the most
complex or subjective decisions or assessment. We consider the following to be our critical policies.
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Revenue Recognition
We generate our revenue through the sale of products, as well as through licensing of technology product rights,
royalties and sponsored research and development. Our policy is to recognize revenue when the applicable revenue
recognition criteria have been met, which generally include the following:
•
•
•
•
Persuasive evidence of an arrangement exists;
Delivery has occurred or services rendered;
Price is fixed or determinable; and
Collectability is reasonably assured.
Revenue from the sale of products is recognized after both the goods are shipped to the customer and acceptance has
been received, if required, with an appropriate provision for estimated returns and allowances. We do not permit
general returns of products sold. Certain of our products have expiration dates. Our policy is to exchange certain
outdated, expired product with the same product. We record an accrual for the estimated cost of replacing the expired
product expected to be returned in the future, based on our historical experience, adjusted for any known factors that
reasonably could be expected to change historical patterns, such as regulatory actions which allow us to extend the
shelf life of our products. Revenue from both direct sales to veterinarians and sales to independent third-party
distributors are generally recognized when goods are shipped. Our products are shipped complete and ready to use by
the customer. The terms of the customer arrangements generally pass title and risk of ownership to the customer at the
time of shipment. Certain customer arrangements provide for acceptance provisions. Revenue for these arrangements
is not recognized until the acceptance has been received or the acceptance period has lapsed. We reduce our revenue
by the estimated cost of any rebates, allowances or similar programs, which are used as promotional programs.
Recording revenue from the sale of products involves the use of estimates and management judgment. We must make
a determination at the time of sale whether the customer has the ability to make payments in accordance with
arrangements. While we do utilize past payment history, and, to the extent available for new customers, public credit
information in making our assessment, the determination of whether collectability is reasonably assured is ultimately a
judgment decision that must be made by management. We must also make estimates regarding our future obligation
relating to returns, rebates, allowances and similar other programs.
License revenue under arrangements to sell or license product rights or technology rights is recognized as obligations
under the agreement are satisfied, which generally occurs over a period of time. Generally, licensing revenue is
deferred and recognized over the estimated life of the related agreements, products, patents or technology.
Nonrefundable licensing fees, marketing rights and milestone payments received under contractual arrangements are
deferred and recognized over the remaining contractual term using the straight-line method.
Recording revenue from license arrangements involves the use of estimates. The primary estimate made by
management is determining the useful life of the related agreement, product, patent or technology. We evaluate all of
our licensing arrangements by estimating the useful life of either the product or the technology, the length of the
agreement or the legal patent life and defer the revenue for recognition over the appropriate period.
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Occasionally we enter into arrangements that include multiple elements. Such arrangements may include the licensing
of technology and manufacturing of product. In these situations we must determine whether the various elements meet
the criteria to be accounted for as separate elements. If the elements cannot be separated, revenue is recognized once
revenue recognition criteria for the entire arrangement have been met or over the period that the Company’s
obligations to the customer are fulfilled, as appropriate. If the elements are determined to be separable, the revenue is
allocated to the separate elements based on relative fair value and recognized separately for each element when the
applicable revenue recognition criteria have been met. In accounting for these multiple element arrangements, we
must make determinations about whether elements can be accounted for separately and make estimates regarding their
relative fair values.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts receivable based on client-specific allowances, as well as a general
allowance. Specific allowances are maintained for clients which are determined to have a high degree of collectability
risk based on such factors, among others, as: (i) the aging of the accounts receivable balance; (ii) the client’s past
payment experience; (iii) a deterioration in the client’s financial condition, evidenced by weak financial condition
and/or continued poor operating results, reduced credit ratings, and/or a bankruptcy filing. In addition to the specific
allowance, the Company maintains a general allowance for credit risk in its accounts receivable which is not covered
by a specific allowance. The general allowance is established based on such factors, among others, as: (i) the total
balance of the outstanding accounts receivable, including considerations of the aging categories of those accounts
receivable; (ii) past history of uncollectable accounts receivable write-offs; and (iii) the overall creditworthiness of the
client base. A considerable amount of judgment is required in assessing the realizability of accounts receivable.
Should any of the factors considered in determining the adequacy of the overall allowance change, an adjustment to
the provision for doubtful accounts receivable may be necessary.
Inventories
Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method.
Inventories are written down if the estimated net realizable value of an inventory item is less than its recorded value.
We review the carrying cost of our inventories by product each quarter to determine the adequacy of our reserves for
obsolescence. In accounting for inventories we must make estimates regarding the estimated net realizable value of
our inventory. This estimate is based, in part, on our forecasts of future sales and shelf life of product.
Deferred Tax Assets — Valuation Allowance
Our deferred tax assets, such as an NOL, are reduced by an offsetting valuation allowance based on judgmental
assessment of available evidence if we are unable to conclude that it is more likely than not that some or all of the
related deferred tax assets will be realized. If we are able to conclude it is more likely than not that we will realize a
future benefit from a deferred tax asset, we will reduce the related valuation allowance by an amount equal to the
estimated quantity of income taxes we would pay in cash if we were not to utilize the deferred tax asset in the future.
The first time this occurs in a given jurisdiction, it will result in a net deferred tax asset on our balance sheet and an
income tax benefit of equal magnitude in our statement of operations in the period we make the determination. In
future periods, we will then recognize as income tax expense the estimated quantity of income taxes we would have
paid in cash had we not utilized the related deferred tax asset. The corresponding journal entry will be a reduction of
our deferred tax asset. If there is a change regarding our tax position in the future, we will make a corresponding
adjustment to the related valuation allowance.
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Results of Operations
The following table summarizes our results of operations for the three most recent fiscal years:
Consolidated Statement of Operations Data:
Revenue:
Core companion animal health
Other vaccines, pharmaceuticals and products
Total revenue, net
Cost of revenue
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring expenses
Other
Total operating expenses
Operating income (loss)
Interest and other expense, net
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
Revenue
Year Ended December 31,
2008
2010
2009
(in thousands except per share amounts)
$
$
68,140
13,513
81,653
$
66,449
9,229
75,678
55,655
9,796
65,451
52,809
47,219
40,659
28,844
28,459
24,792
17,640
1,951
8,917
785
232
29,525
(681)
640
(1,321)
(471)
(850)
(0.17)
(0.17)
$
$
$
14,524
1,718
8,173
—
—
24,415
4,044
306
3,738
1,496
2,242
0.43
0.43
$
$
$
14,726
1,597
8,111
—
—
24,434
358
289
69
51
18
0.00
0.00
$
$
$
Total revenue decreased 14% to $65.5 million in 2010 compared to $75.7 million in 2009. Total revenue decreased 7% to
$75.7 million in 2009 compared to $81.7 million in 2008.
CCA segment revenue decreased 16% to $55.7 million in 2010 compared to $66.4 million in 2009. The largest factor in this
decline was lower sales of consumables for our handheld blood analysis instruments which declined by $9.3 million in 2010 compared
to 2009, primarily due to the loss of supply following cancellation of the underlying contract by our supplier. Other factors in the
decline were lower sales of our heartworm diagnostic tests internationally and lower sales of our IV pumps. CCA segment revenue
decreased by $1.7 million, or 3%, to $66.4 million in 2009 from $68.1 million in 2008. The largest factor in this decline was lower
sales of consumables for our handheld blood analysis instruments which declined by $2.9 million in 2009 as compared to 2008,
primarily due to the loss of supply following cancellation of the underlying contract by our supplier. Other factors in the decline were
lower sales of our chemistry instruments and our microalbumin laboratory packs. These declines were somewhat offset by increased
sales of our non-handheld related instrument consumables, international sales of our heartworm diagnostic tests and sales of our
heartworm preventive.
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OVP segment revenue increased 6% to $9.8 million in 2010 compared to $9.2 million in 2009. Greater sales of bulk bovine
and other biologicals were key factors in the increase. This was somewhat offset by lower sales of cattle vaccines under our contract
with AgriLabs. We had issues producing cattle vaccines to appropriate specifications and, as a result, did not ship any related cattle
vaccine products in the three months ended June 30, 2010 and replaced certain cattle vaccine inventory with new cattle vaccine
inventory in the three months ended December 31, 2010. OVP segment revenue decreased 32% to $9.2 million in 2009 compared to
$13.5 million in 2008. The largest factor in this decline was loss of fish vaccine revenue from AquaHealth, a unit of Novartis, a
customer who had previously informed us that they would be taking their production in-house and accordingly ordered no product
from us in 2009. Lower revenue under our contract with AgriLabs and lower sales of bulk bovine biologicals also contributed to the
year-over-year decline in this segment.
We expect 2011 total revenue to increase as compared with 2010.
Cost of Revenue
2010 Cost of revenue was $40.7 million, a decrease of 14% compared to $47.2 million in 2009. Gross profit decreased 13%
to $24.8 million in 2010 from $28.5 million in 2009. Gross Margin, i.e. gross profit divided by total revenue, increased to 37.9% in
2010 from 37.6% in 2009. A key factor in the increase was product mix, where the overall sales shift was toward higher margin
products. This was somewhat offset by approximately $1.4 million in costs for destroyed product, replacement product and related
reserves in our OVP segment regarding to regulatory issues with certain of our cattle vaccines.
Cost of revenue totaled $47.2 million for the twelve months ended December 31, 2009, an 11% decrease as compared to
$52.8 million for the corresponding period in 2008. Gross profit decreased 1% to $28.5 million for 2009 as compared to $28.8 million
in 2008. Gross Margin increased to 37.6% for 2009 as compared to 35.3% in 2008. Lower reserves taken against inventory we expect
to expire prior to sale, primarily related to consumables for our chemistry instruments and our handheld diagnostic instruments were a
factor in the increase. Another factor in the increase was revenue mix as a lower percentage of revenue in 2009 was related to our
OVP segment, which tends to generate lower Gross Margin than our CCA segment.
We expect Gross Margin to increase in 2011 as compared to 2010.
Operating Expenses
Selling and marketing expenses increased by 1% to $14.7 million in 2010 compared to $14.5 million in 2009. Spending
related to the full launch of our new blood gas analyzer in 2010 was a factor in the increase. Selling and marketing expenses decreased
by 18% to $14.5 million in 2009 compared to $17.6 million in 2008. Key factors in the decline were lower expenses related to product
launches, decreased expenditures on market research and lower commissions.
Research and development expenses decreased by $121 thousand to $1.6 million in 2010 from $1.7 million in 2009.
Research and development expenses decreased by $233 thousand to $1.7 million in 2009 from $2.0 million in 2008. A factor in the
decline was lower spending on research and development resources, such as laboratory supplies, in both cases.
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General and administrative expenses were $8.1 million in 2010, a 1% decline as compared to $8.2 million in 2009. A factor
in the decline was no Management Incentive Plan (“MIP”) payouts were earned in 2010 while there was an MIP payout earned in
2009. General and administrative expenses were $8.2 million in 2009, an 8% decrease as compared to $8.9 million in 2008. A key
factor in the decline was savings resulting from our restructuring at the end of 2008.
In 2008, we recorded restructuring expenses of approximately $785 thousand, consisting of approximately $621 thousand
related primarily to personnel severance and other costs for certain individuals affected by our restructuring in December 2008 and
$164 thousand related to inventory of discontinued products, including a monitoring product the manufacturer had informed us it no
longer intends to support. We recorded no restructuring expenses in 2010 or 2009.
Other operating expenses of approximately $232 thousand in 2008 relate to an asset impairment charge related to certain
rental instruments we owned. We recognized no corresponding asset impairment charges in 2010 or 2009.
We expect 2011 operating expenses will be higher than in 2010.
Interest and Other Expense, Net
Interest and other expense, net was $289 thousand in 2010, as compared to $306 thousand in 2009 and $640 thousand in
2008. This line item can be broken into two components: net interest expense and net foreign currency gains and losses. Net interest
expense was $131 thousand in 2010, as compared to $343 thousand in 2009 and $576 thousand in 2008. The largest factor in the
decrease in 2010 as compared to 2009 and in 2009 as compared to 2008 was lower loan balances and lower market interest rates,
somewhat offset by an increased interest rate spread negotiated with Wells Fargo in December 2008. Net foreign currency losses were
$158 thousand in 2010 and $82 thousand in 2008 and net foreign currency gains were $37 thousand in 2009.
We expect interest and other expense, net to decrease in 2011 as compared to 2010 as we do not anticipate net foreign
currency losses to occur at the same level in 2011 as they did in 2010.
Income Tax Expense (Benefit)
In 2010, we had $61 thousand of current tax expense and $10 thousand in deferred tax benefit. The largest component of
2010 current tax expense relates to the profitable operating performance of our Swiss subsidiary. Domestically, the effect of permanent
differences between tax and GAAP accounting, such as incentive stock option amortization, at low profitability levels tends to raise
the implied tax rate and contributed to our unusually high 74% tax rate. In 2009, domestic deferred income tax expense, a non-cash
expense, represented $1.3 million of our $1.5 million tax expense. In 2008, domestic deferred income tax benefits related to our loss
before income taxes was the primary reason we recorded a $471 thousand income tax benefit.
In 2011, we expect higher income tax expense as opposed to 2010 as we expect higher pre-tax income in 2011 as compared
to 2010.
Net Income (Loss)
Our 2010 net income was $18 thousand as compared to 2009 net income of $2.2 million and a net loss of $850 thousand in
2008. Lower year-over-year revenue was the key factor in the decline in net income between 2010 and 2009. Lower operating
expenses were a key factor in the improvement in 2009 as compared to 2008.
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We expect net income will be higher in 2011 than in 2010, primarily as a result of increased revenue and increased Gross
Margin, somewhat offset by increased operating expenses.
Liquidity, Capital Resources and Financial Condition
We have incurred net cumulative negative cash flow from operations since our inception in 1988. For the year ended
December 31, 2010, we had net income of $18 thousand. In 2010, net cash provided by operations was $1.9 million. At December 31,
2010, we had $5.5 million of cash and cash equivalents, working capital of $14.6 million and $3.1 million of outstanding borrowings
under our revolving line of credit, discussed below.
Net cash flows from operating activities provided cash of $1.9 million as compared to providing cash of $8.6 million in
2009. The largest factor in the change was a $3.8 million decrease in cash provided from inventory as we did not lower our inventory
level at year end 2010 compared to year end 2009 as much as in 2009 compared to 2008, and we had a greater non-cash transfer of
inventory to property and equipment in 2010 as compared to 2009. Other major factors in the change were a $2.2 million decrease in
cash provided by net income resulting from our operating performance and a $1.3 million decrease in cash provided by deferred tax
benefit resulting from our lower level of profitability in 2010. This was somewhat offset by a $1.4 million decline in cash used by
deferred revenue and other, primarily relating to lower contractual prepayments near year end and lower upfront payment amortization
scheduled for 2010 versus 2009. Net cash flows from operating activities provided cash of $8.6 million in 2009 as compared to
providing cash of $1.7 million in 2008. The major factors in the improvement in 2009 as compared to 2008 were a $3.1 million
increase in net income, a $2.5 million improvement in cash provided by inventory as we lowered our inventory levels at year end 2009
compared to year end 2008, including relating to the loss of supply of consumables for our handheld diagnostic instruments, a
$2.0 million improvement in cash provided by accounts payable primarily due to inventory paid for in 2008 and received in 2007 to a
greater degree than for inventory paid for in 2009 and received in 2008, and a $1.8 million improvement in deferred tax expense
primarily related to the utilization of our domestic NOL. This was somewhat offset by a $1.3 million decline in cash provided by
accounts receivable as we lowered our accounts receivable balance to a greater degree from 2007 to 2008 than from 2008 to 2009, a
$701 thousand decline in cash provided by depreciation and amortization with a key factor being lower depreciation related to
instrumentation demonstration units and $585 thousand decline in cash provided by accrued liabilities and other items, of which
restructuring expenses recognized in 2008 but paid in cash in 2009 were a factor.
Net cash flows from investing activities used cash of $620 thousand in 2010 as compared to using cash of $276 thousand in
2009 and using cash of $554 thousand in 2008. Purchases of property and equipment increased $344 thousand in 2010 as compared to
2009, primarily due to greater property and equipment purchases in our OVP segment. Purchases of property and equipment in 2009
decreased $278 thousand as compared to 2008, primarily due to lower purchases of property and equipment in our OVP segment.
Net cash flows from financing activities used cash of $1.4 million in 2010, used cash of $7.6 million in 2009 and used cash
of $2.0 million in 2008. In 2010, we used cash to reduce our borrowings under our line of credit by $1.1 million and repay the
remaining principal on term debt of $381 thousand which was partially offset by proceeds from the issuance of common stock under
our Employee Stock Purchase Plan and upon option exercises. In 2009, we used cash to reduce our borrowings under our line of credit
by $6.8 million and repay principal on term debt of $770 thousand which was partially offset by proceeds from the issuance of
common stock under our Employee Stock Purchase Plan. In 2008 we used cash to reduce our borrowings under our line of credit by
$1.6 million and repay principal on term debt of $776 thousand which was partially offset by proceeds from the issuance of common
stock upon option exercises and in our Employee Stock Purchase Plan totaling $372 thousand. We repaid less and more debt under our
revolving line of credit in 2010 as compared to 2009 and 2009 as compared to 2008, respectively, primarily because we had greater
cash provided by operating activities in 2009 as compared to 2010 and 2008.
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At December 31, 2010, we had a $15.0 million asset-based revolving line of credit with Wells Fargo which has a maturity
date of December 31, 2013. At December 31, 2010, $3.1 million was outstanding under this line of credit. Our ability to borrow under
this line of credit varies based upon available cash, eligible accounts receivable and eligible inventory. On December 31, 2010, interest
was charged at a stated rate of three month LIBOR plus 5.75% and was payable monthly. Based on an amendment to our agreement
with Wells Fargo signed in December 2010, interest was charged at a stated rate of three month LIBOR plus 5.75% beginning on
December 1, 2010 — an increase from three month LIBOR plus 4.00% prior to December 1 — and we expect a decrease in interest
rate to three month LIBOR plus 4.75% beginning April 1, 2011 based on our 2010 financial performance. We are required to comply
with various financial and non-financial covenants, and we have made various representations and warranties under our agreement
with Wells Fargo. Among the financial covenants is a requirement to maintain a minimum liquidity (cash plus excess borrowing base)
of $1.5 million. Additional requirements include covenants for minimum capital monthly and minimum net income quarterly. Failure
to comply with any of the covenants, representations or warranties could result in our being in default on the loan and could cause all
outstanding amounts payable to Wells Fargo to become immediately due and payable or impact our ability to borrow under the
agreement. We were in compliance with all financial covenants as of December 31, 2010. At December 31, 2010, our remaining
available borrowing capacity based upon eligible accounts receivable and eligible inventory under our revolving line of credit was
approximately $5.9 million.
At December 31, 2010, we had deferred revenue and other long term liabilities, net of current portion, of approximately
$4.6 million. Included in this total is approximately $1.9 million of deferred revenue related to up-front fees that have been received
for certain product rights and technology rights out-licensed. These deferred amounts are being recognized on a straight-line basis over
the remaining lives of the agreements, products, patents or technology.
Our primary short-term need for capital, which is subject to change, is to fund our operations, which consist of continued
sales and marketing, general and administrative and research and development efforts, working capital associated with increased
product sales and capital expenditures relating to maintaining and developing our manufacturing operations. Our future liquidity and
capital requirements will depend on numerous factors, including the extent to which our marketing and selling efforts, as well as those
of third parties who market, sell and distribute our products, are successful in increasing our revenue, competition, the extent to which
currently planned products and/or technologies under development are successfully developed, launched and sold, any changes
required by regulatory bodies to maintain our operations and other factors.
Our financial plan for 2011 indicates that our available cash and cash equivalents, together with cash from operations and
borrowings expected to be available under our revolving line of credit, will be sufficient to fund our operations through 2011 and into
2012. However, our actual results may differ from this plan, and we may be required to consider alternative strategies. We may be
required to raise additional capital in the future. If necessary, we expect to raise these additional funds through the sale of equity
securities or the issuance of new term debt secured by the same assets as the term loans which were fully repaid in 2010. There is no
guarantee that additional capital will be available from these sources on acceptable terms, if at all, and certain of these sources may
require approval by existing lenders. If we cannot raise the additional funds through these options on acceptable terms or with the
necessary timing, management could also reduce discretionary spending to decrease our cash burn rate through actions such as
delaying or canceling budgeted hiring activities or marketing plans. These actions would likely extend the then available cash and cash
equivalents, and then available borrowings to some degree. See “Risk Factors” in Item 1A of this Form 10-K for a discussion of some
of the factors that affect our capital raising alternatives.
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A summary of our contractual obligations at December 31, 2010 is shown below:
Less Than
Payments Due by Period (in thousands)
4-5
1-3
Years
Years
1 Year
After
5 Years
Total
Contractual Obligations
Line of credit
Operating leases
Unconditional purchase obligations
Total contractual cash obligations
$
$
3,079
23,347
11,972
38,398
$
$
3,079
2,116
1,245
6,440
$
$
—
5,715
4,877
10,592
$
$
—
3,522
5,850
9,372
$
$
—
11,994
—
11,994
In addition to those agreements considered above where our contractual obligation is fixed, we are party to commercial
agreements which may require us to make milestone payments under certain circumstances. All milestone obligations which we
believe are likely to be triggered but are not yet paid are included in “Unconditional Purchase Obligations” in the table above. We do
not believe other potential milestone obligations, some of which we consider to be of remote likelihood of ever being triggered, will
have a material impact on our liquidity, capital resources or financial condition in the foreseeable future.
Net Operating Loss Carryforwards
As of December 31, 2010, we had a net domestic operating loss carryforward, or NOL, of approximately $160.7 million, a
domestic alternative minimum tax credit carryforward of approximately $257 thousand and a domestic research and development tax
credit carryforward of approximately $352 thousand for federal tax purposes. Our federal NOL is scheduled to expire as follows:
$15.1 million at the end of 2011, $32.1 million at the end of 2012, $107.5 million in 2018 through 2022, $5.5 million in 2024 and
2025 and $407 thousand in 2027 through 2029 and the balance in 2018 through 2025. The NOL and tax credit carryforwards are
subject to alternative minimum tax limitations and to examination by the tax authorities. In addition, we had a “change of ownership”
as defined under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended (an “Ownership Change”). We
believe the latest Ownership Change occurred at the time of our initial public offering in July 1997. We do not believe this Ownership
Change will place a significant restriction on our ability to utilize our NOLs in the future.
Recent Accounting Pronouncements
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial
assets. The guidance requires additional disclosures for transfers of financial assets and changes the requirements for derecognizing
financial assets. The guidance was effective for fiscal years beginning after November 15, 2009. The implementation of this standard
did not have a material impact on our consolidated financial position and results of operations.
In October 2009, the FASB issued guidance on revenue recognition to require companies to allocate revenue in multiple-
element arrangements based on an element’s estimated selling price if vendor-specific or other third-party evidence of value is not
available. This guidance is effective beginning January 1, 2011 with earlier application permitted. The adoption of this guidance will
not have a material impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows due to
adverse changes in financial and commodity market prices and rates. We are exposed to market risk in the areas of changes in United
States and foreign interest rates and changes in foreign currency exchange rates as measured against the United States dollar. These
exposures are directly related to our normal operating and funding activities.
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Interest Rate Risk
The interest payable on certain of our lines of credit and other borrowings is variable based on Wells Fargo three month
LIBOR and, therefore, is affected by changes in market interest rates. At December 31, 2010, approximately $3.1 million was
outstanding on these lines of credit and other borrowings with a weighted average interest rate of 6.05%. We also had approximately
$5.5 million of cash and cash equivalents at December 31, 2010, the majority of which was invested in liquid interest bearing
accounts. We had no interest rate hedge transactions in place on December 31, 2010. We completed an interest rate risk sensitivity
analysis based on the above and an assumed one-percentage point increase/decrease in interest rates. If market rates increase/decrease
by one percentage point, we would experience a decrease/increase in annual interest expense of approximately $24 thousand based on
our outstanding balances as of December 31, 2010.
Foreign Currency Risk
Our investment in foreign assets consists primarily of our investment in our European subsidiary. Foreign currency risk
may impact our results of operations. In cases where we purchase inventory in one currency and sell corresponding products in
another, our gross margin percentage is typically at risk based on foreign currency exchange rates. In addition, in cases where we may
be generating operating income in foreign currencies, the magnitude of such operating income when translated into U.S. dollars will
be at risk based on foreign currency exchange rates. Our agreements with suppliers and customers vary significantly in regard to the
existence and extent of currency adjustment and other currency risk sharing provisions. We had no foreign currency hedge transactions
in place on December 31, 2010.
We have a wholly-owned subsidiary in Switzerland which uses the Swiss Franc as its functional currency. We purchase
inventory in foreign currencies, primarily Euros and Japanese Yen, and sell corresponding products in U.S. dollars. We also sell
products in foreign currencies, primarily Euros and Japanese Yen, where our inventory costs are largely in U.S. dollars. Based on our
2010 results of operations, if foreign currency exchange rates were to strengthen/weaken by 25% against the dollar, we would expect a
resulting pre-tax loss/gain of approximately $371 thousand.
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Item 8.
Financial Statements and Supplementary Data.
HESKA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and 2010
Consolidated Statements of Operations for the years ended December 31, 2008, 2009 and 2010
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008, 2009 and 2010
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2009 and 2010
Notes to Consolidated Financial Statements
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Page
40
41
42
43
44
45
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Heska Corporation
Loveland, Colorado
We have audited the accompanying consolidated balance sheets of Heska Corporation and its subsidiaries (the “Company”)
as of December 31, 2009 and 2010, and the related statements of operations, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2010. In connection with our audit of these consolidated financial statements, we also have
audited the financial statement schedule of valuation and qualifying accounts for the years ended December 31, 2008, 2009 and 2010.
The Company’s management is responsible for these financial statements and schedule. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Heska Corporation and its subsidiaries as of December 31, 2009 and 2010, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement
schedule of valuation and qualifying accounts, for the years ended December 31, 2008, 2009 and 2010, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Ehrhardt Keefe Steiner & Hottman PC
March 18, 2011
Denver, Colorado
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Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
Current assets:
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $177 and $136, respectively
Inventories, net
Deferred tax asset, current
Other current assets
Total current assets
Property and equipment, net
Goodwill
Deferred tax asset, net of current portion
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Accrued compensation
Current portion of deferred revenue
Line of credit
Current portion of long-term debt
Total current liabilities
Deferred revenue, net of current portion, and other
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 2,500,000 shares authorized; none issued or outstanding
Common stock, $.01 par value, 7,500,000 shares authorized; 5,215,911 and 0 shares issued
and outstanding, respectively
Public common stock, $.01 par value, 0 and 7,500,000 shares authorized, respectively; 0 and
5,231,245 shares issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
-41-
December 31,
2009
2010
5,400
9,222
12,018
940
913
28,493
6,349
905
28,387
64,134
4,172
2,249
1,440
1,664
4,201
381
14,107
4,972
19,079
—
52
—
216,829
(30)
(171,796)
45,055
64,134
$
$
$
$
5,492
8,866
11,901
53
967
27,279
5,486
999
29,284
63,048
4,162
3,087
521
1,811
3,079
—
12,660
4,590
17,250
—
—
52
217,240
284
(171,778)
45,798
63,048
$
$
$
$
Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Revenue:
Core companion animal health
Other vaccines, pharmaceuticals and products
Total revenue, net
Cost of revenue
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring expenses
Other
Total operating expenses
Operating income (loss)
Interest and other expense, net
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
Weighted average outstanding shares used to compute basic net income
(loss) per share
Weighted average outstanding shares used to compute diluted net income
(loss) per share
Year Ended December 31,
2009
2008
2010
$
$
68,140
13,513
81,653
$
66,449
9,229
75,678
55,655
9,796
65,451
52,809
47,219
40,659
28,844
28,459
24,792
17,640
1,951
8,917
785
232
29,525
(681)
640
(1,321)
(471)
(850)
(0.17)
(0.17)
$
$
$
14,524
1,718
8,173
—
—
24,415
4,044
306
3,738
1,496
2,242
0.43
0.43
$
$
$
5,167
5,207
5,167
5,212
14,726
1,597
8,111
—
—
24,434
358
289
69
51
18
0.00
0.00
5,220
5,254
$
$
$
See accompanying notes to consolidated financial statements.
-42-
Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Additional
Other
Total
Accumulated
Common Stock
Shares Amount
Paid-in Comprehensive Accumulated Stockholders’
Capital
Equity
Deficit
Income (Loss)
335
$
Balances, January 1, 2008
5,145 $
51 $ 215,685
Issuance of common stock
related to options, ESPP
and other
Recognition of stock based
compensation
Comprehensive net income:
Net (loss)
Minimum pension
liability adjustments
Unrealized (loss) on
available for sale
investments
Foreign currency
translation adjustments
Comprehensive net (loss)
Balances, December 31, 2008
Issuance of common stock
related to options, ESPP
and other
Recognition of stock based
compensation
Comprehensive net income:
Net income
Minimum pension
liability adjustments
Unrealized (loss) on
available for sale
investments
Foreign currency
translation adjustments
Comprehensive net income
Balances, December 31, 2009
Issuance of common stock
related to options, ESPP
and other
Recognition of stock based
compensation
Comprehensive net income:
Net income
Minimum pension
liability adjustments
Unrealized gain on
available for sale
investments
Foreign currency
56
—
—
—
—
—
—
5,201
15
—
—
—
—
—
—
5,216
15
—
—
—
1
—
—
—
—
—
—
52
—
—
—
—
—
—
—
52
—
—
—
—
416
362
—
—
—
—
—
216,463
53
313
—
—
—
—
—
216,829
75
336
—
—
—
—
—
translation adjustments
Comprehensive net income
Balances, December 31, 2010
—
—
5,231 $
—
—
—
—
52 $ 217,240
$
$
(173,188)
$
42,883
—
—
(850)
—
417
362
(850)
(444)
—
(9)
—
—
(174,038)
—
—
2,242
—
—
—
—
(171,796)
—
—
18
—
—
164
(1,139)
42,523
53
313
2,242
(132)
(1)
57
2,166
45,055
75
336
18
22
4
—
—
(171,778)
$
$
288
332
45,798
—
—
—
(444)
(9)
164
—
46
—
—
—
(132)
(1)
57
—
(30)
—
—
—
22
4
288
—
284
See accompanying notes to consolidated financial statements.
-43-
Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Depreciation and amortization
Deferred tax (benefit) expense
Stock based compensation
Unrealized (gain) loss on foreign currency translation
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other current assets
Other long-term assets
Accounts payable
Accrued liabilities and other
Income taxes payable
Deferred revenue and other
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
Proceeds from (repayments of) line of credit borrowings, net
Repayments of debt and capital lease obligations
Net cash provided by (used in) financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest
Non-cash transfer of inventory to property and equipment
$
$
$
Year Ended December 31,
2009
2008
2010
$
(850)
$
2,242
$
18
3,266
(536)
362
80
1,550
599
(77)
57
(1,749)
530
—
(1,542)
1,690
(554)
(554)
372
(1,572)
(776)
(1,976)
21
(819)
5,524
4,705
622
547
$
$
$
2,565
1,291
313
126
292
3,103
40
—
268
(55)
38
(1,608)
8,615
(276)
(276)
53
(6,841)
(770)
(7,558)
(86)
695
4,705
5,400
409
128
$
$
$
2,298
(10)
336
(12)
356
(699)
(44)
—
(10)
(40)
(38)
(214)
1,941
(620)
(620)
75
(1,123)
(381)
(1,429)
200
92
5,400
5,492
162
815
See accompanying notes to consolidated financial statements.
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Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Heska Corporation (“Heska” or the “Company”) develops, manufactures, markets, sells and supports veterinary products.
Heska’s core focus is on the canine and feline companion animal health markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and of its wholly-owned
subsidiaries since their respective dates of acquisitions. All material intercompany transactions and balances have been eliminated in
consolidation.
Reverse Stock Split
The Company completed a 1-for-10 reverse stock split which was effective on December 30, 2010. Except as otherwise
indicated, all related amounts reported in the consolidated financial statements, including common share quantities, earnings per share
amounts and exercise prices of options, have been retroactively adjusted for the effect of this reverse stock split.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. Significant estimates are required when establishing the
allowance for doubtful accounts and the provision for excess/obsolete inventory, in determining the period over which the Company’s
obligations are fulfilled under agreements to license product rights and/or technology rights, evaluating long-lived assets for
impairment, estimating the expense associated with the granting of stock options and in determining the need for, and the amount of, a
valuation allowance on deferred tax assets.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best
estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the
allowance based on historical write-off experience. The Company reviews its allowance for doubtful accounts monthly. Past due
balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged against
the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company
does not have any off-balance-sheet credit exposure related to its customers.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash
equivalents and accounts receivable. The Company maintains the majority of its cash and cash equivalents with financial institutions
that management believes are creditworthy in the form of demand deposits. The Company has no significant off-balance-sheet
concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign currency hedging arrangements. Its
accounts receivable balances are due primarily from domestic veterinary clinics and individual veterinarians, and both domestic and
international corporations.
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Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates market, and include short-term, highly liquid investments
with original maturities of less than three months. The Company valued its European Euro and Japanese Yen cash accounts at the spot
market foreign exchange rate as of each balance sheet date, with changes due to foreign exchange fluctuations recorded in current
earnings. The Company held 1,380,932 and 506,016 Euros at December 31, 2009 and 2010, respectively. The Company held
119,905,609 and 38,539,410 Yen at December 31, 2009 and 2010, respectively. The Company held 235,846 and 217,356 Swiss Francs
at December 31, 2009 and 2010, respectively. The majority of the Company’s cash and cash equivalents are held at U.S.-based or
Swiss-based financial institutions in accounts not insured by governmental entities.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, short-term trade receivables and payables and
notes payable, including the revolving line of credit. The carrying values of cash and cash equivalents and short-term trade receivables
and payables approximate fair value. The fair value of notes payable is estimated based on current rates available for similar debt with
similar maturities and collateral, and at December 31, 2009 and 2010, approximates the carrying value due primarily to the floating
rate of interest on such debt instruments.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out method. Inventory manufactured by the
Company includes the cost of material, labor and overhead. If the cost of inventories exceeds estimated fair value, provisions are made
to reduce the carrying value to estimated fair value.
Inventories, net consist of the following (in thousands):
Raw materials
Work in process
Finished goods
Allowance for excess or obsolete inventory
Property and Equipment
December 31,
2009
2010
$
$
4,969
3,371
4,782
(1,104)
12,018
$
$
4,203
3,483
5,388
(1,173)
11,901
Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the applicable lease period or their estimated useful lives, whichever is
shorter. Maintenance and repairs are charged to expense when incurred, and major renewals and improvements are capitalized.
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Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Property and equipment consist of the following (in thousands):
Land
Building
Machinery and equipment
Leasehold and building improvements
Construction in progress
Less accumulated depreciation and amortization
Estimated
Useful Life
N/A
10 to 20 years
3 to 15 years
7 to 15 years
December 31,
2009
2010
$
$
377
2,678
26,185
5,314
—
34,554
(28,205)
6,349
$
$
377
2,678
27,302
5,322
385
36,064
(30,578)
5,486
From time to time, the Company utilizes marketing programs whereby its instruments in inventory may be placed in a
customer’s location on a rental basis. The cost of these instruments is transferred to machinery and equipment and depreciated,
typically over a four year period. During 2008, 2009 and 2010, total costs transferred from inventory were approximately $547
thousand, $128 thousand and $815 thousand, respectively.
Depreciation and amortization expense for property and equipment was $3.3 million, $2.6 million and $2.3 million for the
years ended December 31, 2008, 2009 and 2010, respectively.
Realizability of Long-Lived Assets
The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated
useful life of long-lived assets may warrant revision, or that the remaining balance of these assets may not be recoverable. When
deemed necessary, the Company completes this evaluation by comparing the carrying amount of the assets with the estimated
undiscounted future cash flows associated with them. If such evaluations indicate that the future undiscounted cash flows of
amortizable long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their estimated
fair values. The Company identified certain long-lived assets where the estimated fair value was less than carrying value as of
December 31, 2008 and therefore the Company recorded an impairment charge of approximately $232 thousand. The Company
determined the estimated fair value based on discounted future cash flows related to these long-lived assets.
Goodwill
Goodwill is subject to an annual assessment for impairment. Impairment is indicated when the carrying amount of the
related reporting unit is greater than its estimated fair value.
The Company’s recorded goodwill relates to the 1997 acquisition of Heska AG, the Company’s Swiss subsidiary. This
goodwill is reviewed at least annually for impairment. At December 31, 2009 and 2010, goodwill was approximately $905 thousand
and $999 thousand, respectively, and is included in the assets of the Core Companion Animal Health segment. The Company
completed its annual analysis of the estimated fair value of its goodwill at December 31, 2010 and determined there was no indicated
impairment of its goodwill. The change in carrying value of the goodwill between years was solely due to foreign currency rate
changes. There can be no assurance that future goodwill impairments will not occur.
Revenue Recognition
The Company generates its revenues through sale of products and services, licensing of product and technology rights, and
research and development services. Revenue is accounted for in accordance with the guidelines provided by SEC Codification of Staff
Accounting Bulletins, Topic 13: Revenue Recognition.
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Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company’s policy is to recognize revenue when the applicable revenue recognition criteria have been met, which generally
include the following:
•
•
•
•
Persuasive evidence of an arrangement exists;
Delivery has occurred or services rendered;
Price is fixed or determinable; and
Collectibility is reasonably assured.
Revenue from the sale of products is generally recognized after both the goods are shipped to the customer and acceptance
has been received, if required, with an appropriate provision for estimated returns and other allowances. The terms of the customer
arrangements generally pass title and risk of ownership to the customer at the time of shipment. Certain customer arrangements
provide for acceptance provisions. Revenue for these arrangements is not recognized until the acceptance has been received or the
acceptance period has lapsed. The Company maintains an allowance for sales returns based upon its customer policies and historical
experience. Shipping and handling costs charged to customers is included as revenue, and the related costs are recorded as a
component of cost of products sold.
In addition to its direct sales force, the Company utilizes distributors to sell its products. Distributors purchase goods from
the Company, take title to those goods and resell them to their customers in the distributors’ territory.
Upfront payments received by the Company under arrangements for product, patent or technology rights in which the
Company retains an interest in the underlying product, patent or technology are initially deferred, and revenue is subsequently
recognized over the estimated life of the agreement, product, patent or technology. The Company has not received any significant up-
front payments in 2008, 2009 or 2010. Revenue from royalties is recognized based upon historical experience or as the Company is
informed of sales on which it is entitled to royalties.
For multiple-element arrangements that are not subject to a higher level of authoritative literature, the Company follows the
authoritative guidance for accounting for revenue arrangements with multiple deliverables in determining the separate units of
accounting. For those arrangements subject to appropriate separation criteria, the Company must determine whether the various
elements meet the criteria to be accounted for as separate elements. If the elements cannot be separated, revenue is recognized once
revenue recognition criteria for the entire arrangement have been met or over the period that the Company’s obligations to the
customer are fulfilled, as appropriate. If the elements are determined to be separable, the revenue is allocated to the separate elements
based on relative fair value and recognized separately for each element when the applicable revenue recognition criteria have been
met. In accounting for these multiple element arrangements, the Company must make determinations about whether elements can be
accounted for separately and make estimates regarding their relative fair values.
Cost of Products Sold
Royalties payable in connection with certain licensing agreements (see Note 9) are reflected in cost of products sold as
incurred.
Stock-Based Compensation
During the years ended December 31, 2009 and 2010, the Company’s income from operations and income before income
taxes were reduced by $313 thousand and $336 thousand, respectively, and net income was reduced by $233 thousand and $287
thousand, respectively, for compensation related to stock options issued. Basic and diluted earnings per share were reduced by $0.00
and $0.00 for 2009 and $0.00 and $0.00 for 2010. During the year ended December 31, 2008, the Company’s loss from operations and
loss before income taxes was increased by $362 thousand, net loss was increased by $219 thousand and basic and diluted loss per
share were not impacted. For all years presented, there was no material impact on cash flow from operations and cash flow from
financing activities. At December 31, 2010, the Company had two stock-based compensation plans. See Note 6 for a description of
these plans and additional disclosures regarding the plans.
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Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restructuring and Other Expenses
The Company recorded net restructuring expenses of $785 thousand for the year ended December 31, 2008 (See Note 7).
At December 31, 2008, approximately $578 thousand of accrued restructuring expenses remained on the Company’s balance sheet.
Restructuring expenses were approximately $621 thousand related primarily to personnel severance and other costs for 24
individuals and $164 thousand related to inventory of discontinued products, including a monitoring product the manufacturer had
informed the Company it no longer intends to support.
The Company recorded $232 thousand in impairment expense in the year ended December 31, 2008. This charge was
related to certain handheld instruments the Company had capitalized as rental units (the “Rental Units”) for use by the Company’s
customers. The majority of the Rental Units were being depreciated over a four year life. The supplier of these handheld instruments
had the right to cancel the agreement under which the Company purchases affiliated cartridges and supplies for the Rental Units prior
to year end 2009, which would prevent the Company from obtaining a future benefit from Rental Unit usage of these items if the
supplier refused to sell the Company cartridges and supplies beyond its contractual obligation and the Company sold all its remaining
inventory of these items. Accordingly, the Company concluded that the appropriate depreciation period for the Rental Units was
through year end 2009. Based on average usage assumptions for these instruments, the Company calculated the future discounted cash
flows associated with usage of the Rental Units through year end 2009 and recorded an impairment to reduce the carrying amount of
the Rental Units to this level.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses were $705 thousand, $471 thousand and $735
thousand for the years ended December 31, 2008, 2009 and 2010, respectively.
Income Taxes
The Company records a current provision for income taxes based on estimated amounts payable or refundable on tax
returns filed or to be filed each year. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates, in each tax
jurisdiction, expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes
the enactment date. The overall change in deferred tax assets and liabilities for the period measures the deferred tax expense or benefit
for the period. Deferred tax assets are reduced by a valuation allowance based on judgmental assessment of available evidence if the
Company is unable to conclude that it is more likely than not that some or all of the deferred tax assets will be realized.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding
during the period. Diluted net income per share is computed using the sum of the weighted average number of shares of common stock
outstanding, and, if not anti-dilutive, the effect of outstanding common stock equivalents (such as stock options and warrants)
determined using the treasury stock method. At December 31, 2008, 2009 and 2010, securities that have been excluded from diluted
net income per share because they would be anti-dilutive are outstanding options to purchase 1,283,527, 1,259,721 and 1,121,264
shares, respectively, of the Company’s common stock. Securities included in the diluted net income per share calculation at
December 31, 2009 and 2010, using the treasury stock method, were outstanding options to purchase approximately 3 thousand and 34
thousand shares of the Company’s common stock, respectively.
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Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Comprehensive Income (Loss)
Comprehensive income (loss), as shown in the Consolidated Statements of Stockholders’ Equity, includes net income
adjusted for the results of certain stockholders’ equity changes. Such changes include foreign currency items and minimum pension
liability adjustments. At December 31, 2010, Accumulated Other Comprehensive Income (Loss) consists of $851 thousand gain for
cumulative translation adjustments, $589 thousand loss for unrealized pension liability and $22 thousand of unrealized gain on
available for sale investments. At December 31, 2009, Accumulated Other Comprehensive Income (Loss) consists of $564 thousand
gain for cumulative translation adjustments, $611 thousand loss for unrealized pension liability and $17 thousand of unrealized gain
on available for sale investments. At December 31, 2008, Accumulated Other Comprehensive Income (Loss) consists of $507
thousand gain for cumulative translation adjustments, $479 thousand loss for unrealized pension liability and $18 thousand of
unrealized gain on available for sale investments.
Foreign Currency Translation
The functional currency of the Company’s Swiss subsidiary is the Swiss Franc. Assets and liabilities of the Company’s
Swiss subsidiary are translated using the exchange rate in effect at the balance sheet date. Revenue and expense accounts and cash
flows are translated using an average of exchange rates in effect during the period. Cumulative translation gains and losses are shown
in the consolidated balance sheets as a separate component of stockholders’ equity. Exchange gains and losses arising from
transactions denominated in foreign currencies (i.e., transaction gains and losses) are recognized as a component of other income
(expense) in current operations, as are exchange gains and losses on intercompany transactions expected to be settled in the near term.
New Accounting Pronouncements
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial
assets. The guidance requires additional disclosures for transfers of financial assets and changes the requirements for derecognizing
financial assets. The guidance was effective for fiscal years beginning after November 15, 2009. The implementation of this standard
did not have a material impact on the Company’s consolidated financial position and results of operations.
In October 2009, the FASB issued guidance on revenue recognition to require companies to allocate revenue in multiple-
element arrangements based on an element’s estimated selling price if vendor-specific or other third-party evidence of value is not
available. This guidance is effective beginning January 1, 2011 with earlier application permitted. The adoption of this guidance will
not have a material impact on the Company’s consolidated financial statements.
-50-
Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
Real estate mortgage loan with a commercial bank, due in monthly installments, with a stated
interest rate of prime plus 2.5% at December 31, 2009 (5.75%). This loan was fully paid in
April 2010.
Term loan with a commercial bank, secured by machinery and equipment, due in monthly
installments, with a stated interest rate of prime plus 2.5% at December 31, 2009 (5.75%).
This loan was fully paid in June 2010.
Term loan with a commercial bank, secured by machinery and equipment, due in monthly
installments, with a stated interest rate of prime plus 2.5% at December 31, 2009 (5.75%).
This loan was fully paid in June 2010.
Less installments due within one year
December 31,
2009
2010
$
57
$
259
65
381
(381)
—
$
$
—
—
—
—
—
—
The Company has a credit and security agreement with Wells Fargo Bank, National Association which expires
December 31, 2013. The agreement included the real estate mortgage loan and term loans above, until such loans were fully repaid in
2010, and a $15.0 million asset-based revolving line of credit with a stated interest rate at December 31, 2010 of LIBOR plus 5.75%
(6.05%). Amounts due under the credit facility are secured by a first security interest in essentially all of the Company’s assets. Under
the agreement, the Company is required to comply with certain financial and non-financial covenants. Among the financial covenants
are requirements for monthly minimum capital, quarterly minimum net income and monthly minimum liquidity. The amount available
for borrowings under the line of credit varies based upon available cash, eligible accounts receivable and eligible inventory. As of
December 31, 2010, approximately $3.1 million was outstanding on the line of credit and there was $5.9 million available capacity for
additional borrowings under the line of credit agreement.
4. SUPPLEMENTAL DISCLOSURE OF INTEREST AND OTHER EXPENSE (INCOME) INFORMATION
Interest and other expense (income):
Interest income
Interest expense
Other, net
5. INCOME TAXES
2008
Year Ended December 31,
2009
(in thousands)
2010
$
$
(66)
624
82
640
$
$
(64)
407
(37)
306
$
$
(58)
189
158
289
As of December 31, 2010, the Company had a domestic net operating loss carryforward (“NOL”), of approximately
$160.7 million, a domestic alternative minimum tax credit carryforward of approximately $257 thousand and domestic research and
development tax credit carryforward of approximately $352 thousand for federal tax purposes. The Company’s federal NOL is
scheduled to expire as follows: $15.1 million at the end of 2011, $32.1 million at the end of 2012, $107.5 million in 2018 through
2022, $5.5 million in 2024 and 2025 and $407 thousand in 2027 through 2029, with the majority scheduled to expire in 2018 or later.
The NOL and tax credit carryforwards are subject to alternative minimum tax limitations and to examination by the tax authorities. In
addition, the Company had a “change of ownership” as defined under the provisions of Section 382 of the Internal Revenue Code of
1986, as amended (an “Ownership Change”). The Company does not believe this Ownership Change will place a significant
restriction on its ability to utilize its NOL in the future.
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Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company is subject to income taxes in the U.S. federal jurisdiction, and various foreign, state and local jurisdictions.
Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant
judgment to apply. In the United States, the tax years 2007 — 2009 remain open to examination by the federal Internal Revenue
Service and the tax years 2006 — 2009 remain open for various state taxing authorities.
The components of income (loss) before income taxes were as follows (in thousands):
Domestic
Foreign
Year Ended December 31,
2009
2008
2010
$
$
(1,451)
130
(1,321)
$
$
3,576
162
3,738
$
$
(101)
170
69
Temporary differences that give rise to the components of deferred tax assets are as follows (in thousands):
Current deferred tax assets:
Inventory
Accrued compensation
Net operating loss carryforwards — domestic
Other
Valuation allowance
Total current deferred tax assets
Noncurrent deferred tax assets:
Research and development
Alternative minimum tax credit
Deferred revenue
Property and equipment
Net operating loss carryforwards — domestic
Valuation allowance
Total noncurrent deferred tax assets (liabilities)
-52-
December 31,
2009
2010
430
229
790
652
2,101
(1,161)
940
294
179
2,121
1,799
59,036
63,429
(35,042)
28,387
$
$
$
$
453
226
618
795
2,092
(2,039)
53
352
257
2,198
1,873
58,419
63,099
(33,815)
29,284
$
$
$
$
Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The components of the income tax expense (benefit) are as follows (in thousands):
Current income tax expense (benefit):
Federal
State
Foreign
Total current expense (benefit)
Deferred income tax expense (benefit):
Federal
State
Foreign
Total deferred expense (benefit)
Valuation allowance
Total income tax expense (benefit)
Year Ended December 31,
2009
2008
2010
$
$
—
—
—
—
(450)
(63)
42
(471)
—
(471)
$
$
69
91
45
205
1,148
143
—
1,291
—
1,496
$
$
7
16
38
61
(9)
(1)
—
(10)
—
51
The Company’s income tax expense (benefit) relating to income (loss) for the periods presented differs from the amounts
that would result from applying the federal statutory rate to that income (loss) as follows:
Statutory federal tax rate
State income taxes, net of federal benefit
Other permanent differences
Domestic NOL utilization
Change in tax rate
Foreign rate difference
Change in valuation allowance
Other
Effective income tax rate
6. CAPITAL STOCK
Common Stock
Year Ended December 31,
2009
2008
2010
34%
5%
(4)%
—
—
1%
—
—
36%
34%
3%
2%
—
31%
—
(29)%
(1)%
40%
34%
52%
121%
—
40%
(29)%
(472)%
328%
74%
The Company completed a 1-for-10 reverse stock split which was effective on December 30, 2010. Except as otherwise
indicated, all related amounts reported in the consolidated financial statements, including common share quantities, earnings per share
amounts and exercise prices of options, have been retroactively adjusted for the effect of this reverse stock split.
Stock Option Plans
The Company has two stock option plans which authorize granting of stock options and stock purchase rights to employees,
officers, directors and consultants of the Company to purchase shares of common stock. In 1997, the board of directors adopted the
1997 Stock Incentive Plan (the “1997 Plan”) and terminated two prior option plans. All shares that remained available for grant under
the terminated plans were incorporated into the 1997 Plan. In addition, all shares subsequently cancelled under the prior plans are
added back to the 1997 Plan on a quarterly basis as additional options available to grant. In May 2009, the stockholders approved an
amendment to the 1997 Plan allowing for the continued issuance of incentive stock options and a 25,000 reduction in shares which
may be issued under the 1997 Plan. In May 2003, the stockholders approved a new plan, the 2003 Stock Incentive Plan, which allows
for the granting of options for up to 239,050 shares of the Company’s common stock. The number of shares reserved for issuance
under all plans as of January 1, 2011 was 219,253.
-53-
Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The stock options granted by the board of directors may be either incentive stock options (“ISOs”) or non-qualified stock
options (“NQs”). The exercise price for options under all of the plans may be no less than 100% of the fair value of the underlying
common stock for ISOs or 85% of fair value for NQs. Options granted will expire no later than the tenth anniversary subsequent to the
date of grant or three months following termination of employment, except in cases of death or disability, in which case the options
will remain exercisable for up to twelve months. Under the terms of the 1997 Plan, in the event the Company is sold or merged,
outstanding options will either be assumed by the surviving corporation or vest immediately.
There are four key inputs to the Black-Scholes model which the Company uses to estimate fair value for options which it
issues: expected term, expected volatility, risk-free interest rate and expected dividends, all of which require the Company to make
estimates. The Company’s estimates for these inputs may not be indicative of actual future performance and changes to any of these
inputs can have a material impact on the resulting estimated fair value calculated for the option. The Company’s expected term input
was estimated based on the Company’s historical experience for time from option grant to option exercise for all employees in 2010,
2009 and 2008; the Company treated all employees in one grouping in all three years. The Company’s expected volatility input was
estimated based on the Company’s historical stock price volatility in 2010, 2009 and 2008. The Company’s risk-free interest rate input
was determined based on the U.S. Treasury yield curve at the time of option issuance in 2010, 2009 and 2008. The Company’s
expected dividends input was zero in 2010, 2009 and 2008. Weighted average assumptions used in 2010, 2009 and 2008 for each of
these four key inputs are listed in the following table:
Risk-free interest rate
Expected lives
Expected volatility
Expected dividend yield
2008
1.89%
2.9 years
56%
0%
2009
1.41%
3.0 years
64%
0%
2010
1.10%
3.0 years
66%
0%
A summary of the Company’s stock option plans, with options to purchase fractional shares resulting from the Company’s
December 2010 1-for-10 reverse stock split included in the “cancelled” row for 2010, is as follows:
2008
Weighted
Average
Exercise
Year Ended December 31,
2009
Weighted
Average
Exercise
2010
Weighted
Average
Exercise
Price
Outstanding at beginning of period
Granted at Market
Cancelled
Exercised
Outstanding at end of period
Exercisable at end of period
Options
1,211,683
157,525
(57,375)
(28,451)
1,283,382
1,104,117
Price
13.979
7.694
25.008
8.527
12.835
Options
1,283,382
107,499
(99,247)
—
1,291,634
13.360
1,098,560
$
$
$
$
$
$
$
$
$
$
$
$
Price
12.835
4.529
16.713
—
11.846
Options
1,291,634
104,900
(53,459)
(1,199)
1,341,876
12.648
1,142,209
$
$
$
$
$
$
11.846
5.945
21.572
5.834
11.003
11.871
The total estimated fair value of stock options granted during the years ended December 31, 2010, 2009 and 2008 were
computed to be approximately $274 thousand, $205 thousand and $452 thousand, respectively. The amounts are amortized ratably
over the vesting periods of the options. The weighted average estimated fair value of options granted during the years ended
December 31, 2010, 2009 and 2008 was computed to be approximately $2.57, $1.91 and $2.87, respectively. The total intrinsic value
of options exercised during the years ended December 31, 2010, 2009 and 2008 was $2 thousand, $0 and $137 thousand, respectively.
The cash proceeds from options exercised during the years ended December 31, 2010, 2009 and 2008 was $7 thousand, $0 and $243
thousand.
-54-
Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes information about stock options outstanding and exercisable at December 31, 2010,
excluding outstanding options to purchase an aggregate of 133.5 fractional shares resulting from the Company’s December 2010
1-for-10 reverse stock split with a weighted average remaining contractual life of 3.44 years, a weighted average exercise price of
$12.98 and exercise prices ranging from $3.40 to $31.50. The Company intends to issue whole shares only from option exercises.
Options
Outstanding
at
December 31,
2010
Options Outstanding
Number of Weighted
Average
Options Exercisable
Number of
Options
Contractual
Remaining Weighted
Exercisable Weighted
Life in
Years
7.86
3.79
1.78
4.28
4.77
4.69
$
$
$
$
$
$
Average
Exercise December 31,
at
Price
4.472
7.981
10.864
13.937
20.095
11.003
2010
135,293
303,811
207,301
275,702
220,102
1,142,209
$
$
$
$
$
$
Average
Exercise
Price
4.221
8.018
10.871
13.937
20.244
11.871
307,989
310,645
208,176
276,702
238,364
1,341,876
Exercise Prices
$2.70 - $4.96
$4.97 - $8.80
$8.81 - $12.40
$12.41 - $16.50
$16.51 - $31.50
$2.70 - $31.50
As of December 31, 2010, there was $508 thousand of total unrecognized compensation expense related to outstanding
stock options. That cost is expected to be recognized over a weighted-average period of 2.5 years with all cost to be recognized by the
end of December 2014, assuming all options vest according to the vesting schedules in place at December 31, 2010. As of
December 31, 2010, the aggregate intrinsic value of outstanding options was $150 thousand and the aggregate intrinsic value of
exercisable options was $100 thousand.
Employee Stock Purchase Plan (the “ESPP”)
Under the 1997 Employee Stock Purchase Plan, the Company is authorized to issue up to 325,000 shares of common stock
to its employees, of which 289,136 had been issued as of December 31, 2010. Employees of the Company and its U.S. subsidiaries
who are expected to work at least 20 hours per week and five months per year are eligible to participate. Under the terms of the plan,
employees can choose to have up to 10% of their annual base earnings withheld to purchase the Company’s common stock. Each
offering period is five years, with six-month accumulation periods ending June 30 and December 31. The purchase price of the stock
for June 30 and December 31 was 85% of the end-of-measurement-period market price.
For the years ended December 31, 2008, 2009 and 2010, the weighted-average fair value of the purchase rights granted was
$2.60, $0.51 and $0.95 per share, respectively.
7. RESTRUCTURING EXPENSES
In the fourth quarter of 2008, the Company recorded restructuring charges of $621 thousand for personnel severance and
other costs related to 24 individuals and $164 thousand related to inventory costs of discontinued products, including a monitoring
product the manufacturer had informed the Company it no longer intends to support.
-55-
Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Shown below is a reconciliation of restructuring costs for the years ended December 31, 2008 and 2009 (in thousands):
Severance pay, benefits and other
Products and other
Total
Balance at
December 31,
2007
$
$
—
—
—
Year Ended
December 31, 2008
Costs
Incurred
621
164
785
$
$
Balance at
Payments/ December 31,
Settlements
(43)
$
(164)
(207)
578
—
578
2008
$
$
$
The balance of $578 thousand is included in accrued restructuring in the accompanying consolidated balance sheets as of
December 31, 2008.
Severance pay, benefits and other
Products and other
Total
8. MAJOR CUSTOMERS
Balance at
December 31,
2008
$
$
578
—
578
Year Ended
December 31, 2009
Costs
Incurred
—
—
—
$
$
Balance at
Payments/ December 31,
Settlements
(578)
$
—
(578)
—
—
—
2009
$
$
$
The Company had one customer to whom sales represented 13% of total revenue for 2010. The Company had one customer
in 2009 to whom sales represented 11% of total revenue. The Company had no customers in 2008 to whom sales represented 10% or
more of total revenue. No customer represented 10% or more of total accounts receivable at December 31, 2009 or 2010.
9. COMMITMENTS AND CONTINGENCIES
The Company holds certain rights to market and manufacture all products developed or created under certain research,
development and licensing agreements with various entities. In connection with such agreements, the Company has agreed to pay the
entities royalties on net product sales. In the years ended December 31, 2010, 2009 and 2008, royalties of $515 thousand, $600
thousand and $580 thousand became payable under these agreements, respectively.
The Company has a contract with two suppliers for unconditional annual minimum inventory purchases totaling
approximately $2.9 million in fiscal 2011.
The Company has entered into operating leases for its office and research facilities and certain equipment with future
minimum payments as of December 31, 2010 as follows (in thousands):
Year Ending December 31,
2011
2012
2013
2014
2015
Thereafter
$ 2,116
2,084
1,822
1,809
1,809
13,707
$ 23,347
The Company had rent expense of $2.1 million, $2.1 million and $1.8 million in 2008, 2009 and 2010, respectively.
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Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
From time to time, the Company may be involved in litigation relating to claims arising out of its operations. At
December 31, 2010, the Company had no material litigation pending.
The Company’s current terms and conditions of sale include a limited warranty that its products and services will conform
to published specifications at the time of shipment and a more extensive warranty related to certain of its products. The typical remedy
for breach of warranty is to correct or replace any defective product, and if not possible or practical, the Company will accept the
return of the defective product and refund the amount paid. Historically, the Company has incurred minimal warranty costs. The
Company’s warranty reserve on December 31, 2010 was $356 thousand.
10. SEGMENT REPORTING
The Company is comprised of two reportable segments, Core Companion Animal Health (“CCA”) and Other Vaccines,
Pharmaceuticals and Products (“OVP”). The Core Companion Animal Health segment includes diagnostic instruments and supplies,
as well as single use diagnostic and other tests, pharmaceuticals and vaccines, primarily for canine and feline use. These products are
sold directly by the Company as well as through independent third-party distributors and through other distribution relationships. CCA
segment products manufactured at the Des Moines, Iowa production facility included in the OVP segment’s assets are transferred at
cost and are not recorded as revenue for the OVP segment. The Other Vaccines, Pharmaceuticals and Products segment includes
private label vaccine and pharmaceutical production, primarily for cattle, but also for other animals including small mammals and fish.
All OVP products are sold by third parties under third-party labels.
Additionally, the Company generates non-product revenue from research and development projects for third parties,
licensing of technology and royalties. The Company performs these research and development projects for both companion animal
and livestock purposes.
Summarized financial information concerning the Company’s reportable segments is shown in the following table (in
thousands):
2008:
Total revenue
Operating income (loss)
Interest expense
Total assets
Net assets
Capital expenditures
Depreciation and amortization
Core
Companion Other Vaccines,
Pharmaceuticals
and Products
Animal
Health
Total
$
$
68,140
(2,220)
474
58,581
34,602
216
2,341
$
13,513
1,539
150
11,857
7,921
338
925
81,653
(681)
624
70,438
42,523
554
3,266
-57-
Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2009:
Total revenue
Operating income
Interest expense
Total assets
Net assets
Capital expenditures
Depreciation and amortization
2010:
Total revenue
Operating income (loss)
Interest expense
Total assets
Net assets
Capital expenditures
Depreciation and amortization
Core
Companion Other Vaccines,
Pharmaceuticals
and Products
Animal
Health
Total
$
$
66,449
3,156
319
52,146
36,924
254
1,631
9,229
888
88
11,988
8,131
22
934
Core
Companion Other Vaccines,
Pharmaceuticals
and Products
Animal
Health
$
$
55,655
1,073
128
53,720
39,016
366
1,413
9,796
(715)
61
9,328
6,782
254
885
$
$
75,678
4,044
407
64,134
45,055
276
2,565
Total
65,451
358
189
63,048
45,798
620
2,298
Total revenue by principal geographic area was as follows (in thousands):
For the Years Ended December 31,
2009
2008
2010
United States
Europe
Other International
Total
$
$
69,062
4,413
8,178
81,653
$
$
65,249
3,984
6,445
75,678
Total assets by principal geographic areas were as follows (in thousands):
United States
Europe
Other International
Total
2008
December 31,
2009
$
$
67,207
3,231
—
70,438
$
$
60,059
4,075
—
64,134
-58-
$
$
$
$
57,927
3,025
4,499
65,451
2010
59,155
3,893
—
63,048
Table of Contents
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
11. QUARTERLY FINANCIAL INFORMATION (unaudited)
The following summarizes selected quarterly financial information for each of the two years in the periods ended
December 31, 2009 and 2010 (amounts in thousands, except per share data).
2009:
Total revenue
Gross profit
Operating income
Net income
Net income per share — basic
Net income per share — diluted
2010:
Total revenue
Gross profit
Operating income (loss)
Net income (loss)
Net income (loss) per share — basic
Net income (loss) per share — diluted
Q1
Q2
Q3
Q4
Total
$
$
$
$
20,141
7,373
1,017
460
0.09
0.09
17,694
6,205
(488)
(331)
(0.06)
(0.06)
$
$
18,629
7,031
1,010
579
0.11
0.11
15,107
5,847
(207)
(164)
(0.03)
(0.03)
$
$
19,550
7,420
1,159
743
0.14
0.14
17,635
6,593
365
241
0.05
0.05
$
$
17,358
6,635
858
460
0.09
0.09
15,015
6,147
688
272
0.05
0.05
75,678
28,459
4,044
2,242
0.43
0.43
65,451
24,792
358
18
0.00
0.00
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the
effectiveness of our disclosure controls and procedures, as defined by Rule 13a-15 of the Exchange Act, as of the period covered by
this Annual Report on Form 10-K. Based on this evaluation, our chief executive officer and chief financial officer have concluded that
our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding disclosure.
-59-
Table of Contents
Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer, the Company conducted an evaluation of the
effectiveness of its internal control over financial reporting based on criteria outlined in the COSO Internal Control over Financial
Reporting — Guidance for Smaller Public Companies, a supplemental implementation guide issued in 2007 which modified criteria
established in the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, the Company’s management has concluded that the Company’s internal control over
financial reporting was effective as of December 31, 2010.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective
system of internal control will provide only reasonable assurance that the objectives of the internal control system are met.
This annual report does not include an attestation report of our independent registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public
accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report to
this annual report.
Changes in Internal Control over Financial Reporting.
There has been no change in our internal control over financial reporting during the fourth fiscal quarter covered by this
Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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Table of Contents
PART III
Certain information required by Part III is incorporated by reference to our definitive Proxy Statement filed with the
Securities and Exchange Commission in connection with the solicitation of proxies for our 2011 Annual Meeting of Stockholders.
Item 10. Directors and Executive Officers of the Registrant.
Executive Officers
The information required by this item with respect to executive officers is incorporated by reference to Item 1 of this report
and can be found under the caption “Executive Officers.”
Directors
The information required by this section with respect to our directors will be incorporated by reference to the information in
the sections entitled “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Code of Ethics
Our Board of Directors has adopted a code of ethics for our senior executive and financial officers (including our principal
executive officer, principal financial officer and principal accounting officer). The code of ethics is available on our website at
www.heska.com. We intend to disclose any amendments to or waivers from the code of ethics at that location.
Audit Committee
The information required by this section with respect to our Audit Committee will be incorporated by reference to the
information in the section entitled “Directors and Executive Officers” in the Proxy Statement.
Section 16(a) Beneficial Ownership Reporting Compliance
The information required by this item is incorporated by reference to the information in the section entitled “Section 16(a)
Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Item 11. Executive Compensation.
The information required by this section will be incorporated by reference to the information in the sections entitled
“Director Compensation” and “Executive Compensation” in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The other information required by this section will be incorporated by reference to the information in the section entitled
“Common Stock Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
Equity Compensation Plan Information
The following table sets forth information about our common stock that may be issued upon exercise of options and rights
under all of our equity compensation plans as of December 31, 2010, including the 1988 Stock Option Plan, the 1997 Stock Incentive
Plan, the 2003 Stock Incentive Plan and the 1997 Employee Stock Purchase Plan. Our stockholders have approved all of these plans.
Plan Category
Equity Compensation Plans Approved
by Stockholders
Equity Compensation Plans Not
Approved by Stockholders
Total
(a) Number of Securities (b) Weighted-Average Remaining Available for Future
to be Issued Upon
Exercise Price of
Issuance Under Equity
Exercise of Outstanding Outstanding Options Compensation Plans (excluding
securities reflected in column (a))
Options and Rights (1)
and Rights (1)
(c) Number of Securities
1,341,876 $
None
1,341,876 $
11.00
None
11.00
255,117
None
255,117
(1) Excluding outstanding options to purchase an aggregate of 133.5 fractional shares resulting form our December 2010 reverse
stock split.
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Table of Contents
Item 13. Certain Relationships and Related Transactions.
The information required by this section will be incorporated by reference to the information in the sections entitled
“Executive Compensation—Employment, Severance and Change of Control Agreements,” “Certain Transactions and Relationships”
and “Directors and Executive Officers” in the Proxy Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this section will be incorporated by reference to the information in the section entitled
“Auditor Fees and Services” in the Proxy Statement.
The information required by Part III to the extent not set forth herein, will be incorporated herein by reference to our
definitive Proxy Statement for the 2011 Annual Meeting of Stockholders.
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Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as a part of this Form 10-K.
(1) Financial Statements:
Reference is made to the Index to Consolidated Financial Statements under Item 8 in Part II of this Form 10-K.
(2) Financial Statement Schedules:
Schedule II — Valuation and Qualifying Accounts.
SCHEDULE II
HESKA CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
Balance at
Beginning
of Year
Additions
Charged to
Costs and
Expenses
Other
Additions
Deductions
Balance at
End of Year
$
$
$
96
209
177
$
$
$
137
89
57
—
—
—
$
$
$
(24)(a)
(121)(a)
(98)(a)
$
$
$
209
177
136
Allowance for doubtful accounts
Year ended:
December 31, 2008
December 31, 2009
December 31, 2010
(a) Write-offs of uncollectible accounts.
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Table of Contents
(3) Exhibits:
The exhibits listed below are required by Item 601 of Regulation S-K. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form 10-K has been identified.
Exhibit
Number
3(i)
3(ii)
3(iii)
3(iv)
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19
10.20
10.21
10.22
10.23
10.24
10.25+
Notes
Description of Document
Restated Certificate of Incorporation of the Registrant.
Certificate of Amendment to Restated Certificate of Incorporation of Registrant.
Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of
Registrant.
(15)
Bylaws of the Registrant.
(10)
(10)
(13)
(13)
(15)
(9)
(11)
(8)
(11)
(10)
(11)
(4)
(11)
(4)
(11)
(10)
(11)
(6)
(7)
(7)
(14)
(10)
1997 Incentive Stock Plan of Registrant, as amended.
1997 Incentive Stock Plan Employees and Consultants Option Agreement.
1997 Incentive Stock Plan Outside Directors Option Agreement.
2003 Equity Incentive Plan, as amended and restated.
2003 Equity Incentive Plan Option Agreement.
1997 Employee Stock Purchase Plan of Registrant, as amended.
Management Incentive Plan Master Document.
2011 Management Incentive Plan.
Director Compensation Policy.
Form of Indemnification Agreement entered into between Registrant and its directors and certain
officers.
Amended and Restated Employment Agreement with Robert B. Grieve, dated March 29, 2006.
Amendment to Employment Agreement between Registrant and Robert B. Grieve, dated
effective as of January 1, 2008.
Employment Agreement between Diamond Animal Health, Inc. and Michael McGinley, dated
May 1, 2000.
Amendment to Employment Agreement between Diamond Animal Health, Inc. and Michael
McGinley, dated effective as of January 1, 2008.
Employment Agreement between Registrant and Jason Napolitano, dated May 6, 2002.
Amendment to Employment Agreement between Registrant and Jason Napolitano, dated
effective as of January 1, 2008.
Employment Agreement between Registrant and Michael Bent, dated May 1, 2000.
Amendment to Employment Agreement between Registrant and Michael Bent, dated effective as
of January 1, 2008.
Employment Agreement between Registrant and Nancy Wisnewski, dated April 15, 2002.
Amendment to Employment Agreement between Registrant and Nancy Wisnewski, dated
effective as of January 1, 2008.
Net Lease Agreement between Registrant and CCMRED 40, LLC, dated May 24, 2004.
First Amendment to Net Lease Agreement and Development Agreement between Registrant and
CCMRED 40, LLC, dated February 11, 2005.
Second Amendment to Net Lease Agreement between Registrant and CCMRED 40, LLC, dated
July 14, 2005.
Third Amendment to Net Lease Agreement between Registrant and Millbrae Square Company,
effective as of January 1, 2010.
Third Amended and Restated Credit and Security Agreement between Registrant, Diamond
Animal Health, Inc. and Wells Fargo Business Credit, Inc., dated December 30, 2005.
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Table of Contents
Exhibit
Number
10.26+
Notes
(11)
10.27+
(11)
10.28
(11)
10.29+
(12)
10.30+
(13)
10.31+
(14)
10.32+
10.33+
10.34+
10.35
10.36+
10.37+
10.38+
10.39+
10.40+
10.41+
10.42+
(1)
(2)
(13)
(3)
(5)
(10)
(10)
(11)
(10)
Description of Document
First Amendment to Third Amended and Restated Credit and Security Agreement between
Registrant, Diamond Animal Health, Inc. and Wells Fargo Bank, National Association, dated
December 5, 2006.
Second Amendment to Third Amended and Restated Credit and Security Agreement between
Registrant, Diamond Animal Health, Inc. and Wells Fargo Bank, National Association, dated
July 20, 2007.
Third Amendment to Third Amended and Restated Credit and Security Agreement between
Registrant, Diamond Animal Health, Inc. and Wells Fargo Bank, National Association, dated
December 21, 2007.
Fourth and Fifth Amendments to Third Amended and Restated Credit and Security Agreement
between Registrant, Diamond Animal Health, Inc. and Wells Fargo Bank, National Association,
dated October 16, 2008.
Sixth Amendment to Third Amended and Restated Credit and Security Agreement between
Registrant, Diamond Animal Health, Inc. and Wells Fargo Bank, National Association, dated
December 30, 2008.
Seventh Amendment to Third Amended and Restated Credit and Security Agreement between
Registrant, Diamond Animal Health, Inc. and Wells Fargo Bank, National Association, dated
November 30, 2009.
Eighth Amendment to Third Amended and Restated Credit and Security Agreement between
Registrant, Diamond Animal Health, Inc. and Wells Fargo Bank, National Association, dated
December 15, 2010.
Product Supply Agreement between Registrant and Quidel Corporation, dated July 3, 1997.
First Amendment to Product Supply Agreement between Registrant and Quidel Corporation,
dated March 15, 1999.
Letter Amendment to Product Supply Agreement between Registrant and Quidel Corporation
dated July 7, 2004.
Amended and Restated Bovine Vaccine Distribution Agreement between Diamond Animal
Health, Inc. and Agri Laboratories, Ltd., dated September 30, 2002.
First Amendment to Amended and Restated Bovine Vaccine Distribution Agreement between
Diamond Animal Health, Inc. and Agri Laboratories, Ltd., dated September 20, 2004.
Second Amendment to Amended and Restated Bovine Vaccine Distribution Agreement between
Diamond Animal Health, Inc. and Agri Laboratories, Ltd., dated December 10, 2004.
Third Amendment to Amended and Restated Bovine Vaccine Distribution Agreement between
Diamond Animal Health, Inc. and Agri Laboratories, Ltd., dated May 26, 2006.
Fourth Amendment to Amended and Restated Bovine Vaccine Distribution Agreement between
Diamond Animal Health, Inc. and Agri Laboratories, Ltd., dated as of November 16, 2007.
Fifth Amendment to Amended and Restated Bovine Vaccine Distribution Agreement between
Diamond Animal Health, Inc. and Agri Laboratories, Ltd., dated as of December 23, 2010.
Supply and Distribution Agreement between Registrant and Boule Medical AB, dated June 17,
2003, Letter Amendment to Supply and Distribution Agreement between Registrant and Boule
Medical AB, dated June 1, 2004 and Letter Amendment to Supply and Distribution Agreement
between Registrant and Boule Medical AB, dated December 31, 2004.
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Table of Contents
Exhibit
Number
10.43+
10.44+
10.45+
10.46+
10.47+
21.1
23.1
24.1
31.1
31.2
32.1**
Notes
Notes
(12)
(10)
(13)
(10)
(11)
Description of Document
Letter Amendment to Supply and Distribution Agreement between Registrant and Boule Medical
AB, dated July 12, 2005; Letter Amendment to Supply and Distribution Agreement between
Registrant and Boule Medical AB, dated March 20, 2007; Letter Amendment to Supply and
Distribution Agreement between Registrant and Boule Medical AB, dated January 23, 2008; and
Sixth Amendment to Supply and Distribution Agreement between Registrant and Boule Medical
AB, dated October 1, 2008.
Supply and License Agreement between Registrant and Schering-Plough Animal Health
Corporation, dated as of August 1, 2003.
Amendment No. 1 to Supply and License Agreement between Registrant and Schering-Plough
Animal Health Corporation, dated August 31, 2005.
Distribution Agreement between Registrant and Arkray Global Business, Inc. dated November 1,
2004.
Clinical Chemistry Analyzer Agreement between Registrant and FUJIFILM Corporation, dated
as of January 30, 2007.
Subsidiaries of the Company.
Consent of Ehrhardt Keefe Steiner & Hottman PC, Independent Registered Public Accounting
Firm.
Power of Attorney (See Signature Page of this Form 10-K).
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended.
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended.
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*
+
Indicates management contract or compensatory plan or arrangement.
Portions of the exhibit have been omitted pursuant to a request for confidential treatment.
** Furnished herewith.
(1) Filed with the Registrant’s Form 10-Q for the quarter ended September 30, 1997.
(2) Filed with the Registrant’s Form 10-K for the year ended December 31, 2001.
(3) Filed with the Registrant’s Form 10-Q for the quarter ended September 30, 2002.
(4) Filed with the Registrant’s Form 10-K for the year ended December 31, 2002.
(5) Filed with the Registrant’s Form 10-Q for the quarter ended September 30, 2004.
(6) Filed with the Registrant’s Form 10-K for the year ended December 31, 2004.
(7) Filed with the Registrant’s Form 10-Q for the quarter ended June 30, 2005.
(8) Filed with the Registrant’s Form 10-K for the year ended December 31, 2005.
(9) Filed with the Registrant’s Form 10-Q for the quarter ended March 31, 2006.
(10) Filed with the Registrant’s Form 10-K for the year ended December 31, 2006.
(11) Filed with the Registrant’s Form 10-K for the year ended December 31, 2007.
(12) Filed with the Registrant’s Form 10-Q for the quarter ended September 30, 2008.
(13) Filed with the Registrant’s Form 10-K for the year ended December 31, 2008.
(14) Filed with the Registrant’s Form 10-K for the year ended December 31, 2009.
(15) Filed with the Registrant’s Form 10-Q for the quarter ended March 31, 2010.
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 18, 2011.
HESKA CORPORATION
By: /s/ ROBERT B. GRIEVE
Robert B. Grieve
Chairman of the Board and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Robert B. Grieve, Jason A. Napolitano and Michael A. Bent, and each of them, his or her true and lawful attorneys-in-fact, each with
full power of substitution, for him or her in any and all capacities, to sign any amendments to this report on Form 10-K and to file the
same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
/s/ ROBERT B. GRIEVE
Robert B. Grieve
/s/ JASON A. NAPOLITANO
Jason A. Napolitano
/s/ MICHAEL A. BENT
Michael A. Bent
/s/ WILLIAM A. AYLESWORTH
William A. Aylesworth
/s/ PETER EIO
Peter Eio
/s/ G. IRWIN GORDON
G. Irwin Gordon
/s/ LOUISE L. McCORMICK
Louise L. McCormick
/s/ JOHN F. SASEN, Sr.
John F. Sasen, Sr.
Title
Date
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer) and Director
Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
Vice President, Controller
(Principal Accounting Officer)
Lead Director
Director
Director
Director
Director
-67-
March 18, 2011
March 18, 2011
March 18, 2011
March 18, 2011
March 18, 2011
March 18, 2011
March 18, 2011
March 18, 2011
RESTATED CERTIFICATE OF INCORPORATION
OF
HESKA CORPORATION
Exhibit 3(i)
HESKA CORPORATION, a corporation organized and existing under the laws of the State of Delaware, hereby certifies as
follows:
FIRST: The name of this corporation is Heska Corporation.
SECOND: The original Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of
Delaware on March 27, 1997 and the original name of the corporation was Heska Merger Corporation. A Restated Certificate of
Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on May 28, 1997. A Certificate of
Merger whereby Heska Corporation, a California corporation, was merged with and into this corporation and this corporation’s
name was changed to Heska Corporation was filed with the Secretary of State of the State of Delaware on May 29, 1997. A
Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on July 7, 1997.
THIRD: The Restated Certificate of Incorporation of said corporation shall be amended and restated to read in full as
follows:
The name of this corporation is HESKA CORPORATION.
ARTICLE I
ARTICLE II
The registered office of the corporation within the State of Delaware is located at 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is The Corporation Trust Company.
The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the
General Corporation Law of Delaware.
ARTICLE III
ARTICLE IV
A. Authorized Stock. This corporation is authorized to issue two classes of shares, to be designated Common Stock and Preferred
Stock, respectively. This corporation is authorized to issue seventy-five million (75,000,000) shares of Common Stock, $.00l par value
per share, and twenty-five million (25,000,000) shares of Preferred Stock, $.00l par value per share.
B. Preferred Stock. The Preferred Stock may be issued in any number of series, as determined by the Board of Directors. The
Board of Directors may by resolution fix the designation and number of shares of any such series, and may determine, alter, or revoke
the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series. The Board of Directors may
thereafter in the same manner, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, increase or decrease the number of shares of any such series (but not
below the number of shares of that series then outstanding). In case the number of shares of any series shall be decreased, the shares
constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of
shares of such series.
C. Common Stock.
1. Relative Rights of Preferred Stock and Common Stock. All preferences, voting powers, relative, participating, optional or
other special rights and privileges, and qualifications, limitations or restrictions of the Common Stock are expressly made subject
and subordinate to those that may be fixed with respect to any shares of the Preferred Stock.
2. Voting Rights. Except as otherwise required by law or this Restated Certificate of Incorporation, each holder of Common
Stock shall have one vote in respect of each share of stock held by such holder of record on the books of the corporation for the
election of directors and on all matters submitted to a vote of stockholders of the corporation.
3. Dividends. Subject to the preferential rights of the Preferred Stock, if any, the holders of shares of Common Stock shall
be entitled to receive, when and if declared by the Board of Directors, out of the assets of the corporation which are by law
available therefor, dividends payable either in cash, in property or in shares of capital stock.
4. Liquidation, Dissolution or Winding Up. In the event of any dissolution, liquidation or winding up of the affairs of the
corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of the Preferred
Stock, holders of Common Stock shall be entitled, unless otherwise provided by law or this Restated Certificate of Incorporation,
to receive all of the remaining assets of the corporation of whatever kind available for distribution to stockholders ratably in
proportion to the number of shares of Common Stock held by them respectively.
-2-
The corporation is to have perpetual existence.
ARTICLE V
ARTICLE VI
A. Classified Board. The Board of Directors shall be divided into three classes, designated Class I, Class II and Class III, as
nearly equal in number as possible, and the term of office of directors of one class shall expire at each annual meeting of stockholders,
and in all cases as to each director when such director’s successor shall be elected and shall qualify or upon such director’s earlier
resignation, removal from office, death or incapacity. Additional directorships resulting from an increase in number of directors shall
be apportioned among the classes as equally as possible. The initial term of office of directors of Class I shall expire at the annual
meeting of stockholders in 1998; that of Class II shall expire at the annual meeting in 1999; and that of Class III shall expire at the
annual meeting in 2000; and in all cases as to each director when such director’s successor shall be elected and shall qualify or upon
such director’s earlier resignation, removal from office, death or incapacity. At each annual meeting of stockholders, beginning with
the annual meeting of stockholders in 1998, the number of directors equal to the number of directors of the class whose term expires at
the time of such meeting (or, if less, the number of directors properly nominated and qualified for election) shall be elected to hold
office until the third succeeding annual meeting of stockholders after their election.
B. Changes. The Board of Directors of this corporation, by amendment to the corporation’s bylaws, is expressly authorized to
change the number of directors in any or all of the classes of directors without the consent of the stockholders.
C. Elections. Elections of directors need not be by written ballot unless the Bylaws of the corporation shall so provide.
D. Vote Required to Amend or Repeal. The affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%)
of the voting power of all of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to amend in any respect or repeal this Article VI.
-3-
ARTICLE VII
A. Special Meetings of Stockholders. Special meetings of the stockholders of the corporation may be called for any purpose or
purposes, unless otherwise prescribed by statute or by this Restated Certificate of Incorporation, only at the request of the Chairman of
the Board of Directors, the Chief Executive Officer or President of the corporation or by a resolution duly adopted by the affirmative
vote of a majority of the Board of Directors.
ARTICLE VIII
A. Amend or Repeal Bylaws. The Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the
corporation; provided, however, that any adoption, amendment or repeal of the Bylaws of the corporation by the Board of Directors
shall require the approval of at least sixty-six and two-thirds percent (66-2/3%) of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or
repeal is presented to the Board of Directors). The stockholders shall also have the power to adopt, amend or repeal the Bylaws of the
corporation, provided, however, that in addition to any vote of the holders of any class or series of stock of the corporation required by
law, the affirmative vote of the holders of more than fifty percent (50%) of the voting power of all of the then outstanding shares of the
stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required for
such adoption, amendment or repeal by the stockholders of any provisions of the Bylaws of the corporation. Notwithstanding the
foregoing sentence, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all
of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of directors, voting together as a
single class, shall be required for the amendment or repeal of Article 3.1 of the Bylaws of the corporation.
The books of the corporation may be kept at such place within or without the State of Delaware as the bylaws of the corporation
may provide or as may be designated from time to time by the board of directors of the corporation.
ARTICLE IX
-4-
ARTICLE X
Whenever a compromise or arrangement is proposed between the corporation and its creditors or any class of them and/or
between the corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware
may, on the application in a summary way of the corporation or of any creditor or stockholder thereof or on the application of any
receivers appointed for the corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of
trustees in dissolution or of any receiver or receivers appointed for the corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or the stockholders or class of stockholders of the
corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority, in number representing three-
fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case
may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization shall if sanctioned by the court to which the said
application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders,
of the corporation, as the case may be, and also on the corporation.
ARTICLE XI
A. Limitation on Liability. A director of the corporation shall not be personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director’s duty of loyalty to
the corporation and its stockholders; (2) for acts or omissions not in good faith or which involve intentional misconduct or knowing
violations of law; (3) under Section 174 of the Delaware General Corporation Law; or (4) for any transaction from which the director
derived an improper personal benefit.
If the Delaware General Corporation Law hereafter is amended to further eliminate or limit the liability of directors, then the
liability of a director of the corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest
extent permitted by the amended Delaware General Corporation Law.
B. Indemnification. The corporation is authorized to indemnify the directors and officers of this corporation to the fullest extent
permissible under Delaware law.
-5-
C. Insurance. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or
agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability
or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law.
D. Repeal and Modification. Any repeal or modification of the foregoing provisions of this Article XI shall not adversely affect
any right or protection of any director, officer, employee or agent of the corporation existing at the time of such repeal or modification.
The corporation reserves the right to amend or repeal any provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon a stockholder herein are granted subject to this
reservation.
ARTTCLE XII
* * * * *
Four: This Restated Certificate of Incorporation was duly adopted by the Board of Directors of this corporation.
Five: This Restated Certificate of Incorporation was duly adopted by written consent of the stockholders of the corporation
in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware and written notice of
such action has been given as provided in Section 228.
IN WITNESS THEREOF, Heska Corporation has caused this certificate to be signed by the undersigned officer, thereunto duly
authorized, this 24th day of May, 2000.
By: /s/ Ronald L. Hendrick
Name: Ronald L. Hendrick
Title: Executive Vice President and
Chief Financial Officer
-6-
CERTIFICATE OF AMENDMENT
TO RESTATED
CERTIFICATE OF INCORPORATION
OF
HESKA CORPORATION
Exhibit 3(ii)
Heska Corporation, a corporation organized and existing under the laws of the State of Delaware, (the “Corporation”), does
hereby certify that:
1. This Amendment to the Corporation’s Restated Certificate of Incorporation has been duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of Delaware.
2. This Amendment to the Corporation’s Restated Certificate of Incorporation amends Article IV of the Corporation’s Restated
Certificate of Incorporation, by deleting the existing Article IV in its entirety and substituting therefor a new Article IV to read in its
entirety as follows:
ARTICLE IV
A. Authorized Stock. The total authorized stock of the Corporation, which shall be an aggregate of 175,000,000 shares, shall consist
of three classes: (i) a class consisting of 75,000,000 shares of existing Common Stock having a par value of $0.001 per share (the
“Original Common Stock”); (ii) a second class consisting of 75,000,000 shares of NOL Restricted Common Stock having a par value
of $0.001 per share (the “Common Stock”, and together with the Original Common Stock, the “Common Stock Securities”); and (iii) a
third class consisting of 25,000,000 shares of Preferred Stock having a par value of $0.001 per share (the “Preferred Stock”).
B. Preferred Stock. The Preferred Stock may be issued in any number of series, as determined by the Board of Directors. The Board
of Directors may by resolution fix the designation and number of shares of any such series, and may determine, alter, or revoke the
rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series. The Board of Directors may
thereafter in the same manner, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, increase or decrease the number of shares of any such series (but not
below the number of shares of that series then outstanding). In case the number of shares of any series shall be decreased, the shares
constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of
shares of such series.
C. Common Stock Securities.
1. Relative Rights of Preferred Stock and Common Stock Securities. All preferences, voting powers, relative, participating,
optional or other special rights and privileges, and qualifications, limitations or restrictions of the Common Stock Securities are
expressly made subject and subordinate to those that may be fixed with respect to any shares of the Preferred Stock.
2. Relative Rights of Original Common Stock and Common Stock. Except as otherwise provided in this Article IV, all shares of
Original Common Stock and Common Stock shall be identical and shall entitle the holder thereof to the same preferences, voting
powers, relative, participating, optional or other special rights and privileges, and qualifications, limitations or restrictions.
3. Voting Rights. Except as otherwise required by law or this Restated Certificate of Incorporation, the holder or holders of
Common Stock Securities shall vote together as one class, and each holder of Common Stock Securities shall have one vote in respect
of each share of such stock held by such holder of record on the books of the corporation, for the election of directors and on all
matters submitted to a vote of stockholders of the corporation.
4. Dividends. Subject to the preferential rights of the Preferred Stock, if any, the holders of shares of Common Stock Securities
shall be entitled to receive, when and if declared by the Board of Directors, out of the assets of the corporation which are by law
available therefor, dividends payable either in cash, in property or in shares of capital stock.
5. Liquidation, Dissolution or Winding Up. In the event of any dissolution, liquidation or winding up of the affairs of the
corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of the Preferred
Stock, holders of Common Stock Securities shall be entitled, unless otherwise provided by law or this Restated Certificate of
Incorporation, to receive all of the remaining assets of the corporation of whatever kind available for distribution to stockholders
ratably in proportion to the number of shares of Common Stock Securities held by them respectively.
6. Subdivisions and Combinations of Shares. The corporation shall not in any manner subdivide (by stock split, stock dividend or
otherwise) or combine (by stock split, stock dividend or otherwise) the outstanding Common Stock or Original Common Stock unless
all outstanding Common Stock Securities are proportionately subdivided or combined.
7. Automatic Conversion. Each share of NOL Restricted Common Stock shall automatically be converted into the equivalent
number of shares of Original Common Stock at the close of business of the Corporation on the Restriction Release Date. Upon the
occurrence of such automatic conversion, all shares of NOL Restricted Common Stock shall be converted without any further action
by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its
transfer agent, and shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and
terminate, except only the right to receive shares of Original Common Stock in exchange therefor. Upon the occurrence of such
automatic conversion, the holders of NOL Restricted Common Stock shall, upon notice from the Corporation, surrender the
certificates representing such shares at the office of the Corporation or of its transfer agent for the Common Stock. Thereupon, there
shall be issued and delivered to such holder a certificate or certificates for the number of shares of Original Common Stock into which
the shares of NOL Restricted Common Stock so surrendered were automatically converted. The Corporation shall not be obligated to
issue such certificates unless certificates evidencing the shares of NOL Restricted Common Stock so converted are either delivered to
the Corporation or any such transfer agent, or the holder notifies the Corporation that such certificates have been lost, stolen, or
destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in
connection therewith. Following such automatic conversion, all shares of NOL Restricted Common Stock so converted shall be retired
and cancelled, and the Corporation shall not reissue any shares of NOL Restricted Common Stock. The Corporation shall, at all times
prior to automatic conversion of the NOL Restricted Common Stock, cause to be authorized and reserved for issuance a number of
shares of Original Common Stock sufficient to permit conversion of the NOL Restricted Common Stock.
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D. Reclassification.
Immediately upon the effectiveness of the filing of this Certificate of Amendment to the Corporation’s Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware (the “Effective Time”), each share of Original Common Stock
issued and outstanding immediately prior to the Effective Time shall be reclassified as and converted into and shall become one share
of NOL Restricted Common Stock (“Common Stock,” pursuant to the “Reclassification”).
The Reclassification of the shares of Original Common Stock into shares of Common Stock shall be deemed to occur at the
Effective Time, regardless of when any certificate previously representing such shares of Original Common Stock (if such shares are
held in certificated form) are physically surrendered to the Corporation in exchange for certificates representing shares of such
Common Stock. Each certificate outstanding immediately prior to the Effective Time representing shares of Original Common Stock
shall, until surrendered to the Corporation in exchange for a certificate representing such new number of shares of Common Stock,
automatically represent from and after the Effective Time the reclassified number of shares of Common Stock. All options and rights
issuable or issued with respect to Original Common Stock pursuant to any stock option plan, employee stock purchase plan or other
stock plan of the Corporation prior to the Effective Time shall represent options and rights for the equivalent number of shares of
Common Stock from and after the Effective Time.
E. Transfer Restrictions.
1. Certain Definitions. As used in this Section E:
“Acquire” or “Acquisition” and similar terms means the acquisition of record, legal, beneficial or any other ownership of
Corporation Securities by any means, including, without limitation, (a) the exercise of any rights under any option, warrant,
convertible security, pledge or other security interest or similar right to acquire shares, or (b) the entering into of any swap, hedge or
other arrangement that results in the acquisition of any of the economic consequences of ownership of Corporation Securities, but
shall not include the acquisition of any such rights unless, as a result, the acquirer would be considered an owner of Corporation
Securities under the rules of Section 382 of the Code.
“Business Day” means any day, other than a Saturday, Sunday or day on which banks located in Denver, Colorado, are
authorized or required by law to close.
“Code” means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.
“Corporation Securities” means (a) shares of Common Stock Securities, (b) shares of Preferred Stock of any class or series of
Preferred Stock (other than Preferred Stock that is not “stock” pursuant to Treasury Regulation Sections 1.382-2(a)(3) and 1.382-2T(f)
(18)(ii) or any successor provision), (c) warrants, rights or options (within the meaning of Treasury Regulation Section 1.382-4(d), or
any successor provision) to purchase Stock and (d) any other interests that would be treated as “stock” of the Corporation pursuant to
Treasury Regulation Section 1.382-2T(f)(18), or any successor provision.
“Dispose” or “Disposition” means any direct or indirect sale, transfer, assignment, conveyance, pledge or other disposition or
other action in any manner whatsoever, whether voluntary or involuntary, by operation of law or otherwise, by any Person or group
that reduces the Percentage Stock Ownership of any Person or group.
“Entity” means an entity within the meaning of Treasury Regulation Section 1.382-3(a)(1).
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“Five Percent Shareholder” means (i) a Person or group of Persons that is identified as a “5-percent shareholder” of the
Corporation pursuant to Treasury Regulation Section 1.382-2T(g)(1) (or any successor provision) or (ii) a Person that is a “first tier
entity” or “higher tier entity” of the Corporation if that person has a “public group” or individual, or a “higher tier entity” of that
Person has a “public group” or individual, that is treated as a “5-percent shareholder” of the Corporation pursuant to Treasury
Regulation Section 1.382-2T(g) or any successor provision (where the terms “first tier entity,” “higher tier entity” and “public group”
are defined in Treasury Regulation Section 1.382-2T(f) (or any successor provision), but excluding any “public group” with respect to
the Corporation, as that term is defined in Treasury Regulation Section 1.382-2T(f)(13) (or any successor provision). For the purposes
of determining the existence and identity of, and the amount of Corporation Securities owned by, any Five Percent Shareholder, the
Corporation is entitled to rely conclusively on (a) the existence and absence of filings of Schedules 13D or 13G under the Securities
Exchange Act of 1934, as amended (or any similar schedules) as of any date, and (b) its actual knowledge of the ownership of the
Corporation Securities.
“Percentage Stock Ownership” and similar terms means percentage Stock Ownership of any Person or group for purposes of
Section 382 of the Code, as determined in accordance with Treasury Regulation Section 1.382-2T(g), (h), (j) and (k) (or any successor
provision).
“Person” means an individual, corporation, estate, trust, association, limited liability company, partnership, joint venture or
similar organization, and also includes a syndicate or group as those terms are used for the purposes of Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended.
“Prohibited Transfer” means any purported Transfer of Corporation Securities to the extent that such a Transfer is prohibited
and/or void under this Article IV.
“Restriction Release Date” means such date, after the Effective Time, that is the earlier of (i) the date that Section 382 of the
Code or any successor statute is repealed if the Board of Directors determines in good faith that this Article IV is no longer necessary
or advisable for preservation of the Tax Benefits, (ii) the date that the Board of Directors determines in good faith that it is in the best
interests of the Corporation and its stockholders for the transfer restrictions set forth in this Article IV to terminate, or (iii) January 1,
2026. Any such determinations by the Board of Directors shall be set forth in a written resolution that is publicly announced or
otherwise made available to stockholders.
“Restricted Holder” means a Person or group of Persons that (a) is a Five Percent Shareholder and Acquires or proposes to
Acquire Corporation Securities, or (b) is proposing to Acquire Corporation Securities, and following such proposed Acquisition of
Corporation Securities, would be a Five Percent Shareholder.
“Stock” means any interest that would be treated as “stock” of the Corporation pursuant to Treasury Regulation Sections 1.382-
2(a)(3) and 1.382-2T(f)(18) (or any successor provisions).
“Stock Ownership” means any direct or indirect ownership of Stock, including any ownership by virtue of application of
constructive ownership rules, with such direct, indirect and constructive ownership determined under the provisions of Section 382 of
the Code.
“Tax Benefits” means the net operating loss carryovers, capital loss carryovers, general business credit carryovers, alternative
minimum tax credit carryovers and foreign tax credit carryovers, as well as any loss or deduction attributable to a “net unrealized
built-in loss” within the meaning of Section 382 of the Code, of the Corporation or any direct or indirect subsidiary thereof.
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“Transfer” means any direct or indirect Acquisition or Disposition of Corporation Securities or other action in any manner
whatsoever, whether voluntary or involuntary, by operation of law or otherwise, that alters the Percentage Stock Ownership of any
Person or group, or any attempt to do any of the foregoing. A Transfer shall also include the creation or grant of an option (including
within the meaning of Treasury Regulation Section 1.382-4(d)). A Transfer shall not include an issuance or grant of Corporation
Securities by the Corporation.
“Treasury Regulation” means a Treasury Regulation promulgated under the Code.
2. Transfer Restrictions.
(a) From and after the Effective Time and prior to the Restriction Release Date, no Transfer shall be permitted, and any
such purported Transfer shall be void ab initio, to the extent that after giving effect to such purported Transfer (or any series of
Transfers of which such Transfer is a part), either (i) any Person or group of Persons shall become a Five Percent Shareholder, or
(ii) the Percentage Stock Ownership interest in the Corporation of any Five Percent Shareholder shall be increased. The prior sentence
is not intended to prevent the Corporation Securities from being DTC-eligible and shall not preclude the settlement of any transactions
in the Corporation Securities entered into through the facilities of a national securities exchange or any national securities quotation
system, provided, that if the settlement of the transaction would result in a Prohibited Transfer, such Transfer shall nonetheless be a
Prohibited Transfer.
(b) The restrictions contained in this Article IV are for the purposes of reducing the risk that any “ownership change” of the
Corporation Securities (as defined in the Code) may limit the Corporation’s ability to utilize its Tax Benefits. In connection therewith,
and to provide for effective policing of these provisions, a Restricted Holder who proposes to Acquire Corporation Securities shall,
prior to the date of the proposed Acquisition, request in writing (a “Request”) that the Board of Directors of the Corporation (or a
committee thereof that has been appointed by the Board of Directors) review the proposed Acquisition and authorize or not authorize
the proposed Acquisition in accordance with this Section E.2(b) of Article IV. A Request shall be mailed or delivered to the Secretary
of the Corporation at the Corporation’s principal place of business, or telecopied to the Corporation’s telecopier number at its principal
place of business. Such Request shall be deemed to have been received by the Corporation when actually received by the Secretary of
the Corporation. A Request shall include (i) the name, address and telephone number of the Restricted Holder, (ii) a description of the
Restricted Holder’s direct and indirect ownership of Corporation Securities, (iii) a description of the Corporation Securities that the
Restricted Holder proposes to Acquire, (iv) the date on which the proposed Acquisition is expected to take place (or, if the Acquisition
is proposed to be made by a Five Percent Shareholder in a transaction on a national securities exchange or any national securities
quotation system, a statement to that effect), (v) the name of the proposed transferor of the Corporation Securities that the Restricted
Holder proposes to Acquire (or, if the Acquisition is proposed to be made by a Five Percent Shareholder in a transaction on a national
securities exchange or any national securities quotation system, a statement to that effect), and (vi) a request that the Board of
Directors (or a committee thereof that has been appointed by the Board of Directors) authorize, if appropriate, the Acquisition
pursuant to this Section E.2(b) of Article IV.
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(c) The Board of Directors may authorize an Acquisition by a Restricted Holder, or otherwise determine to waive the
application of any restrictions contained in this Article IV, if it determines, in its sole discretion, that, after taking into account the
preservation of the Tax Benefits, such Acquisition or waiver would be in the best interests of the Corporation and its stockholders and
in such cases, the restrictions set forth in Section E.2(a) of this Article IV shall not apply, notwithstanding the effect of any such
authorization or waiver on the Tax Benefits. Any proposed Acquisition by a Restricted Holder that is not so authorized by the Board of
Directors or subject to such a waiver shall be deemed a Prohibited Transfer. The Board of Directors may, in its sole discretion, impose
any conditions that it deems reasonable and appropriate in connection with authorizing any such Acquisition by a Restricted Holder or
granting such a waiver. In addition, the Board of Directors may, in its sole discretion, require such representations from the Restricted
Holder or such opinions of counsel to be rendered by counsel selected by the Board of Directors, in each case as to such matters as the
Board of Directors may determine. Any Restricted Holder who makes a Request to the Board of Directors shall reimburse the
Corporation, on demand, for all costs and expenses incurred by the Corporation with respect to any proposed Acquisition of
Corporation Securities subject to such Request, whether or not such Request is granted, including, without limitation, the
Corporation’s costs and expenses incurred in determining whether to authorize the proposed Acquisition, which costs may include, but
are not limited to, any expenses of counsel and/or tax advisors engaged by the Board of Directors to advise the Board of Directors or
deliver an opinion thereto.
3. Treatment of Excess Securities.
(a) No employee or agent of the Corporation shall record any Prohibited Transfer, and the purported transferee of a
Prohibited Transfer (the “Purported Transferee”) shall not be recognized as a stockholder of the Corporation for any purpose
whatsoever in respect of the Corporation Securities which are the subject of the Prohibited Transfer (the “Excess Securities”). The
Purported Transferee shall not be entitled with respect to such Excess Securities to any rights of stockholders of the Corporation,
including, without limitation, the right to vote such Excess Securities and to receive dividends or distributions, whether liquidating or
otherwise, in respect thereof. Once the Excess Securities have been acquired in a Transfer that is not a Prohibited Transfer, such
Corporation Securities shall cease to be Excess Securities.
(b) If the Board of Directors determines that a Prohibited Transfer has been recorded by an agent or employee of the
Corporation notwithstanding the prohibition in Section E.3(a) of this Article IV, such recording and the Prohibited Transfer shall be
void ab initio and have no legal effect and, upon written demand by the Corporation, the Purported Transferee shall transfer or cause
to be transferred any certificate or other evidence of ownership of the Excess Securities within the Purported Transferee’s possession
or control, together with any dividends or other distributions that were received by the Purported Transferee from the Corporation with
respect to the Excess Securities (the “Prohibited Distributions”), to an agent designated by the Board of Directors (the “Agent”). In the
event of an attempted Prohibited Transfer involving the purchase or Acquisition of Corporation Securities in violation of this Article 4
by a Restricted Holder, the Agent shall thereupon sell to a buyer or buyers, which may include the Corporation or the purported
transferor, the Excess Securities transferred to it in one or more arm’s-length transactions (including over a national securities
exchange or national securities quotation system on which the Corporation Securities may be traded); provided, however, that the
Agent, in its sole discretion, shall effect such sale or sales in an orderly fashion and shall not be required to effect any such sale within
any specific time frame if, in the Agent’s discretion, such sale or sales would disrupt the market for the Corporation Securities, would
adversely affect the value of the Corporation Securities or would be in violation of applicable securities laws. If the Purported
Transferee has resold the Excess Securities before receiving the Corporation’s demand to surrender the Excess Securities to the Agent,
the Purported Transferee shall be deemed to have sold the Excess Securities for the Agent, shall be deemed to hold in trust for the
Agent, and shall be required to transfer to the Agent, any Prohibited Distributions and proceeds of such sale, except to the extent that
the Corporation grants written permission to the Purported Transferee to retain a portion of such sales proceeds not exceeding the
amount that the Purported Transferee would have received from the Agent pursuant to Section E.3(c) of this Article IV if the Agent,
rather than the Purported Transferee, had resold the Excess Securities.
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(c) The Agent shall apply any proceeds of a sale by it of Excess Securities and, if the Purported Transferee had previously
resold the Excess Securities, any amounts received by it from a Purported Transferee, together with any Prohibited Distributions
received by it, as follows: (i) first, to reimburse itself to the extent necessary to cover its costs and expenses incurred in accordance
with its duties hereunder; (ii) second, to reimburse the Purported Transferee for the amounts paid by the Purported Transferee for the
Excess Securities (or in the case of any Prohibited Transfer by gift, devise or inheritance or any other Prohibited Transfer without
consideration, the fair market value, calculated on the basis of the closing market price for the Corporation Securities on the day
before the Prohibited Transfer), and (iii) third, the remainder, if any, to the original transferor, or, if the original transferor cannot be
readily identified, to the Company to the extent of any amounts owing to the Company pursuant to Section E.3(f) below, with the
remainder, if any, to be donated to an entity designated by the Corporation’s Board of Directors that is described in Section 501(c) of
the Code, contributions to which must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code. The
recourse of any Purported Transferee with respect of any Prohibited Transfer shall be limited to the amount payable to the Purported
Transferee pursuant to clause (ii) of this Section E.3(c) of this Article IV. Except as may be required by law, in no event shall the
proceeds of any sale of Excess Securities pursuant to this Article IV inure to the benefit of the Corporation or the Agent, except to the
extent used to cover costs and expenses incurred by the Agent in performing its duties hereunder.
(d) In the event of any Transfer which does not involve a transfer of securities of the Corporation within the meaning of
Delaware law (“Securities,” and individually, a “Security”) but which would cause a Five Percent Shareholder to violate a restriction
on Transfers provided for in this Article IV, the application of Section E.3(b) and Section E.3(c) shall be modified as described in this
Section E.3(d). In such case, no such Five Percent Shareholder shall be required to dispose of any interest that is not a Security, but
such Five Percent Shareholder and/or any Person whose ownership of Securities is attributed to such Five Percent Shareholder shall be
deemed to have disposed of and shall be required to dispose of sufficient Securities (which Securities shall be disposed of in the
inverse order in which they were acquired) to cause such Five Percent Shareholder, following such disposition, not to be in violation
of this Article IV. Such disposition shall be deemed to occur simultaneously with the Transfer giving rise to the application of this
provision, and such number of Securities that are deemed to be disposed of shall be considered Excess Securities and shall be disposed
of through the Agent as provided in Section E.3(b) and Section E.3(c), except that the maximum aggregate amount payable either to
such Five Percent Shareholder, or to such other Person that was the record owner of such Excess Securities, in connection with such
sale shall be the fair market value of such Excess Securities at the time of the purported Transfer. All expenses incurred by the Agent
in disposing of such Excess Stock shall be paid out of any amounts due such Five Percent Shareholder or such other Person. The
purpose of this Section E.3(d) is to extend the restrictions in Section E.2(a) and Section E.3(a) to situations in which there is a Five
Percent Shareholder without a direct Transfer of Securities, and this Section E.3(d), along with the other provisions of this Article IV,
shall be interpreted to produce the same results, with differences as the context requires, as a direct Transfer of Corporation Securities.
(e) If the Purported Transferee fails to surrender to the Agent the Excess Securities or the proceeds of a sale thereof, or any
Prohibited Distributions received by it, or to otherwise comply with Section E.3 of this Article IV, within thirty (30) days from the date
on which the Corporation makes a demand pursuant to Section E.(3)(b) of this Article IV, or any written demand with respect to a
deemed disposition pursuant to Section E.3(d) of this Article IV, then the Corporation may take such actions as it deems necessary or
advisable to enforce the provisions hereof, and/or enjoin or rescind any violation hereof, including the institution of legal or equitable
proceedings to compel such surrender.
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(f) If any Person shall knowingly violate, or knowingly cause any other Person under control of such Person (a “Controlled
Person”) to violate this Article IV, then that Person and any such Controlled Person shall be jointly and severally liable for, and shall
pay to the Corporation, such amount as will, after taking account of all taxes imposed with respect to the receipt or accrual of such
amount and all costs incurred by the Corporation as a result of such violation, put the Corporation in the same financial position as it
would have been in had such violation not occurred.
4. Amendment of Transfer Restrictions. Notwithstanding the provisions of Article XII of the Corporation’s Restated Certificate
of Incorporation, the Corporation may only amend or repeal any of the provisions set forth in this Section E. by the affirmative vote of
the holders of two-thirds of the shares entitled to vote thereon.
5. Legends; Compliance
(a) All certificates reflecting Corporation Securities on or after the Effective Time shall, until the Restriction Release Date,
bear a conspicuous legend in substantially the following form:
THE RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED (THE “CERTIFICATE OF INCORPORATION”),
OF THE CORPORATION CONTAINS RESTRICTIONS PROHIBITING THE TRANSFER (AS DEFINED IN THE CERTIFICATE
OF INCORPORATION) OF STOCK OF THE CORPORATION (INCLUDING THE CREATION OR GRANT OF CERTAIN
OPTIONS, RIGHTS AND WARRANTS) WITHOUT THE PRIOR AUTHORIZATION OF THE BOARD OF DIRECTORS OF THE
CORPORATION (THE “BOARD OF DIRECTORS”) IF SUCH TRANSFER AFFECTS THE PERCENTAGE OF STOCK OF THE
CORPORATION (WITHIN THE MEANING OF SECTION 382 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE “CODE”) AND THE TREASURY REGULATIONS PROMULGATED THEREUNDER) THAT IS TREATED AS OWNED
BY A FIVE PERCENT SHAREHOLDER UNDER THE CODE AND SUCH REGULATIONS. IF THE TRANSFER
RESTRICTIONS ARE VIOLATED, THEN THE TRANSFER WILL BE VOID AB INITIO AND THE PURPORTED
TRANSFEREE OF THE STOCK WILL BE REQUIRED TO TRANSFER EXCESS SECURITIES (AS DEFINED IN THE
CERTIFICATE OF INCORPORATION) TO THE CORPORATION’S AGENT. IN THE EVENT OF A TRANSFER WHICH DOES
NOT INVOLVE SECURITIES OF THE CORPORATION WITHIN THE MEANING OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE (“SECURITIES”) BUT WHICH WOULD VIOLATE THE TRANSFER RESTRICTIONS, THE
PURPORTED TRANSFEREE (OR THE RECORD OWNER) OF THE SECURITIES WILL BE REQUIRED TO TRANSFER
SUFFICIENT SECURITIES PURSUANT TO THE TERMS PROVIDED FOR IN THE CORPORATION’S CERTIFICATE OF
INCORPORATION TO CAUSE THE FIVE PERCENT STOCKHOLDER TO NO LONGER BE IN VIOLATION OF THE
TRANSFER RESTRICTIONS. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO ANY PROPERLY
INTERESTED PERSON A COPY OF THE CERTIFICATE OF INCORPORATION, CONTAINING THE ABOVE-REFERENCED
TRANSFER RESTRICTIONS, UPON WRITTEN REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF
BUSINESS.”
The Board of Directors may also require that any certificates issued by the Corporation evidencing ownership of shares of Stock
that are subject to conditions imposed by the Board of Directors under Section E.2(b) of this Article IV also bear a conspicuous legend
referencing the applicable restrictions.
(b) The Corporation shall have the power to make appropriate notations upon its stock transfer records and to instruct any
transfer agent, registrar, securities intermediary or depository with respect to the requirements of this Article IV for any uncertificated
Corporation Securities or Corporation Securities held in an indirect holding system. At the request of the Corporation, or as a
condition to the registration of the Transfer of any Stock, any Person who is a beneficial, legal or record holder of Stock, and any
proposed transferee of such Stock and any Person controlling, controlled by or under common control with the proposed transferee of
such Stock, shall provide such information as the Corporation may request from time to time in order to determine compliance with
this Article IV or the status of the Tax Benefits of the Corporation.
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(c) Nothing contained in this Article IV shall limit the authority of the Board of Directors of the Corporation to take such
other action to the extent permitted by law as it deems necessary or advisable to preserve the Corporation’s Tax Benefits. The Board of
Directors of the Corporation shall have the power to determine all matters necessary for determining compliance with this Article IV,
including, without limitation, determining (i) the identification of Five Percent Shareholders and Restricted Holders, (ii) whether a
Transfer or proposed Transfer is a Prohibited Transfer, (iii) the Percentage Stock Ownership in the Corporation of any Five Percent
Shareholders and Restricted Holders, (iv) whether an instrument or right constitutes a Corporation Security, (v) the amount (or fair
market value) due to a Purported Transferee, (vi) the interpretation of the provisions of this Article IV, and (vii) any other matters
which the Board of Directors deems relevant. In addition, the Board of Directors may, to the extent permitted by law, from time to
time establish, modify, amend or rescind Bylaws, regulations and procedures of the Corporation not inconsistent with the express
provisions of this Article IV for purposes of determining whether any Transfer of Stock would jeopardize the Corporation’s ability to
preserve or use the Tax Benefits, or for the orderly application, administration and implementation of the provisions of this Article IV.
In the case of an ambiguity in the application of any of the provisions of this Article IV, including any definition used herein, the
Board of Directors shall have the power to determine the application of such provisions with respect to any situation based on its
reasonable belief, understanding or knowledge of the circumstances. In the event that this Article IV requires an action by the Board of
Directors but fails to provide specific guidance with respect to such action, the Board of Directors shall have the power to determine
the action to be taken so long as such action is not contrary to the provisions of this Article IV. All actions, calculations, interpretations
and determinations that are done or made by the Board of Directors in good faith pursuant to this Article IV shall be final, conclusive
and binding on the Corporation, the Agent, and all other parties to a Transfer; provided, however, that the Board of Directors may
delegate all or any portion of its duties and powers under this Article IV to a committee of the Board of Directors as it deems advisable
or necessary. All references in this Article IV to the Code and the regulations promulgated thereunder shall be deemed to include any
successor provision.
(d) To the fullest extent permitted by law, the Corporation and the members of the Board of Directors shall be fully
protected in relying in good faith upon the information, opinions, reports or statements of the chief executive officer, the chief
financial officer or the chief accounting officer of the Corporation or of the Corporation’s legal counsel, independent auditors, transfer
agent, investment bankers or other employees and agents in making the determinations and findings contemplated by this Article IV,
and the members of the Board of Directors shall not be responsible for any good faith errors made in connection therewith.
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(e) Nothing contained in this Article IV shall be construed to give any Person other than the Corporation or the Agent any
legal or equitable right, remedy or claim under this Article IV. This Article IV shall be for the sole and exclusive benefit of the
Corporation and the Agent.
(f) With regard to any power, restriction, remedy or right provided herein or otherwise available to the Corporation or the
Agent provided under this Article IV, (i) no waiver will be effective unless expressly contained in writing signed by the waiving party;
and (ii) no waiver alteration, modification or impairment will be implied by reason of any previous waiver, extension of time, delay or
omission in exercise, or other indulgence.
(g) If any provision of this Article IV or the application of any such provision to any Person or under any circumstance
shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provision of this Article IV.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, this Certificate of Amendment to the Corporation’s Restated Certificate of Incorporation has been
executed by a duly authorized officer of the corporation on this the 4th day of May 2010.
Heska Corporation
By: /s/ Jason Napolitano
Name: Jason Napolitano
Title: Executive Vice President, CFO and Secretary
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CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED,
OF
HESKA CORPORATION
Exhibit 3(iii)
Heska Corporation (the “Corporation”), a corporation organized and existing under and by virtue of the General Corporation
Law of the State of Delaware (the “DGCL”), does hereby certify:
1. This Certificate of Amendment to the Corporation’s Restated Certificate of Incorporation, as amended (the “Certificate”),
has been duly adopted in accordance with the provisions of Section 242 of the DGCL.
2. This Certificate of Amendment to the Certificate amends Article IV of the Certificate by deleting the existing
Paragraph A of Article IV in its entirety and substituting therefore a new Paragraph A of Article IV, to read in its entirety as follows:
A. Authorized Stock. The total authorized stock of the Corporation, which shall be an aggregate of 17,500,000 shares,
shall consist of three classes: (i) a first class consisting of 7,500,000 shares of Common Stock having a par value of $0.01
per share (the “Original Common Stock”); (ii) a second class consisting of 7,500,000 shares of Public Common Stock
having a par value of $0.01 per share (the “Common Stock” or “NOL Restricted Common Stock” and, together with the
Original Common Stock, the “Common Stock Securities”); and (iii) a third class consisting of 2,500,000 shares of Preferred
Stock having a par value of $0.01 per share (the “Preferred Stock”).
Effective as of 12:01 a.m., Eastern Time, on December 30, 2010 (the “Effective Time”), (i) each ten shares of Original
Common Stock, issued and outstanding or held by the Corporation as treasury stock, if any, shall, automatically and
without any action on the part of the respective holders thereof, be combined and converted into one share of Original
Common Stock, and (ii) each ten shares of Common Stock, issued and outstanding or held by the Corporation as treasury
stock, if any, shall, automatically and without any action on the part of the respective holders thereof, be combined and
converted into one share of Common Stock. No fractional shares shall be issued and, in lieu thereof, the holder shall receive
a cash payment equal to the fair value, as determined by the Board of Directors, of such fractional shares as of the Effective
Time.
3. This Certificate of Amendment shall become effective as of 12:01 a.m., Eastern Time, on December 30, 2010.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be executed by a duly authorized
officer on this 29th day of December, 2010.
Heska Corporation
By: /s/ Jason A. Napolitano
Name: Jason A. Napolitano
Title: Executive Vice President and Chief Financial Officer
HESKA CORPORATION
1997 STOCK INCENTIVE PLAN
(AS AMENDED MARCH 6, 2007 AND MAY 5, 2009)
Exhibit 10.1
TABLE OF CONTENTS
Page
ARTICLE 1. INTRODUCTION
ARTICLE 2. ADMINISTRATION
2.1 Committee Composition
2.2 Committee Responsibilities
ARTICLE 3. SHARES AVAILABLE FOR GRANTS
3.1 Basic Limitation
3.2 Annual Increase in Shares
3.3 Additional Shares
ARTICLE 4. ELIGIBILITY
4.1 Nonstatutory Stock Options and Restricted Shares
4.2 Incentive Stock Options
ARTICLE 5. OPTIONS
5.1 Stock Option Agreement
5.2 Number of Shares
5.3 Exercise Price
5.4 Exercisability and Term
5.5 Effect of Change in Control
5.6 Modification or Assumption of Options
5.7 Buyout Provisions
ARTICLE 6. PAYMENT FOR OPTION SHARES
6.1 General Rule
6.2 Surrender of Stock
6.3 Exercise/Sale
6.4 Exercise/Pledge
6.5 Promissory Note
6.6 Other Forms of Payment
ARTICLE 7. [Reserved]
ARTICLE 8. RESTRICTED SHARES
8.1 Time, Amount and Form of Awards
8.2 Payment for Awards
8.3 Vesting Conditions
8.4 Voting and Dividend Rights
ARTICLE 9. PROTECTION AGAINST DILUTION
9.1 Adjustments
9.2 Dissolution or Liquidation
9.3 Reorganizations
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ARTICLE 10. AWARDS UNDER OTHER PLANS
ARTICLE 11. LIMITATION ON RIGHTS
11.1 Retention Rights
11.2 Stockholders’ Rights
11.3 Regulatory Requirements
ARTICLE 12. WITHHOLDING TAXES
12.1 General
12.2 Share Withholding
ARTICLE 13. FUTURE OF THE PLAN
13.1 Term of the Plan
13.2 Amendment or Termination
ARTICLE 14. DEFINITIONS
ARTICLE 15. EXECUTION
2
Page
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HESKA CORPORATION
1997 STOCK INCENTIVE PLAN
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board effective March 15, 1997. The purpose of the Plan is to promote the long-term success
of the Company and the creation of stockholder value by (a) encouraging Employees, Outside Directors and Consultants to focus on
critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and Consultants with
exceptional qualifications and (c) linking Employees, Outside Directors and Consultants directly to stockholder interests through
increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares or
Options (which may constitute incentive stock options or nonstatutory stock options).
The Plan shall be governed by, and construed in accordance with, the laws of the State of Colorado (except their choice-of-
law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 Committee Composition. The Plan shall be administered by the Committee. The Committee shall consist exclusively of two
or more directors of the Company, who shall be appointed by the Board. In addition, the composition of the Committee shall
satisfy:
(a) Such requirements as the Securities and Exchange Commission may establish for administrators acting under plans
intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act; and
(b) Such requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to
qualify for exemption under section 162(m)(4)(C) of the Code.
The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company
who need not satisfy the foregoing requirements, who may administer the Plan with respect to Employees and Consultants who are not
considered officers or directors of the Company under section 16 of the Exchange Act, may grant Awards under the Plan to such
Employees and Consultants and may determine all terms of such Awards.
2.2 Committee Responsibilities. The Committee shall (a) select the Employees, Outside Directors and Consultants who are to
receive Awards under the Plan, (b) determine the type, number, vesting requirements and other features and conditions of such
Awards, (c) interpret the Plan and (d) make all other decisions relating to the operation of the Plan. The Committee may adopt
such rules or guidelines as it deems appropriate to implement the Plan. The Committee’s determinations under the Plan shall be
final and binding on all persons.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 Basic Limitation. Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. The
aggregate number of Options and Restricted Shares awarded under the Plan shall not exceed (a) 1,350,000 plus (b) the aggregate
number of Common Shares remaining available for grants under the Predecessor Plans on March 15, 1997, plus (c) the additional
Common Shares described in Sections 3.2 and 3.3 less (d) 250,000. No additional grants shall be made under the Predecessor
Plans after March 15, 1997. The limitation of this Section 3.1 shall be subject to adjustment pursuant to Article 9.
3
3.2 Annual Increase in Shares. As of January 1 of each year, commencing with the year 1998 and continuing through
January 1, 2007, the aggregate number of Options and Restricted Shares that may be awarded under the Plan shall be increased
by a number of Common Shares equal to the lesser of (a) 5% of the total number of Common Shares outstanding as of the next
preceding December 31 or (b) 1,500,000. After the annual increase on January 1, 2007, there shall be no further annual increases
under the Plan unless and until stockholder approval of such increase has been obtained.
3.3 Additional Shares. If Options granted under this Plan or under the Predecessor Plans are forfeited or terminate for any other
reason before being exercised, then the corresponding Common Shares shall become available for the grant of Options and
Restricted Shares under this Plan. If Restricted Shares are forfeited, then the corresponding Common Shares shall again become
available for the grant of NQOs and Restricted Shares under the Plan. The aggregate number of Common Shares that may be
issued under the Plan upon the exercise of ISOs shall not be increased when Restricted Shares are forfeited.
ARTICLE 4. ELIGIBILITY.
4.1 Nonstatutory Stock Options and Restricted Shares. Only Employees, Outside Directors and Consultants shall be eligible
for the grant of NQOs and Restricted Shares.
4.2 Incentive Stock Options. Only Employees who are common-law employees of the Company, a Parent or a Subsidiary shall
be eligible for the grant of ISOs. In addition, an Employee who owns more than 10% of the total combined voting power of all
classes of outstanding stock of the Company or any of its Parents or Subsidiaries shall not be eligible for the grant of an IS0
unless the requirements set forth in section 422(c)(6) of the Code are satisfied.
ARTICLE 5. OPTIONS.
5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between
the Optionee and the Company. Such Option shall be subject to all applicable terms of the Plan and may be subject to any other
terms that are not inconsistent with the Plan. The Stock Option Agreement shall specify whether the Option is an IS0 or an NQO.
The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be
granted in consideration of a cash payment or in consideration of a reduction in the Optionee’s other compensation. A Stock
Option Agreement may provide that a new Option will be granted automatically to the Optionee when he or she exercises a prior
Option and pays the Exercise Price in the form described in Section 6.2.
5.2 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and
shall provide for the adjustment of such number in accordance with Article 9. Options granted to any Optionee in a single fiscal
year of the Company shall not cover more than 500,000 Common Shares, except that Options granted to a new Employee in the
fiscal year of the Company in which his or her service as an Employee first commences shall not cover more than one million
Common Shares. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Article 9.
5.3 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price; provided that the Exercise Price under an IS0
shall in no event be less than 100% of the Fair Market Value of a Common Share on the date of grant and the Exercise Price
under an NQO shall in no event be less than 85% of the Fair Market Value of a Common Share on the date of grant. In the case
of an NQO, a Stock Option Agreement may specify an Exercise Price that varies in accordance with a predetermined formula
while the NQO is outstanding.
4
5.4 Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to
become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an IS0
shall in no event exceed 10 years from the date of grant. A Stock Option Agreement may provide for accelerated exercisability in
the event of the Optionee’s death, disability or retirement or other events and may provide for expiration prior to the end of its
term in the event of the termination of the Optionee’s service. NQOs may also be awarded in combination with Restricted
Shares, and such an Award may provide that the NQOs will not be exercisable unless the related Restricted Shares are forfeited.
5.5 Effect of Change in Control. The Committee may determine, at the time of granting an Option or thereafter, that such
Option shall become exercisable as to all or part of the Common Shares subject to such Option in the event that a Change in
Control occurs with respect to the Company, subject to the following limitations:
(a) In the case of an ISO, the acceleration of exercisability shall not occur without the Optionee’s written consent.
(b) If the Company and the other party to the transaction constituting a Change in Control agree that such transaction is to
be treated as a “pooling of interests” for financial reporting purposes, and if such transaction in fact is so treated, then the
acceleration of exercisability shall not occur to the extent that the surviving entity’s independent public accountants
determine in good faith that such acceleration would preclude the use of “pooling of interests” accounting.
5.6 Modification or Assumption of Options. Within the limitations of the Plan, the Committee may modify, extend or assume
outstanding options or may accept the cancellation of outstanding options (whether granted by the Company or by another
issuer) in return for the grant of new options for the same or a different number of shares and at the same or a different exercise
price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair his
or her rights or obligations under such Option.
5.7 Buyout Provisions. The Committee may at any time (a) offer to buy out for a payment in cash or cash equivalents an Option
previously granted or (b) authorize an Optionee to elect to cash out an Option previously granted, in either case at such time and
based upon such terms and conditions as the Committee shall establish.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash or cash
equivalents at the time when such Common Shares are purchased, except as follows:
(a) In the case of an IS0 granted under the Plan, payment shall be made only pursuant to the express provisions of the
applicable Stock Option Agreement. The Stock Option Agreement may specify that payment may be made in any form(s)
described in this Article 6.
(b) In the case of an NQO, the Committee may at any time accept payment in any form(s) described in this Article 6.
5
6.2 Surrender of Stock. To the extent that this Section 6.2 is applicable, all or any part of the Exercise Price may be paid by
surrendering, Common Shares that are already owned by the Optionee. Such Common Shares shall be valued at their Fair Market
Value on the date when the new Common Shares are purchased under the Plan. The Optionee shall not surrender, Common
Shares in payment of the Exercise Price if such action would cause the Company to recognize compensation expense (or
additional compensation expense) with respect to the Option for financial reporting purposes.
6.3 Exercise/Sale. To the extent that this Section 6.3 is applicable, all or any part of the Exercise Price and any withholding taxes
may be paid by delivering (on a form prescribed by the Company) an irrevocable direction to a securities broker approved by the
Company to sell all or part of the Common Shares being purchased under the Plan and to deliver all or part of the sales proceeds
to the Company.
6.4 Exercise/Pledge. To the extent that this Section 6.4 is applicable, all or any part of the Exercise Price and any withholding
taxes may be paid by delivering (on a form prescribed by the Company) an irrevocable direction to pledge all or part of the
Common Shares being purchased under the Plan to a securities broker or lender approved by the Company, as security for a loan,
and to deliver all or part of the loan proceeds to the Company.
6.5 Promissory Note. To the extent that this Section 6.5 is applicable, all or any part of the Exercise Price and any withholding
taxes may be paid by delivering (on a form prescribed by the Company) a full-recourse promissory note; provided that the par
value of the Common Shares being purchased under the Plan shall be paid in cash or cash equivalents.
6.6 Other Forms of Payment. To the extent that this Section 6.6 is applicable, all or any part of the Exercise Price and any
withholding taxes may be paid in any other form that is consistent with applicable laws, regulations and rules.
ARTICLE 7. [Reserved]
ARTICLE 8. RESTRICTED SHARES.
8.1 Time, Amount and Form of Awards. Awards under the Plan may be granted in the form of Restricted Shares. Restricted
Shares may also be awarded in combination with NQOs, and such an Award may provide that the Restricted Shares will be
forfeited in the event that the related NQOs are exercised.
8.2 Payment for Awards. To the extent that an Award is granted in the form of newly issued Restricted Shares, the Award
recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash or cash equivalents an amount
equal to the par value of such Restricted Shares. To the extent that an Award is granted in the form of Restricted Shares from the
Company’s treasury, no cash consideration shall be required of the Award recipients. Any amount not paid in cash may be paid
with a full recourse promissory note.
6
8.3 Vesting Conditions. Each Award of Restricted Shares may or may not be subject to vesting. Vesting shall occur, in full or in
installments, upon satisfaction of the conditions specified in the Stock Award Agreement. A Stock Award Agreement may
provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events. The Committee
may determine, at the time of granting Restricted Shares or thereafter, that all or part of such Restricted Shares shall become
vested in the event that a Change in Control occurs with respect to the Company, except as provided in the next following
sentence. If the Company and the other party to the transaction constituting a Change in Control agree that such transaction is to
be treated as a “pooling of interests” for financial reporting purposes, and if such transaction in fact is so treated, then the
acceleration of vesting shall not occur to the extent that the surviving entity’s independent public accountants determine in good
faith that such acceleration would preclude the use of “pooling of interests” accounting.
8.4 Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend
and other rights as the Company’s other stockholders. A Stock Award Agreement, however, may require that the holders of
Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be
subject to the same conditions and restrictions as the Award with respect to which the dividends were paid.
ARTICLE 9. PROTECTION AGAINST DILUTION.
9.1 Adjustments. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in
Common Shares, a declaration of a dividend payable in a form other than Common Shares in an amount that has a material effect
on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall
make such adjustments as it, in its sole discretion, deems appropriate in one or more of (a) the number of Options and Restricted
Shares available for future Awards under Article 3, (b) the limitations set forth in Section 5.2, (c) the number of Common Shares
covered by each outstanding Option or (d) the Exercise Price under each outstanding Option. Except as provided in this
Article 9, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible
into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any
other increase or decrease in the number of shares of stock of any class.
9.2 Dissolution or Liquidation. To the extent not previously exercised, Options shall terminate immediately prior to the
dissolution or liquidation of the Company.
9.3 Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Options and
Restricted Shares shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation,
for the continuation of outstanding Awards by the Company (if the Company is a surviving corporation), for their assumption by
the surviving corporation or its parent or subsidiary, for the substitution by the surviving corporation or its parent or subsidiary of
its own awards for such Awards, for accelerated vesting and accelerated expiration, or for settlement in cash or cash equivalents.
7
ARTICLE 10. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such awards may be settled in the form of Common Shares
issued under this Plan. Such Common Shares shall be treated for all purposes under the Plan like Restricted Shares and shall, when
issued, reduce the number of Common Shares available under Article 3.
ARTICLE 11. LIMITATION ON RIGHTS.
11.1 Retention Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to
remain an Employee, Outside Director or Consultant. The Company and its Parents, Subsidiaries and Affiliates reserve the right
to terminate the service of any Employee, Outside Director or Consultant at any time, with or without cause, subject to applicable
laws, the Company’s certificate of incorporation and bylaws and a written employment agreement (if any).
11.2 Stockholders’ Rights. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect
to any Common Shares covered by his or her Award prior to the time when a stock certificate for such Common Shares is issued
or, in the case of an Option, the time when he or she becomes entitled to receive such Common Shares by filing a notice of
exercise and paying the Exercise Price. No adjustment shall be made for cash dividends or other rights for which the record date
is prior to such time, except as expressly provided in the Plan.
11.3 Regulatory Requirements. Any other provision of the Plan notwithstanding, the obligation of the Company to issue
Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory
body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares
pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their
registration, qualification or listing or to an exemption from registration, qualification or listing.
ARTICLE 12. WITHHOLDING TAXES.
12.1 General. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall
make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection
with the Plan. The Company shall not be required to issue any Common Shares or make any cash payment under the Plan until
such obligations are satisfied.
12.2 Share Withholding. The Committee may permit a Participant to satisfy all or part of his or her withholding or income tax
obligations by having the Company withhold all or a portion of any Common Shares that otherwise would be issued to him or
her or by surrendering all or a portion of any Common Shares that he or she previously acquired. Such Common Shares shall be
valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash.
ARTICLE 13. FUTURE OF THE PLAN.
13.1 Term of the Plan. The Plan, as set forth herein, shall become effective on March 14, 1997. The Plan shall remain in effect
until it is terminated under Section 13.2, except that no ISOs shall be granted after May 4, 2019.
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13.2 Amendment or Termination. The Board may, at any time and for any reason, amend or terminate the Plan. An amendment
of the Plan shall be subject to the approval of the Company’s stockholders only to the extent required by applicable laws,
regulations or rules. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Award previously granted under the Plan.
ARTICLE 14. DEFINITIONS.
14.1 “Affiliate” means any entity other than a Subsidiary, if the Company and/or one or more Subsidiaries own not less than
50% of such entity.
14.2 “Award” means any award of an Option or a Restricted Share under the Plan.
14.3 “Board” means the Company’s Board of Directors, as constituted from time to time.
14.4 “Change in Control” shall mean:
(a) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate
reorganization, if more than 50% of the combined voting power of the continuing or surviving entity’s securities
outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not
stockholders of the Company immediately prior to such merger, consolidation or other reorganization;
(b) The sale, transfer or other disposition of all or substantially all of the Company’s assets;
(c) A change in the composition of the Board, a result of which fewer than 50% of the incumbent directors are directors
who either (i) had been directors of the Company on the date 24 months prior to the date of the event that may constitute a
Change in Control (the “original directors”) or (ii) were elected, or nominated for election, to the Board with the affirmative
votes of at least a majority of the aggregate of the original directors who were still in office at the time of the election or
nomination and the directors whose election or nomination was previously so approved; or
(d) Any transaction as a result of which any person is the “beneficial owner” (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing at least 30% of the total voting power represented by
the Company’s then outstanding voting securities. For purposes of this Paragraph (d), the term “person” shall have the same
meaning as when used in sections 13(d) and 14(d) of the Exchange Act but shall exclude (i) any person, or person affiliated
with said person, who, on March 15, 1997, is the beneficial owner of securities of the Company representing at least 20% of
the total voting power represented by the Company’s then outstanding voting securities (11,607,764), (ii) a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or of a Parent or Subsidiary and (iii) a
corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their
ownership of the common stock of the Company.
A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company’s incorporation or to
create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities
immediately before such transaction.
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14.5 “Code” means the Internal Revenue Code of 1986, as amended.
14.6 “Committee” means a committee of the Board, as described in Article 2.
14.7 “Common Share” means one share of the common stock of the Company.
14.8 “Company” means either (a) Heska Corporation, a California corporation (prior to the formation of Heska Corporation, a
Delaware corporation), or (b) Heska Corporation, a Delaware corporation (following its formation).
14.9 “Consultant” means a consultant or adviser who provides bona fide services to the Company, a Parent, a Subsidiary or an
Affiliate as an independent contractor. Service as a Consultant shall be considered employment for all purposes of the Plan,
except as provided in Section 4.2.
14.10 “Employee” means a common-law employee of the Company, a Parent, a Subsidiary or an Affiliate.
14.11 “Exchange Act” means the Securities Exchange Act of 1934, as amended.
14.12 “Exercise Price” means the amount for which one Common Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement.
14.13 “Fair Market Value” means the market price of Common Shares, determined by the Committee in good faith on such
basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the
prices reported in The Wall Street Journal. Such determination shall be conclusive and binding on all persons.
14.14 “ISO” means an incentive stock option described in section 422(b) of the Code.
14.15 “NQO means a stock option not described in sections 422 or 423 of the Code.
14.16 “Option” means an IS0 or NQO granted under the Plan and entitling the holder to purchase Common Shares.
14.17 “Optionee” means an individual or estate who holds an Option.
14.18 “Outside Director” shall mean a member of the Board who is not an Employee. Service as an Outside Director shall be
considered employment for all purposes of the Plan, except as provided in Section 4.2.
14.19 “Parent” means any corporation (other than the Company) in an unbroken chain of corporations ending with the
Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a
date after the adoption of the Plan shall be considered a Parent commencing as of such date.
14.20 “Participant” means an individual or estate who holds an Award.
14.21 “Plan” means this Heska Corporation 1997 Stock Incentive Plan, as amended from time to time.
14.22 “Predecessor Plans” means (a) the 1988 Heska Corporation Stock Plan and (b) the Heska Corporation 1994 Key
Executive Stock Plan.
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14.23 “Restricted Share” means a Common Share awarded under the Plan.
14.24 “Stock Award Agreement” means the agreement between the Company and the recipient of a Restricted Share that
contains the terms, conditions and restrictions pertaining to such Restricted Share.
14.25 “Stock Option Agreement” means the agreement between the Company and an Optionee that contains the terms,
conditions and restrictions pertaining to his or her Option.
14.26 “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the
Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.
ARTICLE 15. EXECUTION.
To record the adoption of the Plan by the Board, the Company has caused its duly authorized officer to execute this
document in the name of the Company.
HESKA CORPORATION
By: /s/ Jason A. Napolitano
Executive Vice President and
Chief Financial Officer
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1.
The Category Percentages for the 2011 MIP are as follows:
Heska Corporation
2011 Management Incentive Plan
Title
Chief Executive Officer
President
Chief Financial Officer
Executive Vice Presidents
Vice Presidents
Managing Directors
Directors
Exhibit 10.8
Heska MIP
50.0% of base pay
35.0% of base pay
35.0% of base pay
35.0% of base pay
35.0% of base pay
25.0% of base pay
25.0% of base pay
2.
The Plan Allocation for the 2011 MIP is as follows:
50% on overall achievement of the Financial Performance Metric (“FPM”) and 50% on Strategic Growth Initiatives (“SGI”).
3.
The Key Parameters for the 2011 MIP are as follows:
•
•
Pre-MIP Operating Income — 50%
Strategic Growth Initiative Milestone Achievement — 50%, as defined below
•
•
Growth Initiative A
•
Milestone A: Execute contract by end of Q2 2011
Growth Initiative B
•
•
Milestone B1: Execute contract by end of Q2 2011
Milestone B2: Launch first product by end of Q3 2011
•
Growth Initiative C
•
•
Milestone C1: Execute agreement by end of Q3 2011
Milestone C2: Formalize alliance by end of Q3 2011
4.
The Payout Structure for the 2011 MIP is as follows:
•
•
For FPM of Pre-MIP Operating Income see the attached table
For SGI, achievement of milestones and Pre-MIP Operating Income of $1,500,000, see the attached table. Each
milestone is worth 20% of the potential MIP payout for SGI
•
•
•
•
Payouts for each parameter will be calculated independent of the success or failure of the other parameter
Maximum MIP Payout for Proposed 2011 MIP for the financial metric parameter is paid at $5,562,500 of Pre-MIP
Operating Income and 100% achievement of the five milestones for SGI
For example, 100% achievement of the SGI milestones and $1,300,000 of Pre-MIP Operating Income would pay no
MIP for either category. Achievement of 60% of the SGI milestones and $3,177,072 of Pre-MIP Operating Income
would pay MIP of $315,000 for SGI and $315,000 for FPM
Any MIP payment in excess of the Maximum MIP Payout shall be at the sole and absolute discretion of the
Compensation Committee
Heska Corporation
2011 MIP Payout Table
Operating
Income
Pre-MIP
Operating
Income
Post-MIP
FPM
MIP
Payout
%
50% FPM
MIP
Amount
SGI Payout
Amount*
Total Payout
Amount
1,500,000
1,779,512
2,059,024
2,338,536
2,618,048
2,897,560
3,177,072
3,456,584
3,736,096
4,015,608
4,295,125
4,548,600
4,802,075
5,055,550
5,309,025
5,562,500
5,562,500+
975,000
1,202,012
1,429,024
1,656,036
1,883,048
2,110,060
2,337,072
2,564,084
2,791,096
3,018,108
3,245,125
3,446,100
3,647,075
3,848,050
4,049,025
4,250,000
4,250,000
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
Capped
*
Assumes 100% achievement of milestones.
—
52,500
105,000
157,500
210,000
262,500
315,000
367,500
420,000
472,500
525,000
577,500
630,000
682,500
735,000
787,500
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
577,500
630,000
682,500
735,000
787,500
840,000
892,500
945,000
997,500
1,050,000
1,102,500
1,155,000
1,207,500
1,260,000
1,312,500
HESKA CORPORATION
DIRECTOR COMPENSATION POLICY
Exhibit 10.9
Non-employee directors of Heska Corporation, a Delaware corporation (the “Company”) shall receive the following
compensation for their service as a member of the Board of Directors (the “Board”) of the Company:
Cash Compensation
Annual Retainer for Board Service
Effective January 1, 2010, each non-employee director shall be entitled to an annual cash retainer in the amount of $30,000 (the
“Annual Retainer”). The Company shall pay the Annual Retainer on a quarterly basis in advance on the first day of the calendar
quarter, subject to the non-employee director’s continued service to the Company as a non-employee director on such date.
Lead Director Retainer
Commencing July 1, 2010, a non-employee director who serves as the Lead Director of the Board shall be entitled to an annual
cash retainer in the amount of $10,000 (the “Lead Director Retainer”). The Company shall pay the Lead Director Retainer on a
quarterly basis in advance on the first day of the calendar quarter, subject to the non-employee director’s continued service to the
Company as Lead Director of the Board on such date.
Board Committee Chair Retainer
Commencing July 1, 2009, a non-employee director who serves as the Chair of the Audit, Compensation or Corporate
Governance committee of the Board shall be entitled to an annual cash retainer in the amount of $2,500 (the “Chair Retainer”). The
Company shall pay the Chair Retainer on a quarterly basis in advance on the first day of the calendar quarter, subject to the non-
employee director’s continued service to the Company as Chair of such committee on such date.
Board Committee Member Retainer
Commencing July 1, 2007, a non-employee director who serves as a member of the Audit, Compensation or Corporate
Governance committee shall be entitled to an annual cash retainer of $2,500 for membership on each Board committee they serve on
(the “Committee Retainer”). A non-employee director who is also the Chair of a committee shall be entitled to the Committee Retainer
in addition to the Chair Retainer. The Company shall pay the Committee Retainer on a quarterly basis in advance on the first day of
the calendar quarter, subject to the non-employee director’s continued service to the Company as a member of such committee on such
date.
Equity Compensation
Initial Award for New Directors
For new non-employee directors appointed or elected after January 1, 2007, on the date a new director becomes a member of the
Board, each non-employee director shall automatically receive a grant of an option valued at $37,500 to purchase shares of the
Company’s common stock (an “Initial Option”), at an exercise price equal to the fair market value of the common stock on the date of
grant, subject to such grant covering a maximum of 5,000 shares. The Initial Option is subject to vesting over a period of four years in
equal annual installments commencing on the date of grant, subject to the non-employee director’s continued service to the Company
through the vesting dates. The Initial Option will be immediately exercisable, but if “early exercised,” unvested shares shall remain
subject to the Company’s right of repurchase at the exercise price upon termination of service prior to the fourth anniversary of the
date of grant. An employee director who ceases to be an employee, but who remains a director, will not receive an Initial Option.
Annual Award for Continuing Board Members
Commencing with the 2007 Annual Meeting of Stockholders, each continuing non-employee director shall automatically receive
an annual grant of an option valued at $37,500 to purchase shares of the Company’s common stock (an “Annual Option”), at an
exercise price equal to the fair market value of the common stock on the date of grant which shall be the date of each Company
Annual Meeting of stockholders, subject to such grant covering a maximum of 5,000 shares. The Annual Option for continuing Board
members shall vest in full on the earlier of (i) the one year anniversary of the date of grant and (ii) the date immediately preceding the
date of the Annual Meeting of the Company’s stockholders for the year following the year of grant for the award, subject to the non-
employee director’s continued service to the Company through the vesting date. The Annual Option shall be immediately exercisable,
but if “early exercised,” remain subject to the Company’s right of repurchase at the exercise price upon termination of service prior to
the vesting date.
Provisions Applicable to All Non-Employee Director Equity Compensation Grants
All grants shall be subject to the terms and conditions of the Company’s 1997 Stock Incentive Plan or 2003 Equity Incentive
Plan, as applicable, and the terms of the Stock Option Agreement issued thereunder.
For purposes of this Director Compensation Policy, the “value” for Initial Grants and Annual Grants to non-employee directors
shall be determined in accordance with the Company’s option valuation policy in place at the time of grant for financial reporting
purposes.
Any unvested shares underlying non-employee director option grants shall become fully vested in the event of: (1) the
termination of the non-employee director’s services because of death, total and permanent disability or retirement at or after age 65; or
(2) a change in control occurs with respect to the Company while such non-employee director is a member of the Board.
2
Expense Reimbursement
All non-employee directors shall be entitled to reimbursement from the Company for their reasonable travel (including airfare
and ground transportation), lodging and meal expenses incident to meetings of the Board or committees thereof or in connection with
other Board related business. The Company shall also reimburse directors for attendance at director continuing education programs
that are relevant to their service on the Board and which attendance is pre-approved by the Chair of the Corporate Governance
Committee and Chairman of the Board. The Company shall make reimbursement to a non-employee director within a reasonable
amount of time following submission by the non-employee director of reasonable written substantiation for the expenses.
Amended and Restated February 23, 2011
3
Exhibit 10.32
[***] — Certain information in this exhibit have been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
EIGHTH AMENDMENT TO THIRD AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of December 15, 2010, is made by and between Heska Corporation, a Delaware corporation
(“Heska”), Diamond Animal Health, Inc., an Iowa corporation (“Diamond”) (each of Heska and Diamond may be referred to herein
individually as a “Borrower” and collectively as the “Borrowers”), and Wells Fargo Bank, National Association, operating through its
Wells Fargo Capital Finance operating division (the “Lender”).
Recitals
The Borrowers and the Lender are parties to a Third Amended and Restated Credit and Security Agreement dated as of
December 30, 2005 (as amended to date and as the same may be hereafter amended from time to time, the “Credit Agreement”).
The Borrowers have requested that certain amendments be made to the Credit Agreement, which the Lender is willing to
make pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is
agreed as follows:
1. Defined Terms. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the
same meanings as defined therein, unless otherwise defined herein. In addition, Section 1.1 of the Credit Agreement is amended by
adding or amending, as the case may be, the following definitions:
“Maturity Date” means December 31, 2013.
“Rental Inventory” of a Borrower means diagnostic and monitoring instruments purchased by such Borrower for the purpose of
demonstrating, loaning, leasing or renting to customers, and/or exchanging for otherwise similar customer instruments requiring
service, whether accounted for as equipment or inventory.
“Revolving Floating Rate” means Daily Three Month LIBOR plus the Spread, which annual rate shall change when and as Daily
Three Month LIBOR changes.
2. Spread. Section 2.7 of the Credit Agreement is hereby amended to read it its entirety as follows:
“Section 2.7 Spread. The spread (the “Spread”) means, from December 1, 2010 through the first adjustment as described
below, 5.75%, and thereafter, the percentage set forth in the table below opposite the applicable prior-fiscal-year Net Income of
the Borrowers, which percentage shall change annually effective as of the first day of the month following the month in which
the Borrowers deliver to the Lender their audited financial statements for the prior fiscal year; provided, however, that in no case
shall any decrease in the Spread occur during a Default Period:
Prior Fiscal Year Net Income
Less than $0
Greater than or equal to $0 but less than $2,500,000
Greater than or equal to $2,500,000 but less than $5,000,000
Greater than or equal to $5,000,000
2
Spread
5.75%
4.75%
3.75%
2.75%”
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
3. Financial Covenants. Sections 6.12 and 6.13 of the Credit Agreement are hereby amended to read in their entireties as
follows:
“Section 6.12 Minimum Capital. Heska will maintain, on a consolidated basis, as of each date listed below, its Capital at an
amount not less than the amount set forth opposite such date:
Date
November 30, 2010
December 31, 2010
January 31, 2011
February 28, 2011
March 31, 2011
April 30, 2011
May 31, 2011
June 30, 2011
July 31, 2011
August 31, 2011
September 30, 2011
October 31, 2011
November 30, 2011
December 31, 2011
$
$
Minimum Capital
13,900,000
14,000,000
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
The covenant levels for January 31, 2011 through and including December 31, 2011 shall be adjusted upwards or
downwards, respectively on a dollar-for-dollar basis, by an amount equal to the amount by which Heska’s Capital, as evidenced
by Heska’s audited balance sheet as of December 31, 2010, is greater than or less than [***]; provided, however, that any such
downward adjustment shall not exceed $500,000.
Section 6.13 Minimum Net Income. Heska will achieve, on a consolidated basis, during each period described below, Net
Income in an amount not less than the amount set forth opposite such period (amounts in parentheses denote negative numbers):
Period
Twelve months ending December 31, 2010
Three months ending March 31, 2011
Six months ending June 30, 2011
Nine months ending September 30, 2011
Twelve months ending December 31, 2011
3
Minimum Net
Income
$ (1,550,000)
[***]
[***]
[***]
[***]
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
4. Capital Expenditures. Section 7.10 of the Credit Agreement is hereby amended to read in its entirety as follows:
“Section 7.10 Capital Expenditures. The Borrowers, together with any Affiliates, will not incur or contract to incur, in the
aggregate, Capital Expenditures in the aggregate during the fiscal year-to-date period ending on any date described below in
excess of the amount set forth opposite such date:
Period
November 30, 2010
December 31, 2010
January 31, 2011
February 28, 2011
March 31, 2011
April 30, 2011
May 31, 2011
June 30, 2011
July 31, 2011
August 31, 2011
September 30, 2011
October 31, 2011
November 30, 2011
December 31, 2011
Maximum Capital
Expenditures
$
$
1,000,000
1,000,000
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
In addition to the foregoing, the amounts set forth above shall be adjusted upward on a dollar-for-dollar basis by the amount
allocated for such purpose in accordance with Section 2.22, from the date of such increase through the end of the fiscal year in
which such increase occurs.”
5. Compliance Certificate. Exhibit B to the Credit Agreement is replaced in its entirety by Exhibit B to this Amendment.
6. No Other Changes. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit
Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder.
7. Consent to Reverse Stock Split. Notwithstanding Section 7.5 of the Credit Agreement, the Lender hereby consents to
Heska’s 10-to-1 reverse stock split proposed to be effected in December 2010, provided that cash payments to shareholders shall be
made only in respect of odd amounts of shares held in Heska stockholder accounts (accounts containing a number of shares prior to
Heska’s 10-to-1 reverse split not divisible by 10) and such cash payments in the aggregate shall not exceed $50,000.
4
8. Restructuring Fee. The Borrower shall pay to the Lender, as of the date of this Agreement, a fully earned, non-refundable
fee of $25,000 in consideration of the Lender’s execution of this Amendment.
9. Conditions Precedent. This Amendment shall be effective when the Lender shall have received an executed original
hereof, together with the following, each in form and substance acceptable to the Lender in its sole discretion:
(a) Payment of the fee described in paragraph 8.
(b) Such other matters as the Lender may require.
10. Representations and Warranties. The Borrowers hereby represent and warrant to the Lender as follows:
(a) The Borrowers have all requisite power and authority to execute this Amendment and to perform all of its obligations
hereunder, and this Amendment has been duly executed and delivered by the Borrowers and constitute the legal, valid and
binding obligation of the Borrowers, enforceable in accordance with their terms.
(b) The execution, delivery and performance by the Borrowers of this Amendment have been duly authorized by all
necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or
regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrowers, or the articles of
incorporation or by-laws of the Borrowers, or (iii) result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which any Borrower is a party or by which it or its properties
may be bound or affected.
(c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date
hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an
earlier date.
11. No Waiver. The execution of this Amendment and acceptance of any documents related hereto shall not be deemed to
be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security
Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this
Amendment.
12. Release. The Borrowers hereby absolutely and unconditionally release and forever discharge the Lender, and any and all
participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof,
together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims,
demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any
state or federal law or otherwise, which any Borrower has had, now has or has made claim to have against any such person for or by
reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this
Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown.
5
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
13. Costs and Expenses. The Borrowers hereby reaffirm their agreement under the Credit Agreement to pay or reimburse
the Lender on demand for all costs and expenses incurred by the Lender in connection with the Loan Documents, including without
limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrowers
specifically agree to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection
with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrowers hereby agree that the
Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrowers, make a loan to
the Borrowers under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements,
costs and expenses.
14. Miscellaneous. This Amendment may be executed in any number of counterparts, each of which when so executed and
delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written
above.
HESKA CORPORATION
DIAMOND ANIMAL HEALTH, INC.
By
/s/ Jason A. Napolitano
Its Chief Financial Officer
WELLS FARGO BANK, NATIONAL
ASSOCIATION
By
[***]
[***], Authorized Signatory
By
/s/ Jason A. Napolitano
Its Chief Financial Officer
6
Compliance Certificate
Exhibit B to Eighth Amendment
To:
Wells Fargo Capital Finance
Date: , 20
Subject: Heska Corporation
Financial Statements
In accordance with our Third Amended and Restated Credit and Security Agreement dated as of December 30, 2005 (the “Credit
Agreement”), attached are the financial statements of Heska Corporation (“Heska”) as of and for , 20 (the “Reporting
Date”) and the year-to-date period then ended (the “Current Financials”). All terms used in this certificate have the meanings given in
the Credit Agreement.
I certify that, to the best of my knowledge, the Current Financials have been prepared in accordance with GAAP, subject to year-end
audit adjustments, and fairly present the Borrowers’ financial condition and the results of its operations as of the date thereof.
Events of Default. (Check one):
o
o
The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit Agreement.
The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement and
attached hereto is a statement of the facts with respect to thereto.
I hereby certify to the Lender as follows:
o
The Reporting Date does not mark the end of one of the Borrowers’ fiscal quarters, hence I am completing all paragraphs
below except paragraph 4.
o
The Reporting Date marks the end of one of the Borrowers’ fiscal quarters, hence I am completing all paragraphs below.
Financial Covenants. I further hereby certify as follows:
1. Accounts Payable. Pursuant to Section 6.5 of the Credit Agreement, as of the Reporting Date, Past Due Payables on a
consolidated basis was $ , which o satisfies o does not satisfy the requirement that the Borrowers have no Past Due
Payables.
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
2. Minimum Capital. Pursuant to Section 6.12 of the Credit Agreement, as of the Reporting Date, Heska’s Capital was, on a
consolidated basis, $ , which o satisfies o does not satisfy the requirement that such amount be not less than
$ on the Reporting Date, as set forth in the table below and adjusted, if applicable, in accordance with Section 6.12:
Date
November 30, 2010
December 31, 2010
January 31, 2011
February 28, 2011
March 31, 2011
April 30, 2011
May 31, 2011
June 30, 2011
July 31, 2011
August 31, 2011
September 30, 2011
October 31, 2011
November 30, 2011
December 31, 2011
$
$
Minimum Capital
13,900,000
14,000,000
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
The covenant levels for January 31, 2011 through and including December 31, 2011 shall be adjusted upwards or
downwards, respectively on a dollar-for-dollar basis, by an amount equal to the amount by which Heska’s Capital, as evidenced
by Heska’s audited balance sheet as of December 31, 2010, is greater than or less than [***]; provided, however, that any such
downward adjustment shall not exceed $500,000.
B-2
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
3. Minimum Net Income. Pursuant to Section 6.13 of the Credit Agreement, as of the Reporting Date, Heska’s Net Income
was, on a consolidated basis, $ , which o satisfies o does not satisfy the requirement that such amount be no less than
$ on the Reporting Date, as set forth in the table below:
Period
Twelve months ending December 31, 2010
Three months ending March 31, 2011
Six months ending June 30, 2011
Nine months ending September 30, 2011
Twelve months ending December 31, 2011
Minimum Net
Income
$ (1,550,000)
[***]
[***]
[***]
[***]
4. Minimum Liquidity. Pursuant to Section 6.14 of the Credit Agreement, as of the Reporting Date, Heska’s Liquidity was,
on a consolidated basis, $ , which o satisfies o does not satisfy the requirement that such amount be no less than
$1,500,000 on the Reporting Date.
5. Minimum Individual Book Net Worth. Pursuant to Section 6.15 of the Credit Agreement, as of the Reporting Date,
Heska’s Book Net Worth was $ and Diamond’s Book Net Worth was $ , which o satisfies o does not
satisfy the requirement that such amounts be no less than zero on the Reporting Date.
6. Maximum Contributions. Pursuant to Section 7.4(a)(v) of the Credit Agreement, as of the Reporting Date, Heska’s fiscal
year-to-date aggregate contributions to non-Borrower Subsidiaries was $ , which o satisfies o does not satisfy the
requirement that such amounts be no more than $700,000 during any fiscal year.
B-3
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
7. Capital Expenditures. Pursuant to Section 7.10 of the Credit Agreement, for the fiscal year-to-date period ending on the
Reporting Date, Heska’s Capital Expenditures were, in the aggregate and on a consolidated basis, $ which o satisfies
o does not satisfy the requirement that such amount be not more than $ during the period ending on the Reporting
Date, as set forth in the table below and adjusted, if applicable, in accordance with Section 7.10:
Period
November 30, 2010
December 31, 2010
January 31, 2011
February 28, 2011
March 31, 2011
April 30, 2011
May 31, 2011
June 30, 2011
July 31, 2011
August 31, 2011
September 30, 2011
October 31, 2011
November 30, 2011
December 31, 2011
Maximum Capital
Expenditures
$
$
1,000,000
1,000,000
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
Attached hereto are all relevant facts in reasonable detail to evidence the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.
HESKA CORPORATION
By
Its
B-4
[***] — Certain information in this exhibit have been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
Exhibit 10.41
FIFTH AMENDMENT
TO
AMENDED AND RESTATED
BOVINE VACCINE DISTRIBUTION AGREEMENT
This Fifth Amendment (“Fifth Amendment”) is entered into as of the 23rd day of December, 2010 (“Effective Date”) by and
between DIAMOND ANIMAL HEALTH, INC., an Iowa corporation with offices at 2538 Southeast 43rd Street, Des Moines, Iowa
50317 (“Diamond”) and AGRI LABORATORIES, LTD., a Delaware corporation, with offices at 20927 State Route K, St. Joseph,
Missouri 64505 (“Distributor”) as an amendment to that certain Amended and Restated Bovine Vaccine Distribution Agreement dated
as of September 30, 2002 between Diamond and Distributor (the “Original Agreement”), as amended by that certain First Amendment
dated as of September 20, 2004 (the “First Amendment”) that certain Second Amendment dated as of December 10, 2004 (the
“Second Amendment”) that certain Third Amendment dated as of May 26, 2006 (the “Third Amendment”) and that certain Fourth
Amendment dated as of November 16, 2007 (the “Fourth Amendment”) (collectively, the “Agreement”).
WHEREAS, Diamond and Distributor are parties to the Agreement providing for the distribution of certain bovine antigens; and
WHEREAS, as of the Effective Date, Diamond, Distributor [***];
WHEREAS, Diamond and Distributor desire to amend the Agreement to provide for the distribution of [***] and to document
certain other amendments agreed upon by the parties, all on the terms and conditions of this Fifth Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Definitions. Capitalized terms used herein shall have the meaning ascribed to them in the Agreement, unless otherwise defined
herein. Capitalized terms defined in the Recitals to this Fifth Amendment are hereby incorporated by reference in the Agreement.
2. Pricing, Payment and Term Amendments.
(i) Price List. As of the Effective Date, Exhibit A of the Agreement is hereby deleted in its entirety and replaced with
Exhibit A of this Fifth Amendment.
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
(ii) Price Adjustments. Sections 3.02 and 3.03 of the Agreement are hereby deleted in their entirety and replaced with the
following paragraphs:
3.02 Annual Price Adjustment. Purchase Prices for each Product set forth in Exhibit A shall be in effect for Products having
specified delivery dates on or after the Effective Date. Diamond may increase Purchase Prices for each Product to be
delivered in each subsequent Contract Year by written notice to Distributor within ninety (90) days prior to the end of the
preceding Contract Year, taking into account factors including, but not limited to, cost changes, volume changes and plant
utilization; provided that, such increase for any Contract Year, plus any increase in the preceding Contract Year pursuant to
Section 3.03, shall not exceed [***] of the Purchase Price in effect at the beginning of the preceding Contract Year;
provided that, [***], Diamond’s right to increase Purchase Prices under this Section 3.02 shall apply for every other
Contract Year, beginning for Contract Year 2014, and applying for every other Contract Year thereafter. [***]
3.03 Cost Increases and Decreases. Diamond shall have the right, but not the obligation, to increase or decrease Purchase
Prices by notice to Distributor in writing during any Contract Year by an amount equal to any cost increases or decreases
for raw materials and packaging components for each Product to the extent such increases or decreases, individually or in
the aggregate, would cause total finished cost of goods of such Product to increase or decrease by more than [***]. Upon
Distributor’s request, Diamond will furnish reasonable supporting documentation therefor.
(iii) Additional Prepayments; [***]. The Agreement is hereby amended as of the Effective Date to add the following new
Section 3.04(iv):
3.04(iv) (A) On or before the first day of each Contract Quarter beginning with the first (1st) Contract Quarter during
Contract Year 2011 and continuing during the term of this Agreement, Distributor shall pay to Diamond an amount equal to
the Minimum Prepayment, which amount shall be credited, effective upon issuance of Diamond invoices, against the
invoice prices for all Products to be shipped in such Contract Year. For purposes of this Agreement, the “Minimum
Prepayment” shall be an amount equal to [***]. Distributor shall not be required to make a Minimum Prepayment during
the pendency of a regulatory order issued by the USDA as a result of Diamond’s negligent act or omission (a “USDA Shut
Down Event”).
2
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
(B) If [***]; provided that, Distributor shall not be obligated to make such payments for any Contract Year if: (1) a
USDA Shut Down Event occurs and continues for more than one hundred twenty (120) days during such Contract Year or
(2) Distributor has ordered Products for shipment in such Contract Year in an amount equal to or greater than [***] and
Diamond has failed to fill such orders.
(C) If [***]. Distributor shall not be obligated to make such payments for any Contract Year if: (1) a USDA Shut
Down Event occurs and continues for more than one hundred twenty (120) days during such Contract Year or (2)
Distributor has ordered Products for shipment in such Contract in an amount equal to or greater than [***], and Diamond
has failed to fill such orders.
(D) Diamond shall be entitled to retain any portion of the [***] shall not apply in any Contract Year in which a USDA
Shut Down Event occurs and continues for more than one hundred twenty (120) days during such Contract Year. In any
Contract Year in which [***].
(E) Notwithstanding any provision of the Agreement to the contrary, no [***] as those terms are defined and calculated in
the Agreement.
(iv) Term Amendments. Section 6.01 of the Agreement is hereby deleted in its entirety and replaced with the following
paragraph:
6.01 Term. The initial Term of this Agreement with respect to all Products shall be for a period commencing on the
[***] and ending on December 15, 2015. This Agreement shall automatically renew after the initial Term with respect to all
Products for additional renewal terms of one (1) year each, unless either party gives at least twelve (12) months written
notice to the other prior to the expiration of the initial Term or any renewal Term that it does not wish to renew this
Agreement with respect to such Products; provided that, the initial Term or any renewal Term shall be extended beyond the
date it would otherwise be scheduled to expire as provided above by a number of days equal to the number of days, if any,
that any stop sale order issued by Diamond was in effect prior to such scheduled expiration date.
3
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
(v) Private Label Authority. Effective on the Effective Date, the Agreement shall be amended to add the following new
Section 3.08:
3.08 Private Label. [***].
(vi) Pricing, Payment and Term Amendments. Without limiting the generality of the foregoing, the amendments set forth in
this Section 2 shall become effective as set forth herein and remain in effect without regard to [***].
3. Contingent Provisions [***]. Effective on [***], the provisions of this Section 3 shall come into force and effect; provided
that, [***], this Section 3 shall be void and of no force and effect whatsoever, but the remainder of this Fifth Amendment shall remain
in full force and effect.
(i) [***] to Agreement. [***].
(ii) Term. Effective on [***], Section 6.01 of the Agreement shall be deleted in its entirety hereby and replaced with the
following paragraph:
6.01 Term. The initial Term of this Agreement with respect to all Products other than [***] shall be for a period
commencing on the [***] and ending on the seventh (7th) anniversary of [***]. This Agreement shall automatically renew
after the initial Term with respect to all Products other than [***] for additional renewal terms of one (1) year each, unless
either party gives at least twelve (12) months written notice to the other prior to the expiration of the initial Term or any
renewal Term that it does not wish to renew this Agreement with respect to such Products; provided that, the initial Term or
any renewal Term shall be extended beyond the date it would otherwise be scheduled to expire as provided above by a
number of days equal to the number of days, if any, that any stop sale order issued by Diamond was in effect prior to such
scheduled expiration date. The initial term of this Agreement with respect to [***] shall be for a period commencing on
[***] and ending on the seventh (7th) anniversary of [***]. This Agreement shall automatically renew after the initial Term
with respect to [***] for additional renewal terms of one (1) year each, unless either party gives at least twelve (12) months
written notice to the other prior to the expiration of the initial Term or any renewal Term that it does not wish to renew this
Agreement with respect to [***]; provided that, the initial Term or any renewal Term shall be extended beyond the date it
would otherwise be scheduled to expire as provided above by a number of days equal to the number of days, if any, that any
stop sale order issued by Diamond was in effect prior to such scheduled expiration date.
(iii) [***]. Effective on [***], Section 1.02 of the Agreement shall be amended hereby to add the following new paragraphs
at the end of such Section:
For the period beginning on [***].
4
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
(iv) Adjustment to Prepayments [***]. Effective on [***], Section 3.04 of the Agreement shall be amended hereby to add
the following new Section 3.04(iv)(F):
3.04(iv)(F) Notwithstanding any provision of the Agreement to the contrary, if Diamond elects not to renew this Agreement
with respect to [***] pursuant to Section 6.01 (a “Non-renewal”), then, unless and until either party elects not to renew this
Agreement with respect to [***], the Minimum Prepayment for each Contract Year following such Non-renewal and any
applicable extension shall be in an amount equal to [***].
(v) USDA Shut Down Event. Effective on [***], the Agreement shall be amended hereby to add the following new
Section 3.09:
3.09 USDA Shut Down Event Reimbursements. If at any time following [***], Diamond’s manufacturing facility is shut
down and Diamond is unable to supply [***] to Distributor for a period exceeding one hundred twenty (120) consecutive days as
a result of a USDA Shut Down Event, then Diamond shall reimburse to Distributor [***]
[***]
Any such refund shall be made in twenty-four (24) equal monthly installments beginning on the first day of the calendar
month following the six (6)-month anniversary of the Shut Down Event and continuing on the first day of each calendar month
thereafter until the applicable amount is paid in full. However, Distributor may elect by written notice to Diamond within one
hundred fifty (150) days after the Shut Down Event, in its sole discretion, to have any such applicable refund credited to [***].
4. Confidentiality of Fifth Amendment. Notwithstanding any provision of the Agreement to the contrary, this Fifth Amendment
shall be publicly available information for SEC filing, press release and other discussion purposes; provided, the parties shall agree to
a draft of this Fifth Amendment (the “Redacted Version”) including highlighted items which shall be redacted from any initial SEC
filings and shall be deemed Confidential Information under Section 13.05 of the Agreement. If the parties do not mutually agree on the
Redacted Version within thirty (30) days after the Effective Date, this Fifth Amendment shall be null and void.
5. Captions. The captions set forth in this Fifth Amendment are for convenience only and shall not be used in any way to
construe or interpret this Fifth Amendment, the Agreement, or the Research and Development Agreement.
5
6. Effect of Amendment. This Fifth Amendment is hereby incorporated by reference into the Agreement as if fully set forth
therein, the Agreement as amended by this Fifth Amendment shall continue in full force and effect following execution and delivery
hereof, and references to the term “Agreement” shall include this Fifth Amendment. In the event of any conflict between the terms and
conditions of the Original Agreement, First Amendment, Second Amendment, Third Amendment or Fourth Amendment and this Fifth
Amendment, the terms and conditions of this Fifth Amendment shall control.
IN WITNESS WHEREOF, the parties have caused this Fifth Amendment be executed by their duly authorized representatives as
of the date first written above.
DIAMOND ANIMAL HEALTH, INC.
By: /s/ Michael J. McGinley
Its: Vice President
AGRI LABORATORIES, LTD.
By: /s/ Steve Schram
Its: CEO/President
6
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
Schedule I
[***]
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
Schedule II
Agri Distributors
AGRILABS Distributors
Company
Animal Medic, Inc.
Fuller Supply Co., Inc.
IVESCO, LLC.
Jeffers Inc.
Lextron
[***]
Michigan Veterinary Farm Supply
MWI Veterinary Supply Co
[***]
Northwest Vet Supply, Inc.
Professional Vet Products
Robert J. Matthews Co.
Southern Livestock Supply Co., Inc.
United Pharmacal Co., Inc.
Valley Vet Supply
Veterinary & Poultry Supply, Inc.
Walco International, Inc.
[***]
West Plains Vet Supply of Springfield
West Plains Vet Supply
Butler Animal Health
Veterinary Services, Inc.
Micro Beef Technologies
Universal
[***]
[***]
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
Exhibit A
HESKA - DIAMOND
ANIMAL HEALTH [***]
LEAD TIME
Product/Size
Titanium 3 (50ds)
Titanium 3 (10ds)
Titanium 5 (50ds)
Titanium 5 (10ds)
Titanium 5 L5 (5ds)
Titanium 5 L5 (10ds)
Titanium 5 L5 (50ds)
Titanium BRSV 3 (50ds)
Titanium IBR (50ds)
Titanium IBR (10ds)
[***]
[***]
[***]
Master Guard 10 (10ds)
MasterGuard 10 (25ds)
MasterGuard 5 (25ds)
MasterGuard Preg 5 (25ds)1
[***]
1
The MasterGuard Preg 5 (25ds) [***], DAH Item Numbers [***].
Batch Size — Minimum Order Qty
[***]
[***]
NOTE: DATING
[***]
DAH Item Number
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***] PRICE LIST
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***] — Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted portions.
Exhibit B
[***]
SUBSIDIARIES OF COMPANY
Exhibit 21.1
Diamond Animal Health, Inc., an Iowa corporation
Sensor Devices, Inc., a Wisconsin Corporation (inactive)
Heska AG, a corporation incorporated under the laws of Switzerland
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements Nos. 333-102871, 333-30951, 333-34111,
333-39448, 333-47129, 333-72155, 333-38138, 333-55112, 333-82096, 333-89738, 333-106679, 333-112701, 333-115995, 333-
123196 and 333-132916 of Heska Corporation (the “Company”) on Form S-8, of our report dated March 18, 2011 relating to the
consolidated financial statements of the Company, appearing in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2010. We also consent to the reference to us under the caption “Experts” in the Registration Statements.
Exhibit 23.1
March 18, 2011
Denver, Colorado
Exhibit 31.1
I, Robert B. Grieve, certify that:
1.
I have reviewed this annual report on Form 10-K of Heska Corporation;
CERTIFICATION
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
and
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 18, 2011
/s/ Robert B. Grieve
ROBERT B. GRIEVE
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Jason A. Napolitano, certify that:
1.
I have reviewed this annual report on Form 10-K of Heska Corporation;
CERTIFICATION
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
and
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 18, 2011
/s/ Jason A. Napolitano
JASON A. NAPOLITANO
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Robert B. Grieve, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that the Annual Report of Heska Corporation on Form 10-K for the year ended December 31, 2010 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-K
fairly presents in all material respects the financial condition and results of operations of Heska Corporation.
Date: March 18, 2011
By: /s/ Robert B. Grieve
Name: ROBERT B. GRIEVE
Title: Chairman of the Board and
Chief Executive Officer
I, Jason A. Napolitano, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that the Annual Report of Heska Corporation on Form 10-K for the year ended December 31, 2010 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-K
fairly presents in all material respects the financial condition and results of operations of Heska Corporation.
Date: March 18, 2011
By: /s/ Jason A. Napolitano
Name: JASON A. NAPOLITANO
Title: Executive Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Heska Corporation and will be retained by
Heska Corporation and furnished to the Securities and Exchange Commission or its staff upon request.