UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
  x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 30, 2011
 
 
OR
 
  o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _________________ to _______________________
 
Commission file number: 000-22427
 
HESKA CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
77-0192527
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification Number)
 
3760 Rocky Mountain Avenue
Loveland, Colorado
 
 
80538
(Address of principal executive offices)
(Zip Code)
 
Registrant's telephone number, including area code:   (970) 493-7272
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of  the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  x     No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes  x    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  o    (Do not check if a small reporting company)
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes  o     No  x
 
The number of shares of the Registrant's NOL Restricted Common Stock outstanding at August 4 2011
was 5,239,277.
 

 
 
 



TABLE OF CONTENTS

 
Page
     
PART I - FINANCIAL INFORMATION
     
Item 1.
Financial Statements:
 
 
 
2
 
 
3
 
 
4
 
5
     
Item 2.
10
     
Item 3.
18
     
Item 4.
19
     
PART II -  OTHER INFORMATION
     
Item 1.
20
     
Item 1A.
20
     
Item 2.
30
     
Item 3.
30
     
Item 4.
30
     
Item 5.
30
     
Item 6.
31
     
32
 
 
 
33

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 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-Q also refers to trademarks and trade names of other organizations.




 
 
-1-
 

HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands except shares and per share amounts)
(unaudited)

ASSETS
 
December 31,
2010
 
June 30,
2011
   
Current assets:
 
Cash and cash equivalents
$
5,492
 
$
5,707
 
Accounts receivable, net of allowance for doubtful accounts of $136 and $179 respectively
 
8,866
   
9,065
 
Inventories, net
 
11,901
   
11,419
 
Deferred tax asset, current
 
53
   
1,328
 
Other current assets
 
967
   
899
 
Total current assets
 
27,279
   
28,418
 
Property and equipment, net
 
5,486
   
4,998
 
Goodwill
 
999
   
1,128
 
Deferred tax asset, net of current portion
 
29,284
   
27,279
 
Total assets
$
63,048
 
$
61,823
 
   
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
Accounts payable
$
4,162
 
$
3,516
 
Accrued liabilities
 
3,608
   
3,951
 
Current portion of deferred revenue
 
1,811
   
2,241
 
Line of credit
 
3,079
   
—
 
Total current liabilities
 
12,660
   
9,708
 
Deferred revenue, net of current portion, and other
 
4,590
   
4,379
 
Total liabilities
 
17,250
   
14,087
 
   
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; none issued or outstanding
 
—
   
—
 
Public common stock, $.01 par value, 7,500,000 shares authorized; 5,231,245 and 5,239,277
     shares issued  and outstanding,  respectively
 
 
52
   
 
52
 
Additional paid-in capital
 
217,240
   
217,493
 
Accumulated other comprehensive income
 
284
   
595
 
Accumulated deficit
 
(171,778
)
 
(170,404
)
Total stockholders' equity
 
45,798
   
47,736
 
Total liabilities and stockholders' equity
$
63,048
 
$
61,823
 






See accompanying notes to condensed consolidated financial statements.

 
 
-2-
 


HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2010
 
2011
 
2010
 
2011
     
Revenue, net:
   
Core companion animal health
$
13,731
 
$
14,023
 
$
29,523
 
$
30,464
 
Other vaccines, pharmaceuticals and products
 
1,376
   
3,424
   
3,278
   
6,488
 
Total revenue, net
 
15,107
   
17,447
   
32,801
   
36,952
 
                         
Cost of revenue
 
9,260
   
     9,978
   
20,749
   
21,185
 
                         
Gross profit
 
5,847
   
7,469
   
12,052
   
15,767
 
                         
Operating expenses:
                       
Selling and marketing
 
3,656
   
3,570
   
7,692
   
7,530
 
Research and development
 
388
   
703
   
845
   
1,034
 
General and administrative
 
2,010
   
2,309
   
4,210
   
4,776
 
Total operating expenses
 
6,054
   
6,582
   
12,747
   
13,340
 
Operating income (loss)
 
(207
)
 
887
   
(695
)
 
2,427
 
Interest and other expense, net
 
122
   
142
   
295
   
165
 
Income (loss) before income taxes
 
(329
)
 
745
   
(990
)
 
2,262
 
Income tax expense (benefit):
                       
Current tax expense
 
14
   
53
   
64
   
159
 
Deferred tax expense (benefit)
 
(178
)
 
235
   
(559
)
 
730
 
Total income tax expense (benefit)
 
(164
)
 
288
   
(495
)
 
889
 
Net income (loss)
$
(165
)
$
457
 
$
(495
)
$
1,373
 
                         
Basic net income (loss) per share
$
(0.03
)
$
0.09
 
$
(0.09
)
$
0.26
 
Diluted net income (loss) per share
$
(0.03
)
$
0.09
 
$
(0.09
)
$
0.26
 
                         
Weighted average outstanding shares used to compute basic net income (loss)
      per share
 
 
5,217
   
 
5,234
   
 
5,216
   
 
5,233
 
                         
Weighted average outstanding shares used to compute diluted net income (loss)
     per share
 
5,217
   
5,353
   
 
5,216
   
5,298
 








See accompanying notes to condensed consolidated financial statements.

 
 
-3-
 

HESKA CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


 
 
Six Months Ended
June 30,
 
2010
2011
   
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
           
Net income (loss)
$
(495
)
$
1,373
 
 
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
           
Depreciation and amortization
 
1,158
   
1,118
 
Deferred tax expense (benefit)
 
(559
)
 
730
 
Stock-based compensation
 
160
   
193
 
Unrealized (gain)/loss on foreign currency translation
 
73
   
92
 
Changes in operating assets and liabilities:
           
Accounts receivable
 
1,637
   
(155
)
Inventories
 
(1,200
)
 
326
 
Other current assets
 
135
   
83
 
Accounts payable
 
(1,046
)
 
(657
)
Accrued liabilities
 
(136
)
 
291
 
Deferred revenue and other liabilities
 
(265
)
 
174
 
Net cash provided by (used in) operating activities
 
(538
)
 
3,568
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
           
Purchase of property and equipment
 
(180
)
 
(445
)
Net cash provided by (used in) investing activities
 
(180
)
 
(445
)
 
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Proceeds from issuance of common stock
 
40
   
58
 
Proceeds from (repayments of) line of credit borrowings, net
 
1,382
   
(3,079
)
Proceeds from (repayments of) debt, net
 
(381
)
 
—
 
Net cash provided by (used in) financing activities
 
1,041
   
(3,021
)
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
 
 
(159
 
)
 
 
113
 
 
INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS
 
 
164
   
 
215
 
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
 
 
5,400
   
 
5,492
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
 
5,564
 
 
$
 
5,707
 
             
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
           
Cash paid for interest
$
92
 
$
26
 
Non-cash transfer of inventory to property and equipment
$
492
 
$
181
 



See accompanying notes to condensed consolidated financial statements.

 
 
-4-
 

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(UNAUDITED)


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 unaudited condensed consolidated financial statements are the responsibility of the Company's management and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and rules and regulations of the Securities and Exchange Commission (the "SEC").  The condensed consolidated balance sheet as of June 30, 2011, the condensed consolidated statements of operations for the three months and six months ended June 30, 2010 and 2011 and the condensed consolidated statements of cash flows for the six months ended June 30, 2010 and 2011 are unaudited, but include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of its financial position, operating results and cash flows for the periods presented.  All material intercompany transactions and balances have been eliminated in consolidation.  Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the SEC.

Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year.  The accompanying financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year.  Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2010, included in the Company's Annual Report on Form 10-K filed with the SEC on March 18, 2011.

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 amount of revenue and expense during the reported 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, and in determining the need for, and the amount of, a valuation allowance on certain deferred tax assets.

 
 
-5-
 
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):

             
December 31,
2010
 
June 30,
2011
                         
Raw  materials
           
$
4,203
 
$
4,600
 
Work in process
             
3,483
   
2,839
 
Finished goods
             
5,388
   
4,505
 
Allowance for excess or obsolete inventory
             
(1,173
)
 
(525
)
             
$
11,901
 
$
11,419
 

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 (loss) 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.  For the three and six months ended June 30, 2011, the Company reported net income and therefore, dilutive common stock equivalent securities, as computed using the treasury method, were added to basic weighted average shares outstanding for the period to derive the weighted average shares for diluted earnings per share calculation.  Common stock equivalent securities that were anti-dilutive for the three and six months ended June 30, 2011, and therefore excluded, were outstanding options to purchase 889,047 and 1,098,208 shares of common stock, respectively.  These securities are anti-dilutive primarily due to exercise prices greater than the average trading price of the Company's common stock during the three and six months ended June 30, 2011.  All common stock equivalent securities were anti-dilutive for the three and six months ended June 30, 2010, because the Company reported a net loss for that period.

3.           CAPITAL STOCK
 
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions for options granted in the three and six months ended June 30, 2010 and 2011.

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2010
 
2011
 
2010
 
2011
                       
Risk-free interest rate
 
1.45%
 
1.00%
 
1.44%
 
1.00%
Expected lives
 
2.8 years
 
2.9 years
 
2.9 years
 
2.9 years
Expected volatility
 
68%
 
82%
 
68%
 
82%
    Expected dividend yield
 
0%
 
0%
 
0%
 
0%


 
 
-6-
 
A summary of the Company's stock option plans, excluding options to purchase fractional shares resulting from the Company's December 2010 1-for-10 reverse stock split is as follows:

 
Year Ended
December 31, 2010
Six Months Ended
June 30, 2011
 
 
 
 
 
     Options
 
Weighted
Average
Exercise
Price
 
 
 
 
 
Options
 
Weighted
Average
Exercise
Price
Outstanding at beginning of period
 
1,291,634
 
$
11.846
   
1,341,876
 
$
11.003
 
 
Granted at market
 
104,900
 
$
5.945
   
74,750
 
$
6.839
 
 
Cancelled
 
(53,459
)
$
21.572
   
(67,861
)
$
12.873
 
 
Exercised
 
(1,199
)
$
5.834
   
(3,330
)
$
4.748
 
Outstanding at end of period
 
1,341,876
 
$
11.003
   
1,345,435
 
$
10.693
 
Exercisable at end of period
 
1,142,209
 
$
11.871
   
1,137,906
 
$
11.567
 

The estimated fair value of stock options granted during the six months ended June 30, 2011 and 2010 was computed to be approximately $269 and $112 thousand, respectively.  The amount is amortized ratably over the vesting period of the options.  The per share weighted average estimated fair value of options granted during the six months ended June 30, 2011 and 2010 was computed to be approximately $3.60 and $3.76, respectively.  The total intrinsic value of options exercised during the six months ended June 30, 2011 and 2010 was approximately $2 thousand and $1 thousand, respectively.  The cash proceeds from options exercised during the six months ended June 30, 2011 and 2010 were approximately $16 thousand and $5 thousand, respectively.

The following table summarizes information about stock options outstanding and exercisable at June 30, 2011, excluding outstanding options to purchase an aggregate of 124.3 fractional shares resulting from the Company's December 2010 1-for-10 reverse stock split with a weighted average remaining contractual life of 3.17 years, a weighted average exercise price of $13.15 and exercise prices ranging from $3.40 to $31.50.  The Company intends to issue whole shares only from option exercises.

 
Options Outstanding
Options Exercisable
 
Exercise Prices
Number of
Options
Outstanding
at
June 30,
2011
Weighted
Average
Remaining
Contractual
Life in Years
Weighted
Average
Exercise
Price
Number of
Options
Exercisable
at
June 30,
2011
Weighted
Average
Exercise
Price
 
$2.70 - $4.96
 
304,907
   
7.44
 
$
4.473
   
162,665
 
$
4.288
 
$4.97 - $8.70
 
249,472
   
5.03
 
$
7.193
   
194,567
 
$
7.286
 
$8.71 - $12.00
 
269,957
   
2.78
 
$
9.567
   
269,332
 
$
9.568
 
$12.01 - $15.90
 
270,118
   
3.58
 
$
13.548
   
269,493
 
$
13.547
 
$15.91 - $31.50
 
250,981
   
4.52
 
$
19.866
   
241,849
 
$
19.925
 
$2.70 - $31.50
 
1,345,435
   
4.74
 
$
10.693
   
1,137,906
 
$
11.567
 

As of June 30, 2011, there was approximately $618 thousand of total unrecognized compensation cost related to outstanding stock options.  That cost is expected to be recognized over a weighted average period of 1.7 years, with approximately $206 thousand to be recognized in the six months ending December 31, 2011 and all the cost to be recognized as of May 2015, assuming all options vest according to the vesting schedules in place at June 30, 2011.  As of June 30, 2011, the aggregate intrinsic value of outstanding options was approximately $2.4 million and the aggregate intrinsic value of exercisable options was approximately $1.5 million.


 
 
-7-
 
4.           SEGMENT REPORTING

The Company is comprised of two reportable segments, Core Companion Animal Health ("CCA") and Other Vaccines, Pharmaceuticals and Products ("OVP").  The CCA 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 other distribution relationships.  CCA segment products manufactured at the Des Moines, Iowa production facility included in our OVP segment's assets are transferred at cost and are not recorded as revenue for our OVP segment.  The OVP 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.

Summarized financial information concerning the Company's reportable segments is shown in the following table (in thousands):

 
 
Core
Companion
Animal Health
 
 
Other Vaccines,
Pharmaceuticals
and Products
 
 
 
 
Total
Six Months Ended
June 30, 2010:
Total  revenue
$
29,523
 
$
3,278
   
$
32,801
 
Operating income (loss)
 
1,164
   
(1,859
)
   
(695
)
Interest expense
 
86
   
30
     
116
 
Total assets
 
54,540
   
8,721
     
63,261
 
Net assets
 
37,938
   
6,695
     
44,633
 
Capital expenditures
 
110
   
70
     
180
 
Depreciation and amortization
 
695
   
463
     
1,158
 
 
Six Months Ended
June 30, 2011:
 
Total  revenue
$
30,464
 
$
6,488
   
$
36,952
 
Operating income
 
1,205
   
1,222
     
2,427
 
Interest expense
 
39
   
16
     
55
 
Total assets
 
51,947
   
9,876
     
61,823
 
Net assets
 
40,576
   
7,160
     
47,736
 
Capital expenditures
 
166
   
279
     
445
 
Depreciation and amortization
 
693
   
425
     
1,118
 


 
 
-8-
 



 
 
Core
Companion
Animal Health
 
 
Other Vaccines,
Pharmaceuticals
and Products
 
 
 
 
Total
Three Months Ended
June 30, 2010:
Total  revenue
$
13,731
 
$
1,376
   
$
15,107
 
Operating income (loss)
 
582
   
(789
)
   
(207
)
Interest expense
 
54
   
11
     
65
 
Total assets
 
54,540
   
8,721
     
63,261
 
Net assets
 
37,938
   
6,695
     
44,633
 
Capital expenditures
 
22
   
58
     
80
 
Depreciation and amortization
 
339
   
230
     
569
 
 
Three Months Ended
June 30, 2011:
 
Total  revenue
$
14,023
 
$
3,424
   
$
17,447
 
Operating income
 
266
   
621
     
887
 
Interest expense
 
18
   
4
     
22
 
Total assets
 
51,947
   
9,876
     
61,823
 
Net assets
 
40,576
   
7,160
     
47,736
 
Capital expenditures
 
109
   
239
     
348
 
Depreciation and amortization
 
296
   
214
     
510
 

5.
COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes net income (loss) plus the results of certain stockholders' equity changes not reflected in the Condensed Consolidated Statements of Operations.  Such changes primarily include foreign currency translation items.  Total comprehensive income (loss) for the six months ended June 30, 2011 and 2010 was $1.683 million and ($622) thousand, respectively.  Total comprehensive income (loss) for the three months ended June 30, 2011 and 2010 was $715 thousand and ($221) thousand, respectively.



 
 

 
 
-9-
 
Item 2.

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 Unaudited Condensed Consolidated Financial Statements and related Notes included in Part I Item 1 of this Form 10-Q.
 
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, general and administrative expenses, research and development expenses, capital resources, capital expenditures and additional financings or borrowings, are subject to risks and uncertainties, including, but not limited to, those discussed below and elsewhere in this Form 10-Q, particularly in Part II 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-Q are as of the close of business on August 4, 2011, and we do not intend to update this forward-looking information.
 
Overview
 
We develop, manufacture, market, sell and support veterinary products.  Our business is comprised of two reportable segments, Core Companion Animal Health ("CCA"), which represented 81% of our revenue for the twelve months ended June 30, 2011 (which we define as "LTM") and Other Vaccines, Pharmaceuticals and Products ("OVP"), which represented 19% of LTM revenue.

The CCA segment includes diagnostic instruments and supplies as well as single use diagnostic and other tests, pharmaceuticals and vaccines, primarily for canine and feline use.

Diagnostic instruments and supplies represented approximately 41% of our LTM 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 LTM revenue resulted from the sale of such consumables to an installed base of instruments and approximately 12% of our revenue was from new hardware sales.  A loss of or disruption in supply of consumables we are selling to an installed base of instruments could substantially harm our business.  All of our diagnostic instruments and supplies are supplied by third parties, who typically own the product rights and supply 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 revenues from consumables, represented approximately 36% of our LTM 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 41% of our LTM revenue.  Since items in this area are often single use by their nature, our typical aim is to build customer satisfaction and loyalty for each product, generate repeat annual sales from existing customers and expand our customer base in the future.  Products in this area are both supplied by third parties and provided by us.  Major products 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 37% of our LTM revenue.

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 occur in the CCA segment.  The majority of our research and development spending is dedicated to this segment, as well.  

 
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All our CCA products are ultimately sold primarily 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 to end users by us as well as through distribution relationships, such as our corporate agreement with Schering-Plough Animal Health Corporation ("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 69% and 31%, respectively, of CCA LTM revenue.

We intend to sustain profitability over the long term 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 increased 3% for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010.  We believe poor economic conditions over the past year have impacted our revenue as, for example, veterinarians have continued to delay or defer capital expenditures on new diagnostic instrumentation.

The OVP segment includes our 168,000 square foot USDA- and FDA-licensed production facility in Des Moines, Iowa.  We view this facility as a strategic asset which will allow us to control our cost of goods on any vaccines and pharmaceuticals that we may commercialize in the future.  We are increasingly integrating this facility with our operations elsewhere.  For example, virtually all our U.S. inventory is now stored at this facility and 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 agreement with a distributor, Agri Laboratories, Ltd., ("AgriLabs"), for the marketing and sale of certain of these vaccines which are sold primarily under the Titanium ® and MasterGuard ® 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 lives 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.

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.

 
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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 a domestic Net Operating Loss ("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.

Results of Operations

Revenue

Total revenue increased 13% to $37.0 million for the six months ended June 30, 2011 as compared to $32.8 million for the corresponding period in 2010.  Total revenue increased 15% to $17.4 million for the three months ended June 30, 2011 as compared to $15.1 million for the corresponding period in 2010.

 
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Revenue from our CCA segment was $30.5 million for the six months ended June 30, 2011, an increase of 3% as compared to $29.5 million for the corresponding period in 2010.  Increased revenue from our instrument consumables and our heartworm diagnostic tests internationally, somewhat offset by a decline in revenue from our heartworm preventive and our chemistry instruments domestically, were factors in the increase.  Revenue from our CCA segment was $14.0 million for the three months ended June 30, 2011, an increase of 2% as compared to $13.7 million for the corresponding period in 2010.  Increased revenue from our instrument consumables, somewhat offset by a decline in revenue from our heartworm preventive and our chemistry instruments domestically, were factors in the increase.

Revenue from our OVP segment was $6.5 million for the six months ended June 30, 2011, an increase of $3.2 million as compared to $3.3 million in the corresponding period in 2010.  Revenue from our OVP segment was $3.4 million for the three months ended June 30, 2011, an increase of $2.0 million  as compared to $1.4 million in the corresponding period in 2010.  In both cases, greater sales of cattle vaccines under our contract with AgriLabs and to new customers were factors in the increase.  We became aware of issues producing these cattle vaccine products to appropriate specifications for purity during the first half of 2010 and did not ship any of these cattle vaccine products in the three months ended June 30, 2010 as a result.
 
We expect 2011 total revenue to increase as compared with 2010.

Cost of Revenue
 
Cost of revenue totaled $21.2 million for the six months ended June 30, 2011, an increase of $436 thousand or 2% as compared to $20.7 million for the corresponding period in 2010.  Gross profit increased by $3.7 million to $15.8 million for the six months ended June 30, 2011 as compared to $12.1 million in the prior year period.  Gross Margin, i.e. gross profit divided by total revenue, increased to 42.7% for the six months ended June 30, 2011 from 36.7% in the prior year period.  The largest factor in the increase was an approximately $1.0 million reserve taken in our OVP segment for cattle vaccine product produced and under review for destruction and replacement in the three months ended March 31, 2010 as discussed above, which did not occur in the three months ended March 31, 2011.

Cost of revenue totaled $10.0 million for the three months ended June 30, 2011, an increase of $718 thousand or 8% as compared to $9.3 million for the corresponding period in 2010.  Gross profit increased by $1.6 million to $7.5 million for the three months ended June 30, 2011 as compared to $5.8 million in the prior year period.  Gross Margin, i.e. gross profit divided by total revenue, increased to 42.8% for the three months ended June 30, 2011 from 38.7% in the prior year period.  The largest factor in the increase was a decrease in idle plant expense related to the cattle vaccine product situation discussed above which occurred in the three months ended June 30, 2010 but not the three months ended June 30, 2011.

We expect 2011 Gross Margin to increase in 2011 as compared to 2010.

Operating Expenses

Total operating expenses increased 5% to $13.3 million in the six months ended June 30, 2011 from $12.7 million in the prior year period.  Total operating expenses increased 9% to $6.6 million in the three months ended June 30, 2011 from $6.1 million in the prior year period.

Selling and marketing expenses decreased 2% to $7.5 million in the six months ended June 30, 2011 as compared to the corresponding period in 2010.  Sales force vacancies and lower advertising expenses were factors in the decline.  Selling and marketing expenses decreased 2% to $3.6 million in the three months ended June 30, 2011 as compared to the corresponding period in 2010.  Sales force vacancies were a factor in the decline.
 
Research and development expenses were $1.0 million for the six months ended June 30, 2011, a 22% increase as compared to $845 thousand in the corresponding period in 2010.  Research and development expenses were $703 thousand for the three months ended June 30, 2011, an increase of $315 thousand as compared to $388 thousand in the corresponding period in 2010.  The largest factor in both cases was a payment to a third party related to a product line we are collaborating to develop with that company.

 
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General and administrative expenses were $4.8 million in the six months ended June 30, 2011, up 13% from $4.2 million in the prior year period.  General and administrative expenses were $2.3 million in the three months ended June 30, 2011, up 15% from $2.0 million in the prior year period.  A greater accrual related to our Management Incentive Plan in the 2011 period as compared to the 2010 period was the largest factor in the increase in both cases.

We expect 2011 operating expenses will be higher than in 2010.

Interest and Other Expense, Net

Interest and other expense, net was $165 thousand in the six months ended June 30, 2011, a decrease of $130 thousand as compared to $295 thousand in the prior year period.  Interest and other expense, net was $142 thousand in the three months ended June 30, 2011, a decrease of $20 thousand as compared to $122 thousand in the prior year period.  This line item can be broken into two components:  net interest expense and net foreign currency gains or losses.  Net interest expense was $25 thousand in the six months ended June 30, 2011, a decrease of $66 thousand from $91 thousand in the prior year period.  Net interest expense was $6 thousand in the three months ended June 30, 2011, a decrease of $49 thousand from $55 thousand in the prior year period.  Lower loan balances was the largest factor in the decline in both cases.  In the six months ended June 30, 2011, net foreign currency loss was $140 thousand, a change of $64 thousand from a net foreign currency loss of $204 thousand in the prior year period.  In the three months ended June 30, 2011, net foreign currency loss was $136 thousand, a change of $69 thousand from a net foreign currency loss of $67 thousand in the prior year period.
 
We expect interest and other expense, net to decrease in 2011 as compared to 2010 as we expect to have a lower average loan balance in 2011 as compared to 2010 and do not anticipate net foreign currency losses to occur at the same level in 2011 as they did in 2010.

Income Tax Expense (Benefit)

We recognized an income tax expense of $889 thousand  in the six months ended June 30, 2011, a $1.4 million change as compared to a tax benefit of $495 thousand in the prior year period.  We recognized an income tax expense of $288 thousand in the three months ended June 30, 2011, a $452 thousand change as compared to a tax benefit of $164 thousand in the prior year period.

Current tax expense was $159 thousand in the six months ended June 30, 2011, an increase of $95 thousand from $64 thousand in the six months ended June 30, 2010.  For the three months ended June 30, 2011, current tax expense was $53 thousand, an increase of $39 thousand from $14 thousand in the prior year period.  Current tax expense represents taxes we are expected to pay in cash as a result of a given period's operations.

Deferred tax expense was $730 thousand in the six months ended June 30, 2011, a $1.3 million change from a deferred tax benefit of $559 thousand in the six months ended June 30, 2010.  For the three months ended June 30, 2011, deferred tax expense was $235 thousand, a $413 thousand change from a deferred tax benefit of $178 thousand in the three months ended June 30, 2010.  Deferred tax expense primarily relates to our large domestic NOL position, which provides a tax shield for most federal income taxes we would otherwise pay.

In all cases, the year-over-year increase in recognized tax expense relates to enhanced pre-tax income in the 2011 period versus the 2010 period.

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.


 
 
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Net Income (Loss)

                Net income was $1.4 million in the six months ended June 30, 2011, an increase of approximately $1.9 million compared to a net loss of $495 thousand in the prior year period.  Net income was $457 thousand in the three months ended June 30, 2011, an increase of approximately $622 thousand compared to a net loss of $165 thousand in the prior year period.  The increase in both cases was primarily due to higher revenue and higher Gross Margin, somewhat offset by higher operating expenses, as discussed above.

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 and Capital Resources

We have incurred net cumulative negative cash flow from operations since our inception in 1988.  For the six months ended June 30, 2011, we had net income of $1.4 million.  During the six months ended June 30, 2011, our operations provided cash of approximately $3.6 million.  At June 30, 2011, we had $5.7 million of cash and cash equivalents, $18.7 million of working capital, and $0 of outstanding borrowings under our revolving line of credit, discussed below.

Net cash provided by operating activities was approximately $3.6 million for the six months ended June 30, 2011 as compared to $538 thousand of cash used by operating activities in the prior year period, a change of approximately $4.1 million.  Major factors in the change were a $1.9 million increase in net income and a related $1.3 million increase in cash provided by deferred income tax expense as we utilized rather than increased our deferred tax assets in the 2011 period, and a $1.5 million increase in cash provided by inventory as we decreased our inventory levels in the 2011 period as opposed to increasing them in the 2010 period.  These were somewhat offset by a $1.8 million change in cash used by accounts receivable as our accounts receivable balance increased in the first six months of 2011 as compared to declining in the first six months of 2010.  Increased revenue was a factor in this change.

Net cash flows from investing activities used cash of $445 thousand in the six months ended June, 2011, an increase of approximately $265 thousand compared to $180 thousand during the corresponding period in 2010.  Expenditures in this area were primarily for the purchase of property and equipment.

Net cash flows used in financing activities were $3.0 million during the six months ended June 30, 2011, a $4.1 million decrease as compared to $1.0 million provided by financing activities during the corresponding period in 2010.  The primary reason for the change was the repayment of outstanding debt under our revolving line of credit during the 2011 period as opposed to an increase of borrowings under our line of credit in the prior year period.  In addition, we repaid $381 thousand of term debt in the 2010 period, with no corresponding term debt to repay in 2011.

At June 30, 2011, we had a $15.0 million asset-based revolving line of credit with Wells Fargo Bank, National Association ("Wells Fargo") which has a maturity date of December 31, 2013 as part of our credit and security agreement with Wells Fargo.  At June 30, 2011, we had no outstanding borrowings under this line of credit.  Our ability to borrow under this facility varies based upon available cash, eligible accounts receivable and eligible inventory.  On June 30, 2011, interest was charged at a stated rate of three month LIBOR plus 4.75% and was payable monthly.  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 June 30, 2011.  At June 30, 2011, we had $8.7 million of borrowing capacity based upon eligible accounts receivable and eligible inventory under our revolving line of credit.

 
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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 and sell our products, are successful in increasing revenue, competition, the extent to which currently planned products and/or technologies 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 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 borrowings under our revolving line of credit, the sale of equity securities or the issuance of new term debt secured by the same assets as 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 research activities or marketing plans.  These actions would likely extend the then available cash and cash equivalents, and then available borrowings to some degree.

Recent Accounting Pronouncements

None.

 
 
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Item 3.

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 and against other foreign currency exchange rates.  These exposures are directly related to our normal operating and funding activities.
 
Interest Rate Risk

At June 30, 2011, there was no debt outstanding on our line of credit with Wells Fargo.  We also had approximately $5.7 million of cash and cash equivalents at June 30, 2011, the majority of which was invested in liquid interest bearing accounts.  We had no interest rate hedge transactions in place on June 30, 2011.  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 net interest expense of approximately $57 thousand based on our outstanding balances as of June 30, 2011.
 
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 customers and suppliers 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 June 30, 2011.

We have a wholly-owned subsidiary in Switzerland which uses the Swiss Franc as its functional currency. We purchase inventory in foreign currencies, primarily Japanese Yen and Euros, and sell corresponding products in U.S. dollars.  We also sell products in foreign currencies, primarily Japanese Yen and Euros, where our inventory costs are in U.S. dollars.  Based on our results of operations for the most recent twelve months, 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 $399 thousand.


 
 
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Item 4.
 
CONTROLS AND PROCEDURES

(a)   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 end of the period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, our chief executive officer and our 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 required disclosure.
 
(b)   Changes in Internal Control over Financial Reporting .  There was no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 

 

 
 
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PART II.  OTHER INFORMATION

Item 1.          Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising out of our operations.  As of June 30, 2011, we were not a party to any legal proceedings that are expected, individually or in the aggregate, to have a material effect on our business, financial condition or operating results.

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 marketing rights.  We are party to an agreement with SPAH, a unit of Merck & Co., Inc. ( " Merck " ), which grants SPAH exclusive distribution and marketing rights in the U.S. for our canine heartworm preventive product, TRI-HEART Plus Chewable Tablets.  Novartis Agro K.K., Tokyo 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 the majority 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 and our sales and financial position could suffer significantly as a result.  Revenue from Merck entities, including SPAH, represented 11% of our LTM revenue.  If SPAH personnel fail to market, sell and support our heartworm preventive sufficiently, 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 Merck has obtained FDA approval for a canine heartworm preventive product with additional claims compared with our TRI-HEART Plus Chewable Tablets which we believe is not currently being marketed actively.  Should SPAH or a unit of Merck decide to emphasize sales and marketing efforts of this 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.

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.  Major suppliers who sell us proprietary products which are responsible for more than 5% of our LTM revenue are Boule Medical AB, FUJIFILM Corporation and Quidel Corporation.  None of these suppliers sold us proprietary products which were responsible for more than 20% of our LTM revenue, although the proprietary products of two of these suppliers were responsible for more than 15% of our LTM revenue and one was responsible for more than 10% of our LTM 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 our lactate instrument, 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:
 
·  
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.  For example, on June 30, 2011 we have a $194 thousand accrued liability on our balance sheet for future payments related to minimum purchase obligations we may make in order to maintain certain product rights.
 
·  
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.
 
·  
The loss of product rights upon expiration or termination of an existing agreement.   Unless we are able to find an alternate supply of a similar product, we would not be able to continue to offer our customers the same breadth of products and our sales and operating results would likely suffer.  In the case of an instrument supplier, we could also potentially suffer the loss of sales of consumable supplies, which would be significant in cases where we have built a significant installed base, further harming our sales prospects and opportunities.  Even if we were able to find an alternate supply for a product to which we lost rights, we would likely face increased competition from the product whose rights we lost being marketed by a third party or the former supplier and it may take us additional time and expense to gain the necessary approvals and launch an alternative product.
 
·  
Loss of exclusivity.   In the case of our veterinary diagnostic instruments, if we are entitled to non-exclusive access to consumable supplies for a defined period upon expiration of exclusive rights, we may face increased competition from a third party with similar non-exclusive access or our former supplier, which could cause us to lose customers and/or significantly decrease our margins and could significantly affect our financial results.  For example, a third party has gained access to chemistry instrument test strips and supplies for our previous chemistry instrument which are provided to us by Arkray Global Business, Inc., 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 generally 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.
 
·  
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.
 
·  
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 or under terms that are less advantageous if available.
 
·  
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.  We do not have control over our suppliers' compliance with these regulations and standards.  Regulatory violations could potentially lead to interruptions in supply that could cause us to lose sales to readily available competitive products.
 
·  
Developmental delays.   We may experience delays in the scale-up quantities needed for product development that could delay regulatory submissions and commercialization of our products in development, causing us to miss key opportunities.
 
·  
Limited intellectual property rights.   We typically do not have intellectual property rights, or may have to share intellectual property rights, to the products supplied by third parties and any improvements to the manufacturing processes or new manufacturing processes for these 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.

 
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The loss of significant customers could harm our operating results.

Revenue from Merck entities, including SPAH, represented approximately 15% and 19% of our total revenue for the six months ended June 30, 2011 and 2010, respectively.  Sales to no other single customer accounted for more than 10% of our consolidated revenue for the six months ended June 30, 2011 and 2010.  No single customer accounted for more than 10% of our consolidated accounts receivable at June 30, 2011 and 2010.  Revenue from Merck entities, including SPAH, represented approximately 10% and 14% of our total revenue for the three months ended June 30, 2011 and 2010, respectively.  Sales to no other single customer accounted for more than 10% of our consolidated revenue for the three months ended June 30, 2011 and 2010.

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.

We may be unable to market and sell our products successfully.

We may not develop and maintain marketing and/or sales capabilities successfully, 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.  This could result in the loss of distribution rights for products or failure to gain access to new products and could 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 CCA 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 CCA products primarily 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 believe that one of our largest competitors, IDEXX Laboratories, Inc. ("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.
 
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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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 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 those of 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, Novartis AG ("Novartis"), Pfizer, sanofi-aventis, 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 or 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.

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 consistent with 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.  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.  For example, our VitalPath Blood Gas and Electrolyte Analyzer generated less revenue than we anticipated following its launch in May 2010 as placements of this product with customers have not occurred as we expected.

 
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Changes to, differing interpretations of, or changing circumstances under which we apply 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 ("FASB") 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 FASB's 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 FASB rules in the future.  Similarly, changes in the underlying circumstances which we apply given accounting standards and principles may affect our results of operations and have a negative impact on us.  For example, in the twelve months ended June 30, 2011, we recognized approximately $1 million in revenue related to large upfront payments received over five years ago from three third parties for certain product rights.  In all three cases, we have deferred the revenue with a related deferred revenue liability on our balance sheet and recognized the revenue over the estimated life of the related agreements, products, patents or technology.  If we are to conclude any or all of the estimated lives of the related agreements, products, patents or technology are to be extended, it could lead to a significant reduction in related revenue recognized in corresponding future periods.

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;
 
·  
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.

 
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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.

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.

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.

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 affected 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 United States Department of Agriculture ("USDA"), the Food and Drug Administration ("FDA"), the Environmental Protection Agency ("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 affected 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 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.  There can be no assurance 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.
 
 
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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.
 
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 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 June 30, 2010, our closing stock price has ranged from a low of $4.15 to a high of $9.96 when adjusted for our December 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:

 
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·  
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.

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 June 30, 2011, we had an accumulated deficit of $170.4 million.  We have achieved only two quarters 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 CCA 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 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.

 
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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 borrowing under our revolving line of credit, 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.  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.  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.  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 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.

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, 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 may be important 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 may need 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.

 
-29-
 
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 are required to comply with the SEC's mandate to provide interactive data using the eXtensible Business Reporting Language as an exhibit to certain SEC filings in 2011.  Compliance with this mandate has required a significant time investment, which may have and may in the future 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.

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.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

   None.

Item 3.     Defaults upon Senior Securities

   None.

Item 4.     Removed and Reserved

                   None.

Item 5.     Other Information

   None.


 
 
-30-
 
Item 6.    Exhibits
 
(a)  
Exhibits

      Number                                                Description
 
10.1
Employment Agreement between Registrant and Joseph P. Aperfine, dated effective as of August 4, 2011.
 
10.2
Assignment and Second Amendment to Employment Agreement between Registrant,  Diamond Animal Health, Inc. and Michael J. McGinley, dated effective as of August 4, 2011.
 
10.3
Employment Agreement between Registrant and Claudine M. Zachara, dated effective as of August 4, 2011.
                           10.4*                                                Seventh Amendment to Supply and Distribution Agreement between
Registrant and Boule Medical AB, dated June 1, 2011.
 
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
 
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended .
 
32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.INS**
XBRL Instance Document.
 
101.SCH**
XBRL Taxonomy Extension Schema Document
 
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document.
 
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document.
 
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document.
 
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document.

*    Confidential portions of this agreement have been omitted pursuant to a request for confidential treatment filed separately with the Securities
           and Exchange Commission.
** Furnished electronically with this report.
 
-31-
 

HESKA CORPORATION

SIGNATURES



Pursuant to the requirements 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.


                                                HESKA CORPORATION

Date:
August 5, 2011
By
/s/ Robert B. Grieve                                                       
     
ROBERT B. GRIEVE
     
Chairman of the Board and Chief Executive Officer
(on behalf of the Registrant and as the Registrant's Principal Executive Officer)
       
Date:
August 5, 2011
By
/s/ Jason A. Napolitano                                                                 
     
JASON A. NAPOLITANO
     
Executive Vice President and Chief Financial Officer
(on behalf of the Registrant and as the Registrant's Principal Financial Officer)



 
-32-
 

Exhibit Index
 
      Number                                             Description
 
10.1
Employment Agreement between Registrant and Joseph P. Aperfine, dated effective as of August 4, 2011.
 
10.2
Assignment and Second Amendment to Employment Agreement between Registrant, Diamond Animal Health, Inc. and Michael J.McGinley, dated effective as of August 4, 2011.
 
10.3
Employment Agreement between Registrant and Claudine M. Zachara, dated effective as of August 4, 2011.
                         10.4*                                               Seventh Amendment to Supply and Distribution Agreement between
Registrant and Boule Medical AB, dated June 1, 2011.
 
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
 
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended .
 
32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.INS**
XBRL Instance Document.
 
101.SCH**
XBRL Taxonomy Extension Schema Document
 
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document.
 
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document.
 
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document.
 
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document.

*   Confidential portions of this agreement have been omitted pursuant to a request for confidential treatment filed separately with the Securities
          and Exchange Commission.
** Furnished electronically with this report.

 
-33-
 

Exhibit 10.1
 
EMPLOYMENT AGREEMENT
 
 
This Employment Agreement   (the “ Agreement ”) is made effective on August 4, 2011 (the “ Effective Date ”) between Heska Corporation, a Delaware corporation (“ Heska ”), and Joseph P. Aperfine (“ Executive ”).  Heska and Executive collectively are referred to as the “ Parties ” and individually as a “ Party .”
 
RECITALS
 
WHEREFORE, Executive is currently the Executive Vice President, Sales and Marketing of Heska.
 
WHEREFORE, Executive and Heska now wish to enter into this Agreement regarding the terms of Executive’s employment, which shall become effective upon execution.
 
NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants, and agreements contained herein, the legal sufficiency of which is acknowledged by the Parties, and intending to be legally bound, the Parties agree as follows:
 
TERMS
 
1. Duties and Scope of Employment .
 
a.   Position and Duties .   As of the Effective Date, Executive will serve as Executive Vice President, Sales and Marketing of Heska.  Executive will render such business and professional services in the performance of Executive’s duties, consistent with Executive’s position within Heska, as will reasonably be assigned to Executive by Heska’s Board of Directors, Chief Executive Officer, President or their supervisor.  Executive’s duties will be subject to review and adjustments will made at the discretion of the Executive’s supervisor and superiors.
 
b.   Obligations .   During the Term of Agreement (as defined below), Executive will devote Executive’s full attention, skills, time and business efforts to Heska.  For the duration of the Term of Agreement, Executive agrees not to actively engage in any other employment, occupation, or consulting activity, for any direct or indirect remuneration, without the prior approval of the Board or the Corporate Governance Committee of the Board (which approval will not be unreasonably withheld); provided, however, that Executive may, without the approval of the Board or the Corporate Governance Committee of the Board, serve in any capacity with any civic, educational, or charitable organization, provided such services do not interfere with Executive’s obligations to Heska.
 
2.   Term of Agreement .
 
a.   The period of Executive’s employment under this Agreement is referred to herein as the “ Term of Agreement .”  Subject to the provisions for earlier termination of employment in Section 6 below, this Agreement will have an initial term of thirty-six (36) months commencing on the Effective Date.  On the 3rd anniversary of the Effective Date, and on each annual anniversary of the Effective Date thereafter, this Agreement automatically will renew for an additional twelve-month term unless Heska provides Executive with notice of non-renewal at least 120 days prior to the date of automatic renewal; provided, however, that either Heska or Executive may terminate Executive’s employment immediately at any time subject to the provisions in Section 6 below.
 
b.   Executive may be entitled to severance benefits pursuant to Section 6 below, depending upon the circumstances of Executive’s termination of employment.  Executive will not be entitled to severance benefits if Heska provides Executive with notice of non-renewal pursuant to Section 2.a. above, regardless of the reason.  Upon the termination of Executive’s employment for any reason, Executive will be entitled to payment of all accrued but unpaid compensation, vacation, expense reimbursements, and other benefits due to Executive through Executive’s termination date under any Heska-provided or paid plans, policies, and arrangements.  Executive agrees to resign from all positions that Executive holds with Heska, without limitation, immediately following the termination of Executive’s employment if the Board so requests.
 
 
 
 
3.   Compensation .
 
a.   Base Salary .   Heska will pay Executive an annual salary of $240,000 as compensation for Executive’s services (the “ Base Salary ”).  The Base Salary will be paid periodically in accordance with Heska’s normal payroll practices and will be subject to the usual, required withholdings and deductions.  Executive’s salary will be subject to review, and adjustments will be made at the sole discretion of the Compensation Committee of the Board (the “ Committee ”) and based upon Heska’s standard practices.
 
b.   Annual Bonus .   During the Term of Agreement, Executive will be eligible to participate in the Management Incentive Plan (the “ Bonus Plan ”), or such other bonus programs as established by the Committee, at a target percentage that is no less than 35% of Executive’s Base Salary then in effect (the “ Target Bonus ”).  The actual bonus paid may be higher or lower than the Target Bonus for over- or under-achievement of Executive’s performance goals, as determined by the Committee in its sole discretion.  Bonuses, if any, will accrue and become payable in accordance with the Committee’s standard practices for paying executive incentive compensation, provided, however, that any bonus payable under this subsection will be payable within two-and-one-half (2-1/2) months after the end of the taxable year to which it relates or such longer period as may be permitted by Treasury regulations in order to avoid application of Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”) to such bonuses.  Any bonuses paid pursuant to this Section will be subject to applicable withholdings and deductions.
 
4.   Expenses .   In addition to the foregoing, Heska will reimburse Executive for Executive’s reasonable out-of-pocket travel, entertainment, and other expenses, in accordance with Heska’s expense reimbursement policies and practices in effect at the time of the reimbursement request.  Executive shall submit such requests within forty-five (45 days) of incurring such expenses.
 
5.   Employee Benefits .   During the Term of Agreement, Executive will be eligible to participate in the benefits offered to other senior executives of Heska, in accordance with benefit plans, policies, and arrangements that may exist from time to time.
 
 
 
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6.   Termination and Severance .
 
a.   Termination without Cause or for Good Reason other than   In Connection with a Change of Control .   If, at any time, Executive’s employment is terminated by Heska without Cause (as defined below), by Executive for Good Reason (as defined below), or due to Executive’s death or Disability (as defined below), and the termination is not In Connection with a Change of Control (as defined below), Executive will receive the following, subject to conditions and limitations set forth in Section 7:
 
i.   A payment of an amount equal to six (6) months of Executive’s Base Salary, payable in accordance with Heska’s standard payroll practices over the shorter of the following periods (A) in equal installments over the period beginning on the date of such termination and ending on the six-month anniversary thereof, or (B) in equal installments on a monthly basis corresponding to the amount Executive would normally receive as salary each month if Executive were still employed with Heska, with a lump sum of any remaining balance of the amount specified above on March 15 of the year following the year of termination.
 
ii.   Provided that Executive timely elects continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”), Heska shall pay the COBRA premium for coverage for Executive and Executive’s eligible dependents under Heska’s Benefit Plans (as defined below) for six (6) months, or if earlier, until Executive becomes employed by another employer and eligible for coverage under such other employer’s welfare benefit plans ( e.g. , payments for medical COBRA premiums will cease when Executive becomes eligible for another employer’s medical plan.)  For the balance of the period during which Executive and Executive’s eligible dependents are entitled to coverage under COBRA, Executive shall be entitled to maintain coverage for Executive and Executive’s eligible dependents at Executive’s sole expense.  Executive shall notify Heska immediately upon Executive’s acceptance of employment with another employer.
 
b.   Termination without Cause or for Good Reason In Connection with a Change of Control .   If, at any time, Executive’s employment is terminated by Heska without Cause or by Executive for Good Reason, and the termination is In Connection with a Change of Control (as defined below), then, subject to the limitations set forth in this Section 7, Executive will receive:
 
i.   A payment of an amount equal to twelve (12) months of Executive’s Base Salary, payable in equal installments in accordance with the standard payroll schedule over the shorter of the following periods (A) the period beginning on the date of such termination and ending on the one-year anniversary thereof, or (B) the period beginning on the date of such termination and ending on March 15 of the year following the year of termination.
 
ii.   Provided that Executive timely elects continuation coverage under COBRA, Heska shall pay the COBRA premium for coverage for Executive and Executive’s eligible dependents under Heska’s Benefit Plans (as defined below) for twelve (12) months, or if earlier, until Executive becomes employed by another employer and eligible for coverage under such other employer’s welfare benefit plans ( e.g. , payments for medical COBRA premiums will cease when Executive becomes eligible for another employer’s medical plan).  For the balance of the period during which Executive and Executive’s eligible dependents are entitled to coverage under COBRA, Executive shall be entitled to maintain coverage for Executive and Executive’s eligible dependents at Executive’s sole expense.  Executive shall notify Heska immediately upon Executive’s acceptance of employment with another employer.
 
c.   Termination without Good Reason; Termination for Cause .   If, at any time, Executive’s employment with Heska terminates voluntarily by Executive without Good Reason or is terminated for Cause by Heska, then (i) all further vesting of Executive’s outstanding equity awards will terminate immediately, (ii) all payments of compensation by Heska to Executive hereunder will terminate immediately (except as to amounts already earned), but Executive will be paid all accrued but unpaid vacation, expense reimbursements, and other benefits due to Executive through Executive’s termination date under any Company-provided or paid plans, policies, and arrangements, and (iii) Executive will not be entitled to any severance.
 
 
 
3
 
d.   Excise Tax .   In the event that any benefits payable to Executive pursuant to Section 6 of this Agreement (“ Termination Benefits ”) (i) constitute “parachute payments” within the meaning of Section 280G of the Code, or any comparable successor provisions, and (ii) but for this Section 6(d), would be subject to the excise tax imposed by Section 4999 of the Code, or any comparable successor provisions (the “ Excise Tax ”), then Executive’s Termination Benefits hereunder shall be either (A) provided to Executive in full, or (B) provided to Executive as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, when taking into account applicable federal, state, local, and foreign income and employment taxes, the Excise Tax, and any other applicable taxes, results in the receipt by Executive, on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under the Excise Tax.  Unless Heska and Executive otherwise agree in writing, any determination required under this Section 6(d) shall be made in writing in good faith by Heska’s independent accountants.  In the event of a reduction of benefits hereunder, Executive shall be given the choice of which benefits to reduce.  If Executive does not provide written identification to Heska of which benefits Executive chooses to reduce within ten (10) days after written notice of the accountants’ determination, and Executive has not disputed the accountants’ determination, then Heska shall select the benefits to be reduced.  For purposes of making the calculations required by this Section 6(d), the accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code and other applicable legal authority.  Heska and Executive shall furnish to the accountants such information and documents as the accountants may reasonably request in order to make a determination under this Section 6(d).  Heska shall bear all costs the accountants may reasonably incur in connection with any calculations contemplated by this Section 6(d).
 
7. Conditions to Receipt of Severance; No Duty to Mitigate .
 
a.   Separation Agreement and Release of Claims .   The receipt of any severance pursuant to Section 6 will be subject to Executive signing and not revoking a confidential separation agreement and release of claims in a form reasonably acceptable to Heska.  Such agreement will provide (among other things) that Executive will not disparage Heska, its affiliates, parents, subsidiaries, directors, executive officers, employees, agents, or representatives.  No severance will be paid or provided until the confidential separation agreement and release agreement becomes effective.  No severance will be paid or provided if the Executive’s confidential separation agreement and release agreement is not signed and irrevocable within forty-five (45) days after the Executive’s termination date.
 
b.   Non-Competition .   In the event of a termination of Executive’s employment that would entitle Executive to the receipt of severance pursuant to Sections 6(a) or 6(b), Executive agrees not to engage in Competition (as defined below) for twelve (12) months following the termination date.  The geographic scope of this Section 7(b) is the United States of America.  If Executive engages in Competition within such period, all continuing payments and benefits to which Executive otherwise may be entitled pursuant to Section 6 will cease immediately.
 
c.   Non-Solicitation .   In the event of a termination of Executive’s employment that would entitle Executive to the receipt of severance pursuant to Sections 6(a) or 6(b), Executive agrees that, for twenty-four (24) months following the termination date, Executive, directly or indirectly, whether as employee, owner, sole proprietor, partner, director, member, consultant, agent, founder, co-venturer, or otherwise, (i) will not solicit, induce, or influence any person to modify his or her employment or consulting relationship with Heska (the “ No-Inducement ”), and (ii) not intentionally divert business away from Heska by soliciting business from any of Heska’s customers and users who would otherwise have placed the solicited order with Heska (the “ No Solicit ”).  The geographic scope of this Section 7(c) is the United States of America.  If Executive breaches the No-Inducement or No Solicit, all continuing payments and benefits to which Executive otherwise may be entitled pursuant to Section 6 will cease immediately.
 
d.   Remedies .   In the event of Executive’s breach of Sections 7(b) or 7(c), Heska shall have any and all remedies available to it in law or in equity, including without limitation the right to seek recovery of any amounts paid under Section 6 of this Agreement and injunctive relief, specific performance, or any other equitable relief to prevent a breach and to secure the enforcement of this Section.  Injunctive relief may be granted immediately upon the commencement of any such action, and Heska need not post a bond to obtain temporary or permanent injunctive relief.
 
 
 
4
 
8.   Definitions .
 
a.   Benefit Plans .   For purposes of this Agreement, “ Benefit Plans ” means plans, policies, or arrangements that Heska sponsors (or participates in) and that immediately prior to Executive’s termination of employment provide Executive and Executive’s eligible dependents with medical, dental, or vision benefits.  Benefit Plans do not include any other type of benefit (including, but not limited to, financial counseling, disability, life insurance, or retirement benefits).  A requirement that Heska provide Executive and Executive’s eligible dependents with coverage under the Benefit Plans will not be satisfied unless the coverage is no less favorable than that provided to Executive and Executive’s eligible dependents immediately prior to Executive’s termination of employment.
 
b.   Cause .   For purposes of this Agreement, “ Cause ” shall mean the occurrence of one or more of the following: (i) conviction of, or an entry of a plea of nolo contendere to, any crime (including one involving moral turpitude), whether a felony or misdemeanor, or any crime which reflects so negatively on Heska to be detrimental to Heska’s image or interests, or any act of fraud or dishonesty that has such negative reflection upon Heska; (ii) the repeated commitment of insubordination or refusal to comply with any reasonable request of the Board of Directors or other superior related to the scope or performance of Executive’s duties; (iii) possession of any illegal drug on Heska premises or being under the influence of illegal drugs or abusing prescription drugs or alcohol while on Heska business, attending Heska-sponsored functions, or on Heska premises; (iv) the gross misconduct or gross negligence in the performance of Executive’s responsibilities which, based upon good faith and reasonable factual investigation of the Board, demonstrates Executive’s unfitness to serve; (v) material breach of Executive’s obligations under this Agreement; or (vi) material breach of any fiduciary duty of Executive to Heska, which results in material damage to Heska or its business; provided, however, that if any occurrence under subsections (ii), (iv), (v), and (vi) may be cured, Heska will provide notice to Executive describing the nature of such event and Executive will thereafter have thirty (30) days to cure such event, and if such event is cured with that 30-day period, then grounds will no longer exist for terminating Executive’s employment for Cause.
 
c.   Change of Control .   For purposes of this Agreement, “ Change of Control ” means (i) a sale of all or substantially all of Heska’s assets, (ii) any merger, consolidation, or other business combination transaction of Heska with or into another corporation, entity, or person, other than a transaction in which the holders of at least a majority of the shares of voting capital stock of Heska outstanding immediately prior to such transaction continue to hold (either by such shares remaining outstanding or by their being converted into shares of voting capital stock of the surviving entity) a majority of the total voting power represented by the shares of voting capital stock of Heska (or the surviving entity) outstanding immediately after such transaction, (iii) the direct or indirect acquisition (including by way of a tender or exchange offer) by any person, or persons acting as a group, of beneficial ownership or a right to acquire beneficial ownership of shares representing a majority of the voting power of the then outstanding shares of capital stock of Heska, (iv) a contested election of Directors, as a result of which or in connection with which the persons who were Directors before such election or their nominees cease to constitute a majority of the Board, or (v) a dissolution or liquidation of Heska.
 
d.   Competition .   For purposes of this Agreement, Executive will be deemed to have engaged in “ Competition ” if Executive, without the written consent of the Board or an authorized officer of any successor company to Heska, directly or indirectly (1) provides services or assistance in any form to any individual, entity, or company providing veterinary products for the companion animal health industry (a “Restricted Company”), whether such services or assistance is provided as an employee, consultant, agent, corporate officer, director, or otherwise or (2) participates in the financing, operation, management, or control of, a Restricted Company.  A Restricted Company includes, without limitation, Abaxis, Inc., IDEXX Laboratories, Inc., scil animal health company GmbH, and Synbiotics Corporation (currently a wholly owned subsidiary of Pfizer).  Notwithstanding the foregoing, nothing contained in this Section 8(d) or in Section 7(b) above shall prohibit Executive from being employed or engaged in a corporate function or senior management position (and holding commensurate equity interests) in a division of a Restricted Company, so long as such division is not in any way engaged in providing veterinary products for the companion animal health industry and Executive does not directly or indirectly provide services or assistance to any division that does provide veterinary products for the companion animal health industry.
 
e.   Disability .   For purposes of this Agreement, “ Disability ” shall mean that, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, the Executive either (i) is unable to engage in any gainful activity, or (ii) is receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering Heska employees.
 
 
5
 
f.   Good Reason .
 
i.   For purposes of this Agreement, “ Good Reason ” means the occurrence of any of the following without Executive’s express written consent:
 
A.   Executive’s authority with Heska is, or Executive’s duties or responsibilities as Executive Vice President, Sales and Marketing are, materially diminished relative to Executive’s authority, duties, and responsibilities as in effect immediately prior to such change;
 
B.   a material diminution in Executive’s Base Salary as in effect immediately prior to such diminution; provided, that an across-the-board reduction in the base compensation and benefits of all other executive officers of Heska by the same percentage amount (or under the same terms and conditions) as part of a general base compensation reduction and/or benefit reduction shall not constitute such a qualifying material diminution;
 
C.   a material change in the geographic location of Executive’s principal place of employment such that the new location results in a commute for Executive that is both (A) longer than Executive’s commute prior to the relocation and (B) greater than fifty (50) road miles each way from Executive’s home in the Summerfield, North Carolina area;
 
D.   any material breach by Heska of any provision of this Agreement; and
 
E.   any acquiring company fails to assume or be bound by the terms of this Agreement In Connection with a Change of Control;
 
ii.   The aforementioned occurrences shall not be deemed Good Reason unless Executive gives Heska written notice of the existence of the condition which Executive believes constitutes Good Reason (which notice must be given within ninety (90) days of the initial existence of the condition) and such condition remains uncured for a period of thirty (30) days after the date of such notice.  An event of Good Reason shall occur automatically at the expiration of such 30-day period if the relevant condition remains uncured at such time.
 
g.   In Connection with a Change of Control .   For purposes of this Agreement, a termination of Executive’s employment with Heska is “ In Connection with a Change of Control ” if Executive’s employment is terminated without Cause or for Good Reason during the period beginning three (3) months prior to a Change of Control and ending eighteen (18) months following a Change of Control.
 
 
6
 
9.   Confidential Information .   Executive acknowledges that Executive has executed Heska’s standard employee Confidential Information and Invention Agreement (the “ Confidentiality Agreement ”).  During the Term of Agreement, and for twenty-four (24) months after termination of Executive’s employment, Executive agrees, if requested by Heska, to execute any updated versions of Heska’s form of employee confidential information agreement as may be required of substantially all of Heska’s executive officers.
 
10.   Executive’s Representations and Warranties . Executive represents and warrants that Executive is not a party to any other employment, non-competition, or other agreement or restriction which could interfere with the Executive’s employment with Heska or Executive’s or Heska’s rights and obligations hereunder and that Executive’s acceptance of employment with Heska and the performance of Executive’s duties hereunder will not breach the provisions of any contract, agreement, or understanding to which the Executive is party or any duty owed by the Executive to any other person.
 
11.   Notices .   All notices, requests, demands, and other communications called for hereunder will be in writing and will be deemed given (a) on the date of delivery if delivered personally, (b) one (1) day after being delivered through a nationally recognized overnight courier service, or (c) five (5) business days after the date of mailing if sent certified or registered mail.  Notice to Heska shall be sent to its principal place of business with a copy provided by facsimile to the Chair of the Committee, and notice to Executive will be delivered personally or sent to Executive’s last known address provided to Heska.
 
12.   Successors and Assigns .   This Agreement will be binding upon and inure to the benefit of (a) the heirs, executors, and legal representatives of Executive upon Executive’s death and (b) any successor of Heska.  Any such Successor (as defined below) of Heska will be deemed substituted for Heska under the terms of this Agreement for all purposes.  For purposes of this Section, “ Successor ” means any person, firm, corporation, or other business entity which at any time, whether by purchase, merger, or otherwise, directly or indirectly, acquires all or substantially all of the assets or business of Heska.  None of the rights of Executive to receive any form of compensation payable pursuant to this Agreement may be assigned or transferred except by will or the laws of descent and distribution.  Any other attempted assignment, transfer, conveyance, or other disposition of Executive’s right to compensation or other benefits will be null and void.
 
13.   Integration .   This Agreement, together with the Confidentiality Agreement, Heska’s stock plans, and Executive’s stock option and restricted stock agreements, represents the entire agreement and understanding between the Parties as to the subject matter herein and supersedes all prior or contemporaneous agreements whether written or oral, including the Prior Agreement.  No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in a writing that specifically references this Section and is signed by duly authorized representatives of the Parties hereto.
 
 
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14.   Interpretation .   Article titles and section headings contained herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.  The determination of the terms of, and the drafting of, this Agreement has been by mutual agreement after negotiation, with consideration by and participation of all Parties.  Accordingly, the Parties agree that rules relating to the interpretation of contracts against the drafter of any particular clause shall not apply in the case of this Agreement.
 
15.   Waivers .   Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the Party or Parties entitled to the benefit thereof.  Any such waiver shall be validly and sufficiently authorized for the purposes of this Agreement if, as to any Party, it is authorized in writing by an authorized representative of such Party.  The failure of any Party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of any Party thereafter to enforce each and every such provision.  No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach.
 
16.   Severability .   If any provision of this Agreement is held illegal, invalid, or unenforceable, such holding shall not affect any other provisions hereof.  In the event any provision is held illegal, invalid, or unenforceable, such provision shall be limited so as to give effect to the intent of the Parties to the fullest extent permitted by applicable law.  Any claim by Executive against Heska shall not constitute a defense to enforcement by Heska.
 
17.   Tax Matters .
 
a.   Except as provided in Section 6(d) above, Executive agrees that Executive is responsible for any applicable taxes of any nature (including any penalties or interest that may apply to such taxes) that are reasonably determined to apply to any payment made to Executive hereunder (or any arrangement contemplated hereunder), that Executive’s receipt of any benefit hereunder is conditioned on Executive’s satisfaction of any applicable withholding or similar obligations that apply to such benefit, and that any cash payment owed to Executive hereunder will be reduced to satisfy any such withholding or similar obligations that may apply thereto.
 
b.   Executive acknowledges that no representative or agent of Heska has provided Executive with any tax advice of any nature, and Executive has consulted with Executive’s own legal, tax, and financial advisor(s) as to tax and related matters concerning the compensation to be received under this Agreement.
 
18.   Section 409A .
 
a.   This Agreement is intended to comply with Section 409A of the Code, as amended (“ Section 409A ”) and shall be construed accordingly.  It is the intention of the parties that payments or benefits payable under this Agreement not be subject to the additional tax or interest imposed pursuant to Section 409A.  To the extent such potential payments or benefits are or could become subject to Section 409A, the parties shall cooperate to amend this Agreement with the goal of giving Executive the economic benefits described herein in a manner that does not result in such tax or interest being imposed; provided, however, that no such amendment shall materially increase the cost to, or impose any liability on Heska with respect to any benefits contemplated or provided hereunder.  Executive shall, at the request of Heska, take any reasonable action (or refrain from taking any action), required to comply with any correction procedure promulgated pursuant to Section 409A.
 
b.   If a payment that could be made under this Agreement would be subject to additional taxes and interest under Section 409A, Heska in its sole discretion may accelerate some or all of a payment otherwise payable under the Agreement to the time at which such amount is includible in the income of Executive, provided that such acceleration shall only be permitted to the extent permitted under Treasury Regulation § 1.409A-3(j)(4)(vii) and the amount of such acceleration does not exceed the amount permitted under Treasury Regulation § 1.409A-3(j)(vii).
 
c.   No payment to be made under this Agreement shall be made at a time earlier than that provided for in this Agreement unless such payment is (i) an acceleration of payment permitted to be made under Treasury Regulation § 1.409A-3(j)(4) or (ii) a payment that would otherwise not be subject to additional taxes and interest under Section 409A.
 
d.   The right to each payment described in this Agreement shall be treated as a right to a series of separate payments and a separately identifiable payment for purposes of Section 409A.
 
e.   For purposes of Section 6 of this Agreement, “termination” (or any similar term) when used in reference to Executive’s employment shall mean “separation from service” with Heska within the meaning of Section 409A(a)(2)(A)(i) of the Code and applicable administrative guidance issued thereunder, and Executive shall be considered to have terminated employment with Heska when, and only when, Executive incurs a “separation from service” with Heska within the meaning of Section 409A(a)(2)(A)(i) of the Code and applicable administrative guidance issued thereunder.
 
f.   If Executive qualifies as a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code and would receive any payment sooner than six (6) months after Executive’s separation from service that, absent the application of this Section 19(f), would be subject to additional tax imposed pursuant to Section 409A as a result of such status as a specified employee, then such payment shall instead be payable on the date that is the earliest of (i) six (6) months after Executive’s separation from service, (ii)  Executive’s death, or (iii) such other date as will not result in such payment being subject to such additional tax.
 
 
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19.   Governing Law; Waiver of Jury Trial .   This Agreement shall be governed by and construed in accordance with the internal laws of the State of Colorado without regard to conflict of law principles.  The Parties hereto each waive their respective rights to a jury trial of any and all such claims and causes of action.
 
20.   Counterparts .   This Agreement may be executed in counterparts, and each counterpart will have the same force and effect as an original and will constitute an effective, binding agreement on the part of each of the undersigned.
 
[ signature page follows ]

 
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IN WITNESS WHEREOF , Heska has caused this Employment Agreement to be duly executed by an officer thereunto duly authorized, and Executive has hereunto set Executive’s hand, all as of the day and year first above written.

   HESKA CORPORATION
 


   /s /  Robert B. Grieve                                                                          
    Robert B. Grieve, Ph.D.
    Chairman of the Board and Chief Executive Officer



EXECUTIVE:



 
/s/  Joseph P. Aperfine                                                                         
Joseph P. Aperfine
Executive Vice President, Sales and Marketing
 
 
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Exhibit 10.2

ASSIGNMENT AND SECOND AMENDMENT TO
EMPLOYMENT AGREEMENT

This Assignment and Second Amendment to Employment Agreement is entered into by and among Heska Corporation, a Delaware corporation (“Heska”), Diamond Animal Health, Inc., an Iowa corporation and wholly-owned subsidiary of Heska (“Diamond”), and Michael J. McGinley, Ph.D. (“Employee”), dated effective as of August 4, 2011 (this “Second Amendment”), and amends the Employment Agreement dated as of May 1, 2000 and as amended as of January 1, 2008 (the “Employment Agreement”), between Diamond and  Employee.  Unless otherwise defined herein, all capitalized terms used herein shall have the meaning ascribed to them in the Employment Agreement.

RECITALS

A.           The parties hereto desire for the Employment Agreement to be assigned by Diamond to Heska, for Heska to assume the Employment Agreement from Diamond, and for Employee to acknowledge and consent to such assignment and assumption as provided in this Second Amendment.

B.           In connection with the assignment and assumption of the Employment Agreement, the parties hereto also desire to amend the Employment Agreement to the extent set forth herein.

C.           Section 10 of the Employment Agreement contemplates that the Employment Agreement is assignable and that it shall be binding upon and inure to the benefit of the successors and assigns of the parties.

D.           The Employment Agreement permits the parties to modify the Employment Agreement in writing, signed by both parties, and Employee and Diamond, with the consent of Heska, have agreed to modify the Employment Agreement to the extent set forth in this Second Amendment.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, including Employee’s employment with Heska, the receipt and sufficiency of which are hereby acknowledged, Employee, Heska and Diamond  hereby agree as follows:

1.           Diamond hereby assigns, conveys and transfers to Heska all of its right, title and interest in and to the Employment Agreement, and Heska, with its principal place of business at 3760 Rocky Mountain Avenue, Loveland, Colorado 80538, hereby assumes from Diamond all of Diamond’s right, title and interest in and to the Employment Agreement.  From and after the date hereof, Diamond shall have no further obligations to Employee under the Employment Agreement, as amended by this Second Amendment, or otherwise.  Employee hereby acknowledges and consents to the assignment by Diamond and assumption by Heska of the Employment Agreement.  Heska hereby consents to the amendments to the Employment Agreement contained in this Second Amendment.  All references to “Company” in the Employment Agreement, as amended by this Second Amendment, shall be deemed from and after the date hereof to refer to Heska.

 
 
 
2.           Section 2 of the Employment Agreement is amended and restated in its entirety to read as set forth below:

Duties and Responsibilities .  Employee shall serve as President and Chief Operating Officer of Company, with such duties and responsibilities as may be assigned to him from time to time by the Chief Executive Officer of the Company and/or the Board of Directors of the Company, and with such on-going daily duties and responsibilities as are typically entailed in such position.  The Chief Executive Officer and/or the Board of Directors shall be entitled to change such title, duties, and responsibilities from time to time, in their discretion.  Employee shall devote his full time and energies to such duties.
 
3.           Section 3 of the Employment Agreement is amended and restated in its entirety to read as set forth below:

Compensation .  Company shall pay Employee as compensation for services rendered under this Agreement, a “base salary” per year, the amount of which initially shall be $265,000 , which may be increased from time-to-time by Company in its discretion.  If for any reason during any given year, Employee does not work an entire year, other than normal vacations as provided hereunder, the compensation will be prorated to compensate only for the actual time worked.
 
4.           Subsection 6(c)(iv) of the Employment Agreement is amended and restated in its entirety to read as set forth below:

In the event that severance pay is due to Employee as a result of the “involuntary termination” of his employment without “cause” due to a “change of control”, Employee will be paid one (1) year’s “base salary” at the rate in effect immediately prior to termination in twelve equal monthly installments (subject to all applicable taxes and other deductions), with the first such installment due 15 days after the date of such termination and with the following eleven installments due no later than monthly thereafter on Company’s then regular payroll dates.  The Company will also pay the employer contribution and administrative cost of the health insurance premiums for the medical and dental insurance coverage previously maintained by the Company for Employee and his eligible dependents during this one year period or until Employee is provided or obtains medical and dental insurance coverage by another employer or entity, whichever first occurs.  Employee shall also be entitled to the immediate vesting as of the effective date of termination of all outstanding equity incentive awards granted to Employee by the Company prior to the effective termination date.

 
 
 
5.           Subsection 6(c)(v) of the Employment Agreement is hereby deleted in its entirety and in its stead the following new Section 11 shall be inserted into the Employment Agreement, which shall read in its entirety as set forth below:

 
11.
409A.

 
(a)
General .  It is the intention of the parties that compensation or benefits payable under this Agreement not be subject to the additional tax imposed pursuant to Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and this Agreement shall be construed accordingly.  To the extent such potential payments or benefits could become subject to additional tax under such Section, the parties shall cooperate to amend this Agreement with the goal of giving Employee the economic benefits described herein in a manner that does not result in such tax being imposed.

 
(b)
Severance Pay; Separate Payments .  Each payment or benefit made pursuant to Section 6 of this Agreement shall be deemed to be a separate payment for purposes of Code Section 409A.  Such payments or benefits shall be exempt from the requirements of Code Section 409A to the maximum extent possible as “short-term deferrals” pursuant to Treasury Regulation Section 1.409A-1(b)(4), as involuntary separation pay pursuant to Treasury Regulation Section 1.409A-1(b)(9)(iii), and/or under any other exemption that may be applicable, and this Agreement shall be construed accordingly.

 
(c)
Definitions .  For purposes of this Agreement, phrases such as “termination of employment” shall be deemed to mean “separation from service,” as defined in Section 409A of the Code and the Treasury Regulations thereunder.

 
(d)
Failsafe 6-Month Delay .  If Employee is a specified employee within the meaning of Section 409A(a)(2)(B)(i) of the Code and would receive any payment sooner than 6 months after Employee’s “separation from service” that, absent the application of this Section 11(d), would be subject to the additional tax imposed pursuant to Section 409A of the Code as a result of such status as a specified employee, then such payment shall instead be payable on the date that is the earliest of (i) 6 months after Employee’s “separation from service,” or (ii) Employee’s death.

 
 
 
 
(e)
Reimbursements .  To the extent that any taxable reimbursement or in-kind benefit provided for hereunder is deferred compensation not otherwise exempt from the requirements of Code Section 409A, such taxable reimbursement or in-kind benefit shall be made on or before the last day of the calendar year following the calendar year in which the expense was incurred.  Taxable reimbursements or in-kind benefits in any one calendar year shall not affect the taxable reimbursements or in-kind benefits eligible for reimbursement or to be provided in any other calendar year.  No taxable reimbursement or in-kind benefit may be subject to liquidation or exchange for any other benefit.

6.           All other terms and conditions of the Employment Agreement shall remain in full force and effect.  This Second Amendment, together with the Employment Agreement, contains all the terms and conditions agreed upon by the parties hereto regarding the subject matter hereof and thereof.  All prior agreements, promises, negotiations and representations, either oral or written, relating to the subject matter of this Second Amendment or the Employment Agreement not expressly set forth in this Second Amendment or the Employment Agreement are of no force or effect.

7.           Any waiver, alteration or modification of any of the terms of this Second Amendment or the Employment Agreement shall be valid only if made in writing and signed by the parties to this Second Amendment who or which intend to be bound by the terms of any such waiver, alteration or modification, it being acknowledged and agreed upon that future amendments to the Employment Agreement, as amended hereby, need only be agreed upon between Heska, as assignee of the rights of Diamond under the Employment Agreement, and Employee.

8.           This Second Amendment may be executed in counterparts, each of which shall constitute an original but all of which together shall constitute one and the same document.  This Second Amendment to the extent signed and delivered by facsimile or other electronic means will be treated in all manner and respects as an original agreement or instrument and will be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person.

[Signature Page(s) to Follow]





 
 
 

IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment effective as of the day and year first above written.



 
HESKA CORPORATION
 


By:  /s/ Robert B. Grieve                                                               
Robert B. Grieve, Ph.D.
Chairman of the Board and Chief Executive Officer

 
DIAMOND ANIMAL HEALTH, INC.
 


By:   /s/ Michael A. Bent                                                               
Michael A. Bent
Treasurer


EXECUTIVE



  /s/ Michael J. McGinley                                                               
 Michael J. McGinley, Ph.D.
 President and Chief Operating Officer



Exhibit 10.3
 
EMPLOYMENT AGREEMENT
 
 
This Employment Agreement   (the “ Agreement ”) is made effective on August 4, 2011 (the “ Effective Date ”) between Heska Corporation, a Delaware corporation (“ Heska ”), and Claudine M. Zachara (“ Executive ”).  Heska and Executive collectively are referred to as the “ Parties ” and individually as a “ Party .”
 
RECITALS
 
WHEREFORE, Executive is currently the Vice President, Marketing and Communications of Heska.
 
WHEREFORE, Executive and Heska now wish to enter into this Agreement regarding the terms of Executive’s employment, which shall become effective upon execution.
 
NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants, and agreements contained herein, the legal sufficiency of which is acknowledged by the Parties, and intending to be legally bound, the Parties agree as follows:
 
TERMS
 
1. Duties and Scope of Employment .
 
a.   Position and Duties .   As of the Effective Date, Executive will serve as Vice President, Marketing and Communications of Heska.  Executive will render such business and professional services in the performance of Executive’s duties, consistent with Executive’s position within Heska, as will reasonably be assigned to Executive by Heska’s Board of Directors, Chief Executive Officer, President or their supervisor.  Executive’s duties will be subject to review and adjustments will made at the discretion of the Executive’s supervisor and superiors.
 
b.   Obligations .   During the Term of Agreement (as defined below), Executive will devote Executive’s full attention, skills, time and business efforts to Heska.  For the duration of the Term of Agreement, Executive agrees not to actively engage in any other employment, occupation, or consulting activity, for any direct or indirect remuneration, without the prior approval of the Board or the Corporate Governance Committee of the Board (which approval will not be unreasonably withheld); provided, however, that Executive may, without the approval of the Board or the Corporate Governance Committee of the Board, serve in any capacity with any civic, educational, or charitable organization, provided such services do not interfere with Executive’s obligations to Heska.
 
2.   Term of Agreement .
 
a.   The period of Executive’s employment under this Agreement is referred to herein as the “ Term of Agreement .”  Subject to the provisions for earlier termination of employment in Section 6 below, this Agreement will have an initial term of thirty-six (36) months commencing on the Effective Date.  On the 3rd anniversary of the Effective Date, and on each annual anniversary of the Effective Date thereafter, this Agreement automatically will renew for an additional twelve-month term unless Heska provides Executive with notice of non-renewal at least 120 days prior to the date of automatic renewal; provided, however, that either Heska or Executive may terminate Executive’s employment immediately at any time subject to the provisions in Section 6 below.
 
b.   Executive may be entitled to severance benefits pursuant to Section 6 below, depending upon the circumstances of Executive’s termination of employment.  Executive will not be entitled to severance benefits if Heska provides Executive with notice of non-renewal pursuant to Section 2.a. above, regardless of the reason.  Upon the termination of Executive’s employment for any reason, Executive will be entitled to payment of all accrued but unpaid compensation, vacation, expense reimbursements, and other benefits due to Executive through Executive’s termination date under any Heska-provided or paid plans, policies, and arrangements.  Executive agrees to resign from all positions that Executive holds with Heska, without limitation, immediately following the termination of Executive’s employment if the Board so requests.
 
 
 
 
3.   Compensation .
 
a.   Base Salary .   Heska will pay Executive an annual salary of $191,500 as compensation for Executive’s services (the “ Base Salary ”).  The Base Salary will be paid periodically in accordance with Heska’s normal payroll practices and will be subject to the usual, required withholdings and deductions.  Executive’s salary will be subject to review, and adjustments will be made at the sole discretion of the Compensation Committee of the Board (the “ Committee ”) and based upon Heska’s standard practices.
 
b.   Annual Bonus .   During the Term of Agreement, Executive will be eligible to participate in the Management Incentive Plan (the “ Bonus Plan ”), or such other bonus programs as established by the Committee, at a target percentage that is no less than 35% of Executive’s Base Salary then in effect (the “ Target Bonus ”).  The actual bonus paid may be higher or lower than the Target Bonus for over- or under-achievement of Executive’s performance goals, as determined by the Committee in its sole discretion.  Bonuses, if any, will accrue and become payable in accordance with the Committee’s standard practices for paying executive incentive compensation, provided, however, that any bonus payable under this subsection will be payable within two-and-one-half (2-1/2) months after the end of the taxable year to which it relates or such longer period as may be permitted by Treasury regulations in order to avoid application of Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”) to such bonuses.  Any bonuses paid pursuant to this Section will be subject to applicable withholdings and deductions.
 
4.   Expenses .   In addition to the foregoing, Heska will reimburse Executive for Executive’s reasonable out-of-pocket travel, entertainment, and other expenses, in accordance with Heska’s expense reimbursement policies and practices in effect at the time of the reimbursement request.  Executive shall submit such requests within forty-five (45 days) of incurring such expenses.
 
5.   Employee Benefits .   During the Term of Agreement, Executive will be eligible to participate in the benefits offered to other senior executives of Heska, in accordance with benefit plans, policies, and arrangements that may exist from time to time.
 
 
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6.   Termination and Severance .
 
a.   Termination without Cause or for Good Reason other than   In Connection with a Change of Control .   If, at any time, Executive’s employment is terminated by Heska without Cause (as defined below), by Executive for Good Reason (as defined below), or due to Executive’s death or Disability (as defined below), and the termination is not In Connection with a Change of Control (as defined below), Executive will receive the following, subject to conditions and limitations set forth in Section 7:
 
i.   A payment of an amount equal to six (6) months of Executive’s Base Salary, payable in accordance with Heska’s standard payroll practices over the shorter of the following periods (A) in equal installments over the period beginning on the date of such termination and ending on the six-month anniversary thereof, or (B) in equal installments on a monthly basis corresponding to the amount Executive would normally receive as salary each month if Executive were still employed with Heska, with a lump sum of any remaining balance of the amount specified above on March 15 of the year following the year of termination.
 
ii.   Provided that Executive timely elects continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”), Heska shall pay the COBRA premium for coverage for Executive and Executive’s eligible dependents under Heska’s Benefit Plans (as defined below) for six (6) months, or if earlier, until Executive becomes employed by another employer and eligible for coverage under such other employer’s welfare benefit plans ( e.g. , payments for medical COBRA premiums will cease when Executive becomes eligible for another employer’s medical plan.)  For the balance of the period during which Executive and Executive’s eligible dependents are entitled to coverage under COBRA, Executive shall be entitled to maintain coverage for Executive and Executive’s eligible dependents at Executive’s sole expense.  Executive shall notify Heska immediately upon Executive’s acceptance of employment with another employer.
 
b.   Termination without Cause or for Good Reason In Connection with a Change of Control .   If, at any time, Executive’s employment is terminated by Heska without Cause or by Executive for Good Reason, and the termination is In Connection with a Change of Control (as defined below), then, subject to the limitations set forth in this Section 7, Executive will receive:
 
i.   A payment of an amount equal to twelve (12) months of Executive’s Base Salary, payable in equal installments in accordance with the standard payroll schedule over the shorter of the following periods (A) the period beginning on the date of such termination and ending on the one-year anniversary thereof, or (B) the period beginning on the date of such termination and ending on March 15 of the year following the year of termination.
 
ii.   Provided that Executive timely elects continuation coverage under COBRA, Heska shall pay the COBRA premium for coverage for Executive and Executive’s eligible dependents under Heska’s Benefit Plans (as defined below) for twelve (12) months, or if earlier, until Executive becomes employed by another employer and eligible for coverage under such other employer’s welfare benefit plans ( e.g. , payments for medical COBRA premiums will cease when Executive becomes eligible for another employer’s medical plan).  For the balance of the period during which Executive and Executive’s eligible dependents are entitled to coverage under COBRA, Executive shall be entitled to maintain coverage for Executive and Executive’s eligible dependents at Executive’s sole expense.  Executive shall notify Heska immediately upon Executive’s acceptance of employment with another employer.
 
c.   Termination without Good Reason; Termination for Cause .   If, at any time, Executive’s employment with Heska terminates voluntarily by Executive without Good Reason or is terminated for Cause by Heska, then (i) all further vesting of Executive’s outstanding equity awards will terminate immediately, (ii) all payments of compensation by Heska to Executive hereunder will terminate immediately (except as to amounts already earned), but Executive will be paid all accrued but unpaid vacation, expense reimbursements, and other benefits due to Executive through Executive’s termination date under any Company-provided or paid plans, policies, and arrangements, and (iii) Executive will not be entitled to any severance.
 
 
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d.   Excise Tax .   In the event that any benefits payable to Executive pursuant to Section 6 of this Agreement (“ Termination Benefits ”) (i) constitute “parachute payments” within the meaning of Section 280G of the Code, or any comparable successor provisions, and (ii) but for this Section 6(d), would be subject to the excise tax imposed by Section 4999 of the Code, or any comparable successor provisions (the “ Excise Tax ”), then Executive’s Termination Benefits hereunder shall be either (A) provided to Executive in full, or (B) provided to Executive as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, when taking into account applicable federal, state, local, and foreign income and employment taxes, the Excise Tax, and any other applicable taxes, results in the receipt by Executive, on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under the Excise Tax.  Unless Heska and Executive otherwise agree in writing, any determination required under this Section 6(d) shall be made in writing in good faith by Heska’s independent accountants.  In the event of a reduction of benefits hereunder, Executive shall be given the choice of which benefits to reduce.  If Executive does not provide written identification to Heska of which benefits Executive chooses to reduce within ten (10) days after written notice of the accountants’ determination, and Executive has not disputed the accountants’ determination, then Heska shall select the benefits to be reduced.  For purposes of making the calculations required by this Section 6(d), the accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code and other applicable legal authority.  Heska and Executive shall furnish to the accountants such information and documents as the accountants may reasonably request in order to make a determination under this Section 6(d).  Heska shall bear all costs the accountants may reasonably incur in connection with any calculations contemplated by this Section 6(d).
 
7. Conditions to Receipt of Severance; No Duty to Mitigate .
 
a.   Separation Agreement and Release of Claims .   The receipt of any severance pursuant to Section 6 will be subject to Executive signing and not revoking a confidential separation agreement and release of claims in a form reasonably acceptable to Heska.  Such agreement will provide (among other things) that Executive will not disparage Heska, its affiliates, parents, subsidiaries, directors, executive officers, employees, agents, or representatives.  No severance will be paid or provided until the confidential separation agreement and release agreement becomes effective.  No severance will be paid or provided if the Executive’s confidential separation agreement and release agreement is not signed and irrevocable within forty-five (45) days after the Executive’s termination date.
 
b.   Non-Competition .   In the event of a termination of Executive’s employment that would entitle Executive to the receipt of severance pursuant to Sections 6(a) or 6(b), Executive agrees not to engage in Competition (as defined below) for twelve (12) months following the termination date.  The geographic scope of this Section 7(b) is the United States of America.  If Executive engages in Competition within such period, all continuing payments and benefits to which Executive otherwise may be entitled pursuant to Section 6 will cease immediately.
 
c.   Non-Solicitation .   In the event of a termination of Executive’s employment that would entitle Executive to the receipt of severance pursuant to Sections 6(a) or 6(b), Executive agrees that, for twenty-four (24) months following the termination date, Executive, directly or indirectly, whether as employee, owner, sole proprietor, partner, director, member, consultant, agent, founder, co-venturer, or otherwise, (i) will not solicit, induce, or influence any person to modify his or her employment or consulting relationship with Heska (the “ No-Inducement ”), and (ii) not intentionally divert business away from Heska by soliciting business from any of Heska’s customers and users who would otherwise have placed the solicited order with Heska (the “ No Solicit ”).  The geographic scope of this Section 7(c) is the United States of America.  If Executive breaches the No-Inducement or No Solicit, all continuing payments and benefits to which Executive otherwise may be entitled pursuant to Section 6 will cease immediately.
 
d.   Remedies .   In the event of Executive’s breach of Sections 7(b) or 7(c), Heska shall have any and all remedies available to it in law or in equity, including without limitation the right to seek recovery of any amounts paid under Section 6 of this Agreement and injunctive relief, specific performance, or any other equitable relief to prevent a breach and to secure the enforcement of this Section.  Injunctive relief may be granted immediately upon the commencement of any such action, and Heska need not post a bond to obtain temporary or permanent injunctive relief.
 
 
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8.   Definitions .
 
a.   Benefit Plans .   For purposes of this Agreement, “ Benefit Plans ” means plans, policies, or arrangements that Heska sponsors (or participates in) and that immediately prior to Executive’s termination of employment provide Executive and Executive’s eligible dependents with medical, dental, or vision benefits.  Benefit Plans do not include any other type of benefit (including, but not limited to, financial counseling, disability, life insurance, or retirement benefits).  A requirement that Heska provide Executive and Executive’s eligible dependents with coverage under the Benefit Plans will not be satisfied unless the coverage is no less favorable than that provided to Executive and Executive’s eligible dependents immediately prior to Executive’s termination of employment.
 
b.   Cause .   For purposes of this Agreement, “ Cause ” shall mean the occurrence of one or more of the following: (i) conviction of, or an entry of a plea of nolo contendere to, any crime (including one involving moral turpitude), whether a felony or misdemeanor, or any crime which reflects so negatively on Heska to be detrimental to Heska’s image or interests, or any act of fraud or dishonesty that has such negative reflection upon Heska; (ii) the repeated commitment of insubordination or refusal to comply with any reasonable request of the Board of Directors or other superior related to the scope or performance of Executive’s duties; (iii) possession of any illegal drug on Heska premises or being under the influence of illegal drugs or abusing prescription drugs or alcohol while on Heska business, attending Heska-sponsored functions, or on Heska premises; (iv) the gross misconduct or gross negligence in the performance of Executive’s responsibilities which, based upon good faith and reasonable factual investigation of the Board, demonstrates Executive’s unfitness to serve; (v) material breach of Executive’s obligations under this Agreement; or (vi) material breach of any fiduciary duty of Executive to Heska, which results in material damage to Heska or its business; provided, however, that if any occurrence under subsections (ii), (iv), (v), and (vi) may be cured, Heska will provide notice to Executive describing the nature of such event and Executive will thereafter have thirty (30) days to cure such event, and if such event is cured with that 30-day period, then grounds will no longer exist for terminating Executive’s employment for Cause.
 
c.   Change of Control .   For purposes of this Agreement, “ Change of Control ” means (i) a sale of all or substantially all of Heska’s assets, (ii) any merger, consolidation, or other business combination transaction of Heska with or into another corporation, entity, or person, other than a transaction in which the holders of at least a majority of the shares of voting capital stock of Heska outstanding immediately prior to such transaction continue to hold (either by such shares remaining outstanding or by their being converted into shares of voting capital stock of the surviving entity) a majority of the total voting power represented by the shares of voting capital stock of Heska (or the surviving entity) outstanding immediately after such transaction, (iii) the direct or indirect acquisition (including by way of a tender or exchange offer) by any person, or persons acting as a group, of beneficial ownership or a right to acquire beneficial ownership of shares representing a majority of the voting power of the then outstanding shares of capital stock of Heska, (iv) a contested election of Directors, as a result of which or in connection with which the persons who were Directors before such election or their nominees cease to constitute a majority of the Board, or (v) a dissolution or liquidation of Heska.
 
d.   Competition .   For purposes of this Agreement, Executive will be deemed to have engaged in “ Competition ” if Executive, without the written consent of the Board or an authorized officer of any successor company to Heska, directly or indirectly (1) provides services or assistance in any form to any individual, entity, or company providing veterinary products for the companion animal health industry (a “Restricted Company”), whether such services or assistance is provided as an employee, consultant, agent, corporate officer, director, or otherwise or (2) participates in the financing, operation, management, or control of, a Restricted Company.  A Restricted Company includes, without limitation, Abaxis, Inc., IDEXX Laboratories, Inc., scil animal health company GmbH, and Synbiotics Corporation (currently a wholly owned subsidiary of Pfizer).  Notwithstanding the foregoing, nothing contained in this Section 8(d) or in Section 7(b) above shall prohibit Executive from being employed or engaged in a corporate function or senior management position (and holding commensurate equity interests) in a division of a Restricted Company, so long as such division is not in any way engaged in providing veterinary products for the companion animal health industry and Executive does not directly or indirectly provide services or assistance to any division that does provide veterinary products for the companion animal health industry.
 
e.   Disability .   For purposes of this Agreement, “ Disability ” shall mean that, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, the Executive either (i) is unable to engage in any gainful activity, or (ii) is receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering Heska employees.
 
 
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f.   Good Reason .
 
i.   For purposes of this Agreement, “ Good Reason ” means the occurrence of any of the following without Executive’s express written consent:
 
A.   Executive’s authority with Heska is, or Executive’s duties or responsibilities as Vice President, Marketing and Communications are, materially diminished relative to Executive’s authority, duties, and responsibilities as in effect immediately prior to such change;
 
B.   a material diminution in Executive’s Base Salary as in effect immediately prior to such diminution; provided, that an across-the-board reduction in the base compensation and benefits of all other executive officers of Heska by the same percentage amount (or under the same terms and conditions) as part of a general base compensation reduction and/or benefit reduction shall not constitute such a qualifying material diminution;
 
C.   a material change in the geographic location of Executive’s principal place of employment such that the new location results in a commute for Executive that is both (A) longer than Executive’s commute prior to the relocation and (B) greater than fifty (50) road miles each way from Executive’s home in the Timnath, Colorado area;
 
D.   any material breach by Heska of any provision of this Agreement; and
 
E.   any acquiring company fails to assume or be bound by the terms of this Agreement In Connection with a Change of Control;
 
ii.   The aforementioned occurrences shall not be deemed Good Reason unless Executive gives Heska written notice of the existence of the condition which Executive believes constitutes Good Reason (which notice must be given within ninety (90) days of the initial existence of the condition) and such condition remains uncured for a period of thirty (30) days after the date of such notice.  An event of Good Reason shall occur automatically at the expiration of such 30-day period if the relevant condition remains uncured at such time.
 
g.   In Connection with a Change of Control .   For purposes of this Agreement, a termination of Executive’s employment with Heska is “ In Connection with a Change of Control ” if Executive’s employment is terminated without Cause or for Good Reason during the period beginning three (3) months prior to a Change of Control and ending eighteen (18) months following a Change of Control.
 
 
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9.   Confidential Information .   Executive acknowledges that Executive has executed Heska’s standard employee Confidential Information and Invention Agreement (the “ Confidentiality Agreement ”).  During the Term of Agreement, and for twenty-four (24) months after termination of Executive’s employment, Executive agrees, if requested by Heska, to execute any updated versions of Heska’s form of employee confidential information agreement as may be required of substantially all of Heska’s executive officers.
 
10.   Executive’s Representations and Warranties . Executive represents and warrants that Executive is not a party to any other employment, non-competition, or other agreement or restriction which could interfere with the Executive’s employment with Heska or Executive’s or Heska’s rights and obligations hereunder and that Executive’s acceptance of employment with Heska and the performance of Executive’s duties hereunder will not breach the provisions of any contract, agreement, or understanding to which the Executive is party or any duty owed by the Executive to any other person.
 
11.   Notices .   All notices, requests, demands, and other communications called for hereunder will be in writing and will be deemed given (a) on the date of delivery if delivered personally, (b) one (1) day after being delivered through a nationally recognized overnight courier service, or (c) five (5) business days after the date of mailing if sent certified or registered mail.  Notice to Heska shall be sent to its principal place of business with a copy provided by facsimile to the Chair of the Committee, and notice to Executive will be delivered personally or sent to Executive’s last known address provided to Heska.
 
12.   Successors and Assigns .   This Agreement will be binding upon and inure to the benefit of (a) the heirs, executors, and legal representatives of Executive upon Executive’s death and (b) any successor of Heska.  Any such Successor (as defined below) of Heska will be deemed substituted for Heska under the terms of this Agreement for all purposes.  For purposes of this Section, “ Successor ” means any person, firm, corporation, or other business entity which at any time, whether by purchase, merger, or otherwise, directly or indirectly, acquires all or substantially all of the assets or business of Heska.  None of the rights of Executive to receive any form of compensation payable pursuant to this Agreement may be assigned or transferred except by will or the laws of descent and distribution.  Any other attempted assignment, transfer, conveyance, or other disposition of Executive’s right to compensation or other benefits will be null and void.
 
13.   Integration .   This Agreement, together with the Confidentiality Agreement, Heska’s stock plans, and Executive’s stock option and restricted stock agreements, represents the entire agreement and understanding between the Parties as to the subject matter herein and supersedes all prior or contemporaneous agreements whether written or oral, including the Prior Agreement.  No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in a writing that specifically references this Section and is signed by duly authorized representatives of the Parties hereto.
 
 
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14.   Interpretation .   Article titles and section headings contained herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.  The determination of the terms of, and the drafting of, this Agreement has been by mutual agreement after negotiation, with consideration by and participation of all Parties.  Accordingly, the Parties agree that rules relating to the interpretation of contracts against the drafter of any particular clause shall not apply in the case of this Agreement.
 
15.   Waivers .   Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the Party or Parties entitled to the benefit thereof.  Any such waiver shall be validly and sufficiently authorized for the purposes of this Agreement if, as to any Party, it is authorized in writing by an authorized representative of such Party.  The failure of any Party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of any Party thereafter to enforce each and every such provision.  No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach.
 
16.   Severability .   If any provision of this Agreement is held illegal, invalid, or unenforceable, such holding shall not affect any other provisions hereof.  In the event any provision is held illegal, invalid, or unenforceable, such provision shall be limited so as to give effect to the intent of the Parties to the fullest extent permitted by applicable law.  Any claim by Executive against Heska shall not constitute a defense to enforcement by Heska.
 
17.   Tax Matters .
 
a.   Except as provided in Section 6(d) above, Executive agrees that Executive is responsible for any applicable taxes of any nature (including any penalties or interest that may apply to such taxes) that are reasonably determined to apply to any payment made to Executive hereunder (or any arrangement contemplated hereunder), that Executive’s receipt of any benefit hereunder is conditioned on Executive’s satisfaction of any applicable withholding or similar obligations that apply to such benefit, and that any cash payment owed to Executive hereunder will be reduced to satisfy any such withholding or similar obligations that may apply thereto.
 
b.   Executive acknowledges that no representative or agent of Heska has provided Executive with any tax advice of any nature, and Executive has consulted with Executive’s own legal, tax, and financial advisor(s) as to tax and related matters concerning the compensation to be received under this Agreement.
 
18.   Section 409A .
 
a.   This Agreement is intended to comply with Section 409A of the Code, as amended (“ Section 409A ”) and shall be construed accordingly.  It is the intention of the parties that payments or benefits payable under this Agreement not be subject to the additional tax or interest imposed pursuant to Section 409A.  To the extent such potential payments or benefits are or could become subject to Section 409A, the parties shall cooperate to amend this Agreement with the goal of giving Executive the economic benefits described herein in a manner that does not result in such tax or interest being imposed; provided, however, that no such amendment shall materially increase the cost to, or impose any liability on Heska with respect to any benefits contemplated or provided hereunder.  Executive shall, at the request of Heska, take any reasonable action (or refrain from taking any action), required to comply with any correction procedure promulgated pursuant to Section 409A.
 
b.   If a payment that could be made under this Agreement would be subject to additional taxes and interest under Section 409A, Heska in its sole discretion may accelerate some or all of a payment otherwise payable under the Agreement to the time at which such amount is includible in the income of Executive, provided that such acceleration shall only be permitted to the extent permitted under Treasury Regulation § 1.409A-3(j)(4)(vii) and the amount of such acceleration does not exceed the amount permitted under Treasury Regulation § 1.409A-3(j)(vii).
 
c.   No payment to be made under this Agreement shall be made at a time earlier than that provided for in this Agreement unless such payment is (i) an acceleration of payment permitted to be made under Treasury Regulation § 1.409A-3(j)(4) or (ii) a payment that would otherwise not be subject to additional taxes and interest under Section 409A.
 
d.   The right to each payment described in this Agreement shall be treated as a right to a series of separate payments and a separately identifiable payment for purposes of Section 409A.
 
e.   For purposes of Section 6 of this Agreement, “termination” (or any similar term) when used in reference to Executive’s employment shall mean “separation from service” with Heska within the meaning of Section 409A(a)(2)(A)(i) of the Code and applicable administrative guidance issued thereunder, and Executive shall be considered to have terminated employment with Heska when, and only when, Executive incurs a “separation from service” with Heska within the meaning of Section 409A(a)(2)(A)(i) of the Code and applicable administrative guidance issued thereunder.
 
f.   If Executive qualifies as a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code and would receive any payment sooner than six (6) months after Executive’s separation from service that, absent the application of this Section 19(f), would be subject to additional tax imposed pursuant to Section 409A as a result of such status as a specified employee, then such payment shall instead be payable on the date that is the earliest of (i) six (6) months after Executive’s separation from service, (ii)  Executive’s death, or (iii) such other date as will not result in such payment being subject to such additional tax.
 
 
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19.   Governing Law; Waiver of Jury Trial .   This Agreement shall be governed by and construed in accordance with the internal laws of the State of Colorado without regard to conflict of law principles.  The Parties hereto each waive their respective rights to a jury trial of any and all such claims and causes of action.
 
20.   Counterparts .   This Agreement may be executed in counterparts, and each counterpart will have the same force and effect as an original and will constitute an effective, binding agreement on the part of each of the undersigned.
 
[ signature page follows ]

 
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IN WITNESS WHEREOF , Heska has caused this Employment Agreement to be duly executed by an officer thereunto duly authorized, and Executive has hereunto set Executive’s hand, all as of the day and year first above written.

HESKA CORPORATION
 


/s/   Robert B. Grieve                                                                          
Robert B. Grieve, Ph.D.
Chairman of the Board and Chief Executive Officer


                                                                                EXECUTIVE:


                                                                                 /s/   Claudine M. Zachara                                                                        
                                                                               Claudine M. Zachara
                                                                               Vice President, Marketing and Communications



 
10
 

Exhibit 10.4

 
Portions of this Exhibit have been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act.  Omitted information, marked “[***]” in this exhibit, has been filed with the Securities and Exchange Commission together with such request for confidential treatment .
 
AMENDMENT TO
SUPPLY AND DISTRIBUTION AGREEMENT

This Amendment,   effective as of June 1, 2011 (the “Effective Date”), modifies the Supply and Distribution Agreement between Heska Corporation (“Heska”) and Boule Medical AB (“Boule”), dated June 17, 2003, hereinafter referred to as “Amendment No. 7”, as modified by Amendment Letter dated June 1, 2004 (hereinafter referred to as “Amendment No. 1”), Amendment Letter dated December 31, 2004 (hereinafter referred to as “Amendment No. 2”), Amendment Letter dated July 12, 2005 (hereinafter referred to as “Amendment No. 3”), Amendment Letter dated March 20, 2007 (hereinafter referred to as “Amendment No. 4”), Amendment Letter dated January 23, 2008 (hereinafter referred to as “Amendment No. 5”) and Amendment to Supply and Distribution Agreement effective as of October 1, 2008 (hereinafter referred to as “Amendment No. 6”), collectively referred to as the “Original Agreement”.

1.  
Section 1.2 .  Section 1.2 “Analyzer”, of the Original   Agreement is hereby deleted in its entirety and replaced with the following:

 
1.2 “Analyzer” means the BM800 Veterinary Hematology Analyzer (HemaTrue™ Veterinary Hematology Analyzer) manufactured by Boule or a similar three (3) part veterinary analyzer sold by Boule in the future replacing the BM800 Veterinary Hematology Analyzer.

2.  
Section 1.10 .  A new Section 1.10 “Out-of-Box Failure” consisting of the following is hereby added to the Original Agreement:

 
1.10 “Out-of-Box Failure” means an Analyzer which is not in compliance with the specifications as set forth in Appendix B the first time an analyzer is under installation by a Heska employee or subdistributor in a clinic if during the Warranty Period defined in Section 6.1(c).

3.  
Section 1.11 .  A new Section 1.11 “Region” consisting of the following is hereby added to the Original Agreement:

 
1.11 “Region” means Europe (excluding Denmark, Finland, Norway and Sweden), Australia, New Zealand and Brazil.

4.  
Section 2.1 .  Section 2.1 “Distribution Right”, of the Original   Agreement is hereby modified by adding the following as the final sentence of Section 2.1:

 
Boule hereby grants Heska the non-exclusive right to promote, market, sell and distribute Product in the Field and within the Region.

 
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Portions of this Exhibit have been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act.  Omitted information, marked “[***]” in this exhibit, has been filed with the Securities and Exchange Commission together with such request for confidential treatment .

5.  
Section 2.2 .  Section 2.2 “Subdistributors”, of the Original   Agreement is hereby modified by adding the following as the final sentence of Section 2.2:

 
Heska shall have the right to appoint subdistributors to promote, market, sell and distribute Product in the Field and within the Region.

6.  
Section 2.3 .  Section 2.3 “Restrictions”, of the Original Agreement is hereby deleted in its entirety and replaced with the following:

 
2.3 Restrictions.   Without the prior written consent of Boule, Heska undertakes not to manufacture or distribute within the Territory or the Region any products that are similar or identical to or otherwise competing with any of the Products, except that Heska shall have the right to manufacture and/or distribute a five (5) part differential hematology system within the Territory and/or the Region.

 
Moreover, Heska will refrain without Boule’s prior written consent, to the extent admissible under any mandatory law applicable to this Agreement, from selling, directly or indirectly, any Products to customers outside the Territory, Region and/or the Field or, to the best of Heska’s knowledge, Products otherwise intended for use outside the Territory, Region and/or outside the Field.

7.  
Section 2.5 .  Section 2.5 “New Product Development”, of the Original   Agreement is hereby deleted in its entirety and replaced with the following:

 
Boule shall provide timelines acceptable to Heska for the development of [***].  Should Boule fail [***], Heska shall have the right to sell a similar system without the loss of rights to distribute Boule products Heska is then currently distributing, including, without limitation, the rights to distribute Products.

8.  
Section 3.4 .  The first paragraph of Section 3.4 “Delivery and Acceptance”, of the Original Agreement is hereby deleted in its entirety and replaced with the following:

 
3.4 Delivery and Acceptance.   Product shall be delivered F.O.B. Stockholm, Sweden or F.O.B Beijing, China (INCOTERMS 2000), at Boule’s option, and shall otherwise be delivered in accordance with Heska’s instructions and to the location specified by Heska.

9.  
Section 3.7 “New Products”, of the Original   Agreement is hereby modified by adding the following as the final sentence of Section 3.7:

Should the Parties fail to reach such terms within 90 days, Heska shall have the right to sell a similar system without the loss of rights to distribute Boule products Heska is then currently distributing, including, without limitation, the rights to distribute Products according to this Agreement, and Boule shall have the right to distribute such New Product through other distributors within the Territory and Region; provided, however, that Boule shall not offer or enter into any agreement or other arrangement with respect to such New Product with a third party on terms more favorable to such third party than those offered in writing to Heska.

 
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Portions of this Exhibit have been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act.  Omitted information, marked “[***]” in this exhibit, has been filed with the Securities and Exchange Commission together with such request for confidential treatment .
 
10.  
Section 5.4 .  Section 5.4 “Complaints/Recalls”, of the Original Agreement is hereby deleted in its entirety and replaced with the following:

 
5.4 Complaints/Recalls.   Boule will use reasonable efforts to assist Heska in investigating and correcting any problems Heska or its customers may experience with the Product.  Such efforts will include visiting the Territory or Region by Boule’s representatives only where deemed necessary by Boule.  Heska will use reasonable efforts to implement any corrective action deemed necessary by Boule.  Heska further agrees to reasonably cooperate with Boule in any mandatory or voluntary Product recall by assisting in the notification of all affected customers, using materials and documentation that are mutually acceptable to the Parties. The sharing of Heska’s expenses to implement the corrective action shall be negotiated in good faith.

11.  
Section 5.7 .  Section 5.7 “Approvals, Etc.”, of the Original Agreement is hereby deleted in its entirety and replaced with the following:

 
5.7 Approvals, Etc.   Heska shall at its own expense obtain all approvals and other authorizations and file all notices which are required to be obtained or filed for the sale and use of the Product in the Territory or the Region.  Moreover, Heska shall keep Boule currently informed of all laws, rules and regulations applicable in the Territory or the Region directly affecting the sale and use of the Product.  The Parties acknowledge the Products are currently not regulated by any government agency within the Territory or the Region.   Should the Products become regulated during the term of this Agreement, the Parties shall negotiate in good faith terms and conditions for allocating the responsibility and costs for obtaining regulatory approval.

12.  
Section 6.1 .  Part (c) of Section 6.1 “Warranty”, of the Original Agreement is hereby deleted in its entirety and replaced with the following:

 
(c) the Product conforms to the specifications as set forth in Appendix B and are free from defects in material and workmanship during a fifteen (15) month warranty period under normal use from the date of delivery as per Section 3.4 (“Warranty Period”) for the Analyzers and 12 month minimum expiration dating for reagents.  The warranty covers, at Boule’s exclusive choice, its replacement or repair of the non-conforming or defective Product.  If requested by Boule, Heska shall return to Boule at Boule’s cost and expense the non-conforming or

 
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Portions of this Exhibit have been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act.  Omitted information, marked “[***]” in this exhibit, has been filed with the Securities and Exchange Commission together with such request for confidential treatment .

 
defective Product.  In order to avail itself of its rights hereunder Heska shall have given Boule notice in writing of the non-conforming or defective Product within the Warranty Period.  Save as stipulated in this paragraph (c) Boule shall not be liable in any respect of any non-conforming or defective Product.

13.   
Section 6.2 Section 6.2 “Repairs”, of the Original   Agreement is hereby deleted is hereby deleted in its entirety and replaced with the following:

 
6.2   Repairs : The following is applicable for repairs:
 
 
(a)  
Out-Of-Box Failure Repairs. For Out-of-Box Failures, Boule shall reimburse or credit Heska at $[***] USD per hour up to a maximum of [***] hours per Analyzer for time required to repair such non-conforming Analyzer. In addition, Boule shall reimburse Heska for actual shipping expenses incurred to transport such non-conforming Product to Heska’s designated repair facility up to a maximum of $[***] per Analyzer, and Boule shall provide all parts required to perform repair for Product at no cost to Heska.  If requested by Boule, Heska shall return to Boule at Boule’s cost and expense the non-conforming or defective Parts. Heska shall provide Boule an invoice for labor including a copy of the Service Work Order documenting the Out-of-Box Failure repair, and any transportation charges associated with the return of the Product to Heska’s designated service facility.

 
(b)  
Warranty Repairs.   During the Warranty Period, Heska shall at the request of Boule and may at Heska’s choice elect to provide warranty service at Heska's designated facilities for the repair of defective Products.  Boule shall provide all parts required to perform repair for Product under warranty at no cost to Heska. Boule agrees to provide, at Boule's sole expense, one (1) week of service training to Heska's personnel at Heska's facility.  Boule further agrees to provide additional training, as requested by Heska, at a mutually acceptable consulting rate.  Boule will provide an initial pool of five (5) Analyzers to the extent the BM800  Veterinary Hematology Analyzer (HemaTrue™ Veterinary Hematology Analyzer) is replaced by a similar three (3) part veterinary analyzer, to serve as loaners to Heska's customers during warranty service repairs.  The Parties agree that additional Analyzers may be added to the pool of loaner units depending on mean time between failure (MTBF) rates and service turn around times required to perform warranty service repairs.

         13.
Purchase Minimum . Boule acknowledges Heska has met its minimum purchase obligation for 2008, 2009 and 2010.  The minimum purchase commitment for 2011 shall be [***] Analyzers.
 
 
         14.
Appendix A4 .  Appendix A4 of the Original Agreement is hereby deleted in its entirety and replaced with Appendix A4 attached hereto.

 
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Portions of this Exhibit have been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act.  Omitted information, marked “[***]” in this exhibit, has been filed with the Securities and Exchange Commission together with such request for confidential treatment .
 
         15.
Appendix A5 .  Appendix A5 of the Original Agreement is hereby deleted in its entirety and replaced with Appendix A5 attached hereto.

         16.
Appendix B . Appendix B of the Original Agreement is hereby deleted in its entirety and replaced with Appendix B attached hereto.

         17.
Mutual Waiver .  Both parties agree that all invoices issued as of the Effective Date are proper, accurate and complete and neither party deems the other to be in breach of the Original Agreement as of the Effective Date.

         18.
No Other Changes .  Except as expressly modified by this Amendment No. 7, all other provisions of the Original   Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the parties have executed this Amendment by their duly authorized representatives.


SIGNED:


Heska Corporation                                                                           Boule Medical AB

By:   /s/ Michael J. McGinley                                                           By:   /s/ Ernst Westman                                                       

Name: Michael J. McGinley                                                           Name: Ernst Westman

Title: President and Chief Operating Officer                               Title: Chief Executive Officer

Date:   June 29, 2011                                                                          Date:    June 23, 2011                                                                 

 
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Portions of this Exhibit have been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act.  Omitted information, marked “[***]” in this exhibit, has been filed with the Securities and Exchange Commission together with such request for confidential treatment .

Appendix A4
 
This Appendix forms an integrated part of the Supply and Distributorship Agreement between BOULE and HESKA.

Payment for one hundred percent (100%) of the units of the Products listed below shall be made in Euros.  The initial Euro price for each of such Products shall be the price set forth below, subject to adjustment for actual changes in raw material and labor costs pursuant to the last paragraph of Section 4.1 of the Supply and Distribution Agreement.
 
Boule P/N
Description
Price Net
1010464
Instrument cover, Heska
[***] eur
1010849
Display Grounding Bar Short
[***] eur
1010851
Display Grounding Bar Long
[***] eur
1010921_S
Start plate VET
[***] eur
1020144
Lid to Cubitainer
[***] eur
1021136_S
Tube holder, Heska
[***] eur
1030122
Flat display cable, shielded
[***] eur
1030127_S
Power cord Main board
[***] eur
1030128_S
Cable blood detector
[***] eur
1030129_S
BB cable, Mixingchamber cable
[***] eur
1030140_S
Cable Coax WBC
[***] eur
1030142_S
Cable, photometer
[***] eur
1030143_S
Ground cable
[***] eur
1030146
Valve cable 5 assy
[***] eur
1040017_S
Contact plate cover ground x10
[***] eur
1040079
Extension spring
[***] eur
1050159
Keyboard folio CBC
[***] eur
1060046
Rubber washer
[***] eur
1080030
Transport Fuse, Tubing
[***] eur
1080048
Door, CBCDiff
[***] eur
1080055
Tube holder
[***] eur
1080058_S
Pinch valve head x10
[***] eur
1090719_S
Switch cable MCI
[***] eur
1090787_S
Cable, Start Micro switch
[***] eur
1090796_S
Switch
[***] eur
1090836
Start plate 1
[***] eur
1090842
Motor assy connected Heska
[***] eur
1090910_S
Tube valve complete
[***] eur
1090916_S
Membrane pump
[***] eur
1090919_S
Level detector complete
[***] eur
1090921_S
WBC measuring chamber complete
[***] eur
1090922_S
Cap. Holder complete RBC
[***] eur
1090927_S
Shear valve complete
[***] eur
1090928_S
Display complete
[***] eur
1090929_S
Display incl. touch BM800
[***] eur
1090933_S
Asp. washing cup complete
[***] eur
1090941_S
Drain cup
[***] eur


 
6
 
Portions of this Exhibit have been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act.  Omitted information, marked “[***]” in this exhibit, has been filed with the Securities and Exchange Commission together with such request for confidential treatment .

1090945_S
RBC measuring chamber complete
[***] eur
1091002
Barcode reader, Medonic
[***] eur
1091043_S
RBC pipette incl. tubes
[***] eur
1091044_S
WBC metering unit incl. tubes
[***] eur
1091050_S
RBC metering unit incl. tubes
[***] eur
1091061_S
WBC pipette incl. tubes
[***] eur
1091091_S
Mixer motor
[***] eur
1091149
Clog Filter Device
[***] eur
1091152_S
Aspiration whole blood
[***] eur
1091159
Level Detector Lyse Vet
[***] eur
1091160
Level Detector Diluent Vet
[***] eur
1091161_S
Liquid filter kpl.
[***] eur
1091165_S
Capillary holder WBC
[***] eur
1091220
Front assy. BM800 Heska
[***] eur
1091227_S
MPA handle assy
[***] eur
1091232_S
MPA assy
[***] eur
1091234_S
CPU board, assy
[***] eur
1091244_S
Valve board BM800 tested
[***] eur
1091249
Bottle tray assy
[***] eur
1091250_S
Level detector yellow assy
[***] eur
1091251_S
Level detector red assy
[***] eur
1091252_S
Level detector blue assy
[***] eur
1091268_S
DC air pump assy.
[***] eur
1110047
Lifting strap
[***] eur
1120074_S
Display board BM800
[***] eur
1120078_S
Switched Powerboard
[***] eur
1140103
Cylindr.isol. C15/15 M4x4 55
[***] eur
1140111
Locking washer
[***] eur
1140165
Locking washer black CCLR2
[***] eur
1140258
Tube PVC 3,0 x 1,5
[***] eur
1140614
Port, Reagent Level Sensor,Red
[***] eur
1140615
Port, Reagent lvl sensor, Ylow
[***] eur
1140641
Clips for door
[***] eur
1140643_S
Transformer BM800
[***] eur
1140703_S
Cable for CAN COM. 0,5m BM800
[***] eur
1150495_S
KNF Liquid Pump
[***] eur
1150521
Repairkit Waste pump KNF
[***] eur
1200064
Back Flush Syringe Kit
[***] eur
1301077
MPA accessories kit
[***] eur
2604013
Case long, complete
[***] eur
2604014
Case short, complete
[***] eur
2606002
Handle complete
[***] eur
4804014
Ind. lower
[***] eur
5303042
Cover plate filter board
[***] eur
5304002
Indicator housing
[***] eur
5304008
Rolled threadball screw
[***] eur
5304011
Guiding rod
[***] eur
5304015
Guiding wheel
[***] eur
5304026
Measuring tube
[***] eur
5304048
Rear valve
[***] eur
5304075
Housing upper glass cyl.
[***] eur
 
 
 
7
 
Portions of this Exhibit have been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act.  Omitted information, marked “[***]” in this exhibit, has been filed with the Securities and Exchange Commission together with such request for confidential treatment .
 
5304077
Glass Cylinder
[***] eur
5304085
Lacquer notation
[***] eur
5304097
Detector
[***] eur
5304116
Rear valve part US
[***] eur
5304167
Tube, ground connector
[***] eur
5304174
Gearbox machining
[***] eur
5306002
Capillary Tube Holder, Complete
[***] eur
5306003
Counting cup RBC compete
[***] eur
5306004
Counting cup WBC compete
[***] eur
5306006
Gearbox complete
[***] eur
5306007
Asp. Pipette Whole Blood
[***] eur
5306008
Sealing rod complete
[***] eur
5306009
Sealing piston complete
[***] eur
5306026_S
Mixing cup complete
[***] eur
5306078
MPA mounted
[***] eur
5306081
Motor assy connected
[***] eur
5306103
Waste pump 60Hz mounted
[***] eur
5308002
Detector cable mix cup CBC
[***] eur
5308004
Cable blood detector
[***] eur
5308005
Cable Assy servo potm.
[***] eur
5308008
Photocell, HGB, complete
[***] eur
5308009_S
Cable, coax, RBC, L=420
[***] eur
5308011
Cable Assy Start/Stop
[***] eur
5308013
Cable Assay HGB lamp
[***] eur
5308014
Cable Assy optoswitch/syring
[***] eur
5309001
PCB CPU 530 complete tested
[***] eur
5309011
PCB power mounted tested
[***] eur
5309021
PCB amplifier mounted & tested
[***] eur
5814036
Mixing cup
[***] eur
5814064
Asp. pip. predil. blood / upps
[***] eur
5814142
Valve part f.
[***] eur
5814143
Valve house
[***] eur
6209001
PCB display mounted tested
[***] eur
9970119
Tubing FEP 0.7 x 1.5
[***] eur
9980001
Repair kit for waste pump
[***] eur
9990455
Washer 0734 nylon svart
[***] eur
9990598
Filter VG9 4mm Ø 8
[***] eur
9990970
Pin CP 4*25 A1m6
[***] eur
9990973
Gearbox type F, 4 1/6
[***] eur
9991148
Rod Sealing Guidence Cap
[***] eur
9991161
Plastic cover PVC print Medoni
[***] eur
9991197
Plastic cover PVC 350*430*
[***] eur
9991619
Bi pin lamp with tech.addendum
[***] eur
N/A
Vet Mixing rotor 3 ml (HemaTrue)
[***] eur


 
8
 
Portions of this Exhibit have been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act.  Omitted information, marked “[***]” in this exhibit, has been filed with the Securities and Exchange Commission together with such request for confidential treatment .

Appendix A5
 
This Appendix forms an integrated part of the Supply and Distributorship Agreement between BOULE and HESKA.
 
Heska agrees to make orders of the following Products in units divisible by two.  Payment for fifty percent (50%) of the units in each shipment shall be made in Euros and fifty percent (50%) in U.S. dollars.  The Euro price shall be as listed below, subject to adjustment for actual changes in material and labor costs pursuant to the last paragraph of Section 4.1of the Supply and Distribution Agreement.  The U.S. dollar prices shall be as listed below, subject to adjustment for actual changes in material and labor costs pursuant to the last paragraph of Section 4.1of the Supply and Distribution Agreement.


Art no
Description
Price Net Euro
Price Net USD
     
INSTRUMENTS
   
1400060
HemaTrue™ Veterinary Hematology Analyzer System with MPA
[***]
[***]
     


 
9
 
Portions of this Exhibit have been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act.  Omitted information, marked “[***]” in this exhibit, has been filed with the Securities and Exchange Commission together with such request for confidential treatment .

Appendix B

Product Specifications: HemaTrue™ Veterinary Hematology Analyzer


Measuring principle RBC, WBC, PLT
Impedance
Measuring principle HGB
Photometer, Cyanide free method 535nm ±5nm
Programmable WBC Discriminator
Yes
Sampling system
Closed shear valve
Parameters reported
RBC, MCV, HCT, PLT, MPV, HGB, MCH, MCHC, WBC, RDW%, RDW abs, LYMPH abs, MONO abs, GRAN abs, LYMPH%, MONO%, GRAN %
Size distributions printed for
RBC, PLT and WBC diff
Aspirated blood volume (open tubes)
< 125 µl
Blood volume using the Micropipette Adapter (MPA)
20 µl
LCD
Graphical color touch screen, 240 columns x 320 rows
Keyboard
Virtual incorporated keyboard (External keyboard possible)
Analysis time
< 1 minute
QC capabilities
Mean, SD, CV, Levey-Jennings
HGB correction on high WBC counts
Yes
System information messages on parameter abnormalities
Yes
Floating discriminator RBC/PLT
Yes (position printed)
Automatic HGB blank on each sample
Yes
Carry over
RBC, HGB, WBC ≤ 1%, PLT ≤ 2%
Barcode reader input
Yes
Serial output
Yes (Conformed to standard EN 60950)
Power consumption (operational)
Max 100 VA
Power consumption (standby)
Max 20 VA
Mains frequency
50-60 HZ
Mains voltage
100-240 VHZ
Effective mains current
Max. 2 A
Certified external mains power supply
AML 150PS24 >2556 or FDF 1503-A-24-C14 (51441)
Built-in test/adjustment programs
Yes
Temperature
18-32° C (64-90° F)
Humidity (non-condensing)
Up to 80%
Dimensions
(HxWxD) 410x290x460 mm (16.1 x 11.4 x 18.1 in)
Weight
≤ 18 kg (Standard Version) (≤ 40 lb)


 
10
 

 
Exhibit 31.1


 
CERTIFICATION

 
I, Robert B. Grieve, certify that:

 
1.
I have reviewed this quarterly report on Form 10-Q of Heska Corporation;
 
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.


Dated:           August 5, 2011
 /s/  Robert B. Grieve  
 
ROBERT B. GRIEVE
 
Chairman of the Board and Chief Executive Officer
 
(Principal Executive Officer)

 


Exhibit 31.2

 
CERTIFICATION

 
I, Jason A. Napolitano, certify that:

 
1.
I have reviewed this quarterly report on Form 10-Q of Heska Corporation;
 
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.


Dated:     August 5, 2011
  /s/ Jason A. Napolitano                                                                            
 
JASON A. NAPOLITANO
 
Executive Vice President and Chief Financial Officer
 
(Principal Financial Officer)






Exhibit 32.1

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

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 Quarterly Report of Heska Corporation on Form 10-Q for the quarter ended June 30, 2011 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-Q fairly presents in all material respects the financial condition and results of operations of Heska Corporation.

Dated:             August 5, 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 Quarterly Report of Heska Corporation on Form 10-Q for the quarter ended June 30, 2011 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-Q fairly presents in all material respects the financial condition and results of operations of Heska Corporation.

Dated:             August 5, 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.