Capital Expenditure Guidelines

Updated as of August 15, 2019

Capital Expenditure

1.Purpose

The purpose of this document is to provide guidelines to set out National Veterinary Associates (“NVA” or the “Company”) procedures in relation to the appropriate management, accounting, and reporting of all the Company’s fixed assets (“capital expenditures” or “capex”) in order to comply with applicable accounting standards and regulations, internal controls, and audit obligations.

2.Guideline Objectives

The objective of these guidelines are to assist the Company in gathering and maintaining information needed for the preparation of budgets and the financial statements. These guidelines establish definitions, asset valuation methods, capitalization thresholds, useful lives, and depreciation methods.

Costs which qualify for capitalization under these guidelines will be recorded as an asset on the balance sheet when incurred, and subsequently depreciated on a straight-line basis over the useful life of the asset. The depreciation must begin when the asset is complete and is ready for its intended use, commonly referred to as the “placed-in-service” date.

3.Definitions

“Capital Expenditure (or Fixed Asset)”: Assets which are intended for long-term use and are not likely to be converted quickly into cash, such as land, buildings, and equipment.

“Carrying Amount (or Book Value)”: The amount at which the asset is carried/recorded on the Company’s books/financial statements. Total purchase price less any previously recognized depreciation and adjustment for impairment.

“Depreciate (Depreciation)”: A reduction in the value of an asset with the passage of time, due in particular to wear and tear.

“Fair Value”: The amount at which an asset could be bought or sold in an arm’s length transaction between willing parties. Quoted market prices in active markets are the best evidence of Fair Value. However, if quoted market prices are not available, the estimate for Fair Value shall be based on the prices of similar assets.

“Impairment”: Inability to recover the Carrying Amount of an asset.

“Maintenance”: Activities undertaken after an asset has been placed in service to repair or preserve its continued use and function. Those activities include items such as routine upkeep and service, or replacement of minor parts.

“Placed-In-Service Date”: The placed-in-service date is the point in time when property or long- term assets that can be depreciated are first placed in use for the purposes of accounting and marks the beginning of the depreciation period.

“Total Purchase Price”: The total initial value of the asset including all costs required to bring the asset to its working condition. This can include, but is not limited to, such items as freight, sales tax, labor, and installation.

4.Accounting Literature

Refer to the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 360 – Property, Plant and Equipment, for the applicable authoritative accounting literature used as basis for the policies and procedures contained in this document.

5.Accounting Matters

A capital expenditure, for purposes of these guidelines, is defined as an investment in real or personal property which:

1. Is held for use of income rather than for sale or conversion into goods or cash; and 2. Has a useful service life in excess of one year.

Nonrecurring expenses directly associated with the investment (such as freight, sales tax, labor) should be included as part of the total expenditure for evaluation purposes. Any items that are not eligible for capitalization should be expensed and appropriately charged to an operating expense line item.

A capital expenditure project is a separable physical and analytical unit consisting of one or more related capital expenditures which, if undertaken, will function as a unit to accomplish a specific objective. A capital project must always include all of the capital expenditures, related expenses and working capital requirements necessary to accomplish the stated objective.

5.1 General Guidelines

If the “total item unit cost” is $500 or greater and the item has an expected service life of at least one year, the expenditure is to be capitalized. If the item acquired meets the one-year life criterion, but its unit cost is less than $500, it must be expensed. As a general rule, items costing less than $500 will not be considered for capitalization.

If the invoice contains more than one item that each belong in separate accounts, the $500 guideline should be applied to the unit cost of each individual item – for instance, $1,100 for surgical lights and $150 for an office chair. In this instance, the lights would be a capex item, but the chair would not. In a bulk purchase of similar items with a useful life of more than one year, the $500 limitation will also be applied to the individual unit cost. An example would be the purchase of 3 office printers for $1,200 with the individual unit cost being $400 each, and thus would not be capex items.

The total item unit cost includes the total billed price per unit on the invoice including freight, sales tax, labor and wiring for installation, and other costs related to the acquisition.

5.2 Capitalizable Fixed Assets

The fixed asset accounts that follow contain definitions and/or examples of expenditures that are capitalized subject to this section.

Automobiles (GL # 15010)

Includes four-wheeled passenger and non-passenger vehicles such as cars, vans, trucks, golf carts, tractors, etc.

Medical Equipment (GL # 15020)

Includes both traditional and specialized equipment used in the treatment and care of a patient. Common items include, but are not limited to, the following:

Anesthesia IV Pump

Autoclave Laser Therapy

Bair Hugger

Livestock Chute Centrifuge Microscope Chemo Hood/ Biosafety Cabinet Monitor Crematory MRI CT Respiratory Equipment Dental Equipment ECG EMG / BAEP Scales Surgical Tools > $500 Tables for Procedures

Endoscopy Equipment Exam Table Tonometer Tonovet

Forceps Gastroscope Incubator Underwater Treadmill Vaporizer Vetlab Touch Monitors Ultrasonic Scaler Ultrasound Warming Units Water Pump X-Ray

Furniture & Fixtures (GL # 15030)

Includes the accumulated capitalized costs for all furniture, fixtures, and non-medical equipment. Common items include, but are not limited to, the following:

AC Unit (Portable or Window) Kennels Art Laundry Equipment Blinds/Windows Lighting (Moveable / Portable)

Bookcases Microwave

Chairs Desks File Cabinets Refrigerator Signage (Moveable / Portable) Tables

Freezers Televisions

Furniture Heating Unit Water Heater

Leasehold Improvements (GL # 15040)

Includes the cost of improvements made to leased property. This includes any new construction and additions to, or renovations of, existing structures both prior to the facility opening and subsequent to the building being placed in service. The total capitalized cost of the asset will include the cost of construction labor, materials, and services such as architectural fees. Common items include, but are not limited to, the following:

Alarm System Architectural Fees Curbs and Paving Electrical and Cabling Fencing Flooring HVAC Certain Landscaping Costs Lighting (Fixed to Facility) Remodeling / Renovation Roofing (New / Replacement) Security System Septic Signage (Fixed to Facility) Sprinkler System

Note: if you are planning a significant project (e.g. major remodel or renovation), please consult members of the Operations team (Senior Director of Business Operations and the Director of Real Property) who can be of additional assistance.

Construction in Progress (GL # 15060)

Includes the accumulated cost of real property that is under construction and has not been placed in service. Once the property has been completed and placed into service, it shall be transferred to the appropriate fixed asset account(s) as defined herein. Please note, use of this account is generally restricted to the Accounting Department, and may not be used without prior approval.

Computers and Other Office Equipment (GL # 15070)

Includes such items as computer hardware and peripheral equipment (e.g. printers, servers), Corporate ITrelated work (conversions, refreshes, break/fix), telephone equipment, cables, terminals, etc.

Software (GL # 15080)

Includes externally purchased or in-house developed software. Refer to the Company’s Capitalized Software Policy, which describes the proper accounting for computer software developed or obtained for internal use consistent with FASB ASC 360 and AICPA SOP 98-1. If the purchase of computer software is included with the price of computer hardware and is inherent to its operations, the estimated useful life of the software should be consistent with the life of the hardware.

Asset Acquisition (GL # 15090)

Includes real estate that is currently being used in business operations as well as land held as a potential building site or for other speculative or investment purposes. Amounts allocated to the land account consist of the entire cost of placing the land into suitable condition as a building site and should include the following:

a) Basic purchase price b) All costs of closing the transaction, such as brokers' commission, fees for examining and recording the title, appraisal fees and legal fees c) All costs of surveying, clearing, draining, or filling to make the property suitable for its desired use, including the cost of removing or demolishing existing structures, including buildings. Any salvage recovery from clearing land should reduce the land cost d) Any past-due payments on the seller's mortgage, accrued interest, delinquent property taxes, and other encumbrances on the land by the Company at acquisition

5.3 Depreciable Lives

The goal of determining the appropriate depreciable life is to provide for a reasonable, consistent matching of revenue and expense by systematically allocating the cost of the depreciable asset over its estimated useful life. The estimated useful life of a depreciable asset may differ from company to company or industry to industry. For financial reporting, all depreciation is to be charged on a straight-line basis over the estimated useful life of the asset as follows:

Automobiles, Medical Equipment, Computers and Office Equipment, and Software 5 Years Furniture and Fixtures 7 Years Leasehold Improvements 10 Years

5.4 Additions, Betterments, and Improvements

An addition is an increase (extension, enlargement or expansion) in an existing fixed asset, not a replacement of a fixed asset. This increase may be represented by separate units, such as chairs and tables, or by component parts, such as floor or wall tile where there were not originals. Additions that meet the service life criteria for fixed assets should be treated like original expenditures and capitalized, except where the cost is insignificant – e.g., under $500.

Betterments and Improvements include major remodeling of an existing asset or replacement of a portion of an existing asset or unit by an improved or superior asset or unit that would extend the life or improve profits during the life of the asset. Major remodeling would include all costs associated with that remodeling even if some of those costs might normally be expensed if they were not part of a major remodeling project. An example would be changing an existing room (office, lobby, etc.) into an examination room where such costs as painting and decorating should be capitalized as opposed to incurring an expense.

Minor additions, betterments and improvements are considered as repairs and maintenance and should be expensed as incurred.

5.5 Repairs and Maintenance

Recurring expenditures necessary to maintain a given quantity and quality of service, or one-time expenditures to return an asset to a working condition, are considered repairs and maintenance. They do not add materially to the value of the asset, or prolong its expected service life appreciably, but are necessary to keep the asset in operational condition. The following expenditures are considered repairs and maintenance and are not subject to the total cost guidelines outlined previously (except as noted below):

Automobile Parts Caulking and Sealing Maintenance Service Contract (i.e., landscape, janitorial, medical equipment) Painting of Building or Rooms Patchwork on Parking Lot Refinishing of Furniture or Fixtures Repainting of Buildings or Rooms Glass Replacement Locks, Locksets, Keys Replacement of Lamps and Lights Re-Plastering

Retiling of Floors, Walls, Ceilings Re-upholstery of Furniture Small Parts for Equipment Toilet Seat Waterproofing, Reroofing

For those expenditures which are not clearly repairs and maintenance, if it can be determined that any part of the expenditure is a Betterment and Improvement (substitution with an improved or superior unit), that part of the expenditure should be capitalized. Similarly, a change in or modification of an asset should be capitalized, such as cutting a new entrance to the facility or extending air conditioning ducts to a new room. Relocations and alterations that increase the value of the asset and/or prolong the service life should also be capitalized; however, simply relocating an asset does not increase the value, and those costs would be expensed as incurred.

The Finance Department should periodically review the repairs and maintenance account to ensure no costs are included that would normally be capitalized.

5.6 Internal Labor

The following applies to the Information Technology (“IT”) department only. Internal labor may not be capitalized by any other departments without obtaining approval in advance from the VP of Finance/Controller or Chief Financial Officer. Requests for such an exception are to be submitted in writing to the appropriate office.

The use of internal labor may be considered a capital cost when used as an integral part of the construction or development of a capital asset or capital project. In order to capitalize internal labor costs, the fixed asset must meet the capital requirements as defined previously.

Capitalizable costs include payroll and payroll benefit-related costs of certain employees who devote time to the construction or development of a capital asset or capital project, to the extent of time the employees spent directly on that activity. Adequate records (i.e. employee time and expense reports) must be maintained to support amounts capitalized for each project. Payroll and payroll benefit-related costs for employees providing accounting, auditing, procurement, and administrative support do not qualify for capitalization and should be expensed as incurred.

5.7 Carrying Value

The cost of an asset and its related reserves should be kept on the books and records of the Company for as long as the asset remains in service.

Although the net effect of fully depreciated assets has no financial impact on the total assets of the Company, the financial statements should disclose the existence and total cost of the assets in use.

GAAP (specifically Accounting Research Bulletin No. 43) requires that assets be recorded at cost. The basis of accounting for depreciable fixed assets is historical cost, including all the normal expenditures of readying an asset for use. However, unnecessary expenditures that do not add to the life or utility of the asset should be charged to expense. For example, the expenditure for repairing a piece of equipment that was damaged during shipment should be charged to expense.

Expenditures that substantially increase the capacity or operating efficiency of an asset should be capitalized. Minor expenditures are usually treated as period costs although they may have the characteristics of capital expenditures. All stand-alone costs for less than $500 will be considered minor and generally not eligible for capitalization.

5.8 Intercompany Transfer of Assets

Any assets that are transferred between sites should be recorded at their book value (asset cost less accumulated depreciation). No gain or loss should be recorded as a result of a transfer. When an agreement is made between sites to transfer fixed assets, the involved sites should contact the Accounting Department who will confirm the transfer before processing the transaction.

5.9 Self-Constructed Assets

Fixed assets that are constructed with the use of internal labor and materials can be capitalized. Indirect labor and other costs, such as utilities, insurance, and supplies should be expensed in the usual manner. For Internal Labor policy, see Section 5.6.

5.10 Approval and Submission Process

All capital expenditures require the approval of the Division Leader (DL) prior to purchase. Equipment purchases that exceed $50,000 also require the approval of the Vice President (VP) of Operations. When submitting the invoice to the Support Center for payment (this includes estimates, deposits, and subsequent invoices received after the initial submission), please include all required approvals by the parties mentioned above. When approval is obtained via email, please submit a copy of the email with the invoice submission.