10-Q

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 September 30, 2013
	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 Public Common Stock outstanding at November 13, 2013 was 5,837,403.

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 2012 and September 30, 2013	2
	Condensed Consolidated Statements of Operations (Unaudited) for the three months and nine months ended September 30, 2012 and 2013	3
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months and nine months ended September 30, 2012 and 2013	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2012 and 2013	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	23
PART II -  OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
Signatures		38
Exhibit Index		39

HESKA, ALLERCEPT, AVERT,  E-SCREEN, FELINE ULTRANASAL, HEMATRUE, SOLO STEP, THYROMED, VET/OX and VITALPATH are registered trademarks and CBC-DIFF,  ELEMENT DC and VET/IV are trademarks of Heska Corporation.  TRI-HEART is a registered trademark of Intervet Inc., formerly known as Schering-Plough Animal Health Corporation,  a unit of Merck & Co., Inc. in the United States and is a registered trademark of Heska Corporation in other countries.  DRI-CHEM is a registered trademark of FUJIFILM Corporation. This Form 10-Q also refers to trademarks and trade names of other organizations.

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HESKA CORPORATION AND SUBSIDIARIES

(amounts in thousands except shares and per share amounts)

(unaudited)

ASSETS
	December 31, 2012			September 30, 2013
Current assets:
Cash and cash equivalents	$	5,784			$		6,344
Accounts receivable, net of allowance for doubtful accounts of $155 and $212, respectively		11,044					7,662
Inventories, net		12,483					13,569
Deferred tax asset, current		1,130					404
Other current assets		2,514					1,466
Total current assets		32,955					29,445
Property and equipment, net		6,005					8,444
Note receivable – related party		—					1,657
Goodwill and other intangible assets		1,120					21,619
Deferred tax asset, net of current portion		26,746					29,056
Other long-term assets		—					212
Total assets	$	66,826			$		90,433
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	5,298			$	5,177
Accrued liabilities		4,132				5,301
Current portion of deferred revenue		2,407				3,664
Line of credit		2,552				4,281
Other short-term borrowings, including current portion    of long-term note payable		—				232
Total current liabilities		14,389				18,655
Long-term note payable, net of current portion		—				402
Deferred revenue, net of current portion, and other		3,575				9,372
Total liabilities		17,964				28,429
Commitments and contingencies
Non-Controlling Interest		—						13,105
Public Common Stock subject to redemption		—						2,431
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;     5,372,336 and 5,835,603 shares issued and outstanding, respectively		54						58
Additional paid-in capital		218,544						218,949
Accumulated other comprehensive income		296						330
Accumulated deficit		(170,032	)					(172,869	)
Total stockholders' equity		48,862						46,468
Total liabilities and stockholders' equity	$	66,826		$				90,433

See accompanying notes to condensed consolidated financial statements.

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HESKA CORPORATION AND SUBSIDIARIES

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended September 30,								Nine Months Ended September 30,
	2012				2013				2012	2013
Revenue, net:
Core companion animal health	$	13,530		$		14,515		$	45,811	$	46,015
Other vaccines, pharmaceuticals and products		3,376				3,080			8,541		8,820
Total revenue, net		16,906				17,595			54,352		54,835
Cost of revenue		10,180				10,189			30,655		34,607
Gross profit		6,726				7,406			23,697		20,228
Operating expenses:
Selling and marketing		4,381				4,591			14,020		14,554
Research and development		180				324			717		1,197
General and administrative		2,192				2,416			7,522		8,662
Total operating expenses		6,753				7,331			22,259		24,413
Operating income (loss)		(27	)			75			1,438		(4,185	)
Interest and other (income) expense, net		(16	)			93			69		134
Income (loss) before income taxes		(11	)			(18	)		1,369		(4,319	)
Income tax expense (benefit):
Current tax expense		16				6			98		71
Deferred tax expense (benefit)		5				(6	)		457		(1,553	)
Total income tax expense (benefit)		21				—			555		(1,482	)
Net income (loss)	$	(32	)	$		(18	)	$	814	$	(2,837	)
Net income (loss) attributable to non-controlling interest		—				(259	)		—		(464	)
Net income (loss) attributable to Heska Corporation	$	(32	)	$		241		$	814	$	(2,373	)
Basic net income (loss) per share attributable to Heska Corporation	$	(0.01	)	$		0.04		$	0.15	$	(0.41	)
Diluted net income (loss) per share attributable to Heska Corporation	$	(0.01	)	$		0.04		$	0.15	$	(0.41	)
Weighted average outstanding shares used to compute basic net income (loss) per share attributable to Heska Corporation		5,350				5,826			5,314		5,727
Weighted average outstanding shares used to compute diluted net income (loss) per share attributable to Heska Corporation		5,350				5,865			5,503		5,727

See accompanying notes to condensed consolidated financial statements.

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HESKA CORPORATION AND SUBSIDIARIES

(in thousands)

(unaudited)

	Three Months Ended September 30,							Nine Months Ended September 30,
	2012			2013				2012	2013
Net income (loss)	$	(32	)	$	(18	)	$	814	$	(2,837	)
Other comprehensive income (expense):
Foreign currency translation		38			114			3		20
Unrealized gain on available for sale investments		—			—			—		13
Comprehensive income (loss)	$	6		$	96		$	817	$	(2,804	)
Comprehensive income (loss) attributable to non-controlling interest	$	—		$	(259	)	$	—	$	(464	)
Comprehensive income (loss) attributable to Heska Corporation	$	6		$	355		$	817	$	(2,340	)

See accompanying notes to condensed consolidated financial statements.

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HESKA CORPORATION AND SUBSIDIARIES

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2012			2013
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)	$	814		$	(2,837	)
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization		1,271			1,715
Deferred tax expense (benefit)		457			(1,553	)
Stock-based compensation		285			315
Unrealized (gain) loss on foreign currency translation		(34	)		13
Changes in operating assets and liabilities:
Accounts receivable		(859	)		3,896
Inventories		(897	)		(1,975	)
Other current assets		(515	)		(108	)
Accounts payable		677			(1,545	)
Accrued liabilities		68			935
Deferred revenue and other liabilities		(250	)		(116	)
Net cash provided by (used in) operating activities		1,017			(1,260	)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Investment in subsidiary		—			(3,019	)
Purchase of property and equipment		(905	)		(1,270	)
Proceeds from disposition of property and equipment		—			5,020
Net cash provided by (used in) investing activities		(905	)		731
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock		307			254
Proceeds from (repayments of) line of credit borrowings, net		—			1,728
Proceeds from (repayments of) other debt		—			(893	)
Dividends to shareholders		(1,066	)		—
Net cash provided by (used in) financing activities		(759	)		1,089
EFFECT OF EXCHANGE RATE CHANGES ON CASH		32			—
INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS		(615	)		560
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		6,332			5,784
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	5,717		$	6,344
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Dividends payable	$	536		$	—
Cash paid for interest	$	68		$	61
Non-cash transfer of inventory to PP&E and other assets	$	982		$	2,363
Prepaid applied to acquisition of Heska Imaging	$	—		$	1,000

See accompanying notes to condensed consolidated financial statements.

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HESKA CORPORATION AND SUBSIDIARIES

September 30, 2013

(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 September 30, 2013, the condensed consolidated statements of operations for the three months and nine months ended September 30, 2012 and 2013, the condensed consolidated statements of comprehensive income for the three months and nine months ended September 30, 2012 and 2013 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2012 and 2013 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, 2012, included in the Company's Annual Report on Form 10-K filed with the SEC on March 14, 2013.

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, in determining the need for, and the amount of, a valuation allowance on certain deferred tax assets and in determining the need for, and the amount of, an accrued liability for future payments related to minimum purchase obligations the Company may make in order to maintain certain product rights.

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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, 2012			September 30, 2013
Raw materials	$	5,275		$	5,550
Work in process		3,342			3,593
Finished goods		4,671			6,344
Allowance for excess or obsolete inventory		(805	)		(1,918	)
	$	12,483		$	13,569

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 months ended September 30, 2013 and nine months ended September 30, 2012, the Company reported net income attributable to Heska Corporation 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 other than options to purchase fractional shares that were anti-dilutive for the three months ended September 30, 2013 and nine months ended September 30, 2012, and therefore excluded, were outstanding options to purchase 924,643 and 527,438 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 months ended September 30, 2013 and nine months ended September 30, 2012.  For the nine months ended September 30, 2013 and three months ended September 30, 2012, the Company reported a net loss attributable to Heska Corporation and therefore all common stock equivalent securities would be anti-dilutive and were not included in the diluted earnings per share calculation for the period.  Common stock equivalent securities other than options to purchase fractional shares that were anti-dilutive for the nine months ended September 30, 2013 and three months ended September 30, 2012, and therefore excluded, were outstanding options to purchase 1,089,779 and 1,154,275 shares of common stock, respectively.  These securities are anti-dilutive due to the Company’s net loss attributable to Heska Corporation for the nine months ended September 30, 2013 and the three months ended September 30, 2012.

3.           ACQUISITION

Cuattro Veterinary USA, LLC

On February 24, 2013, the Company acquired a 54.6% interest in Cuattro Veterinary USA, LLC ("Cuattro Vet USA") for approximately $7.6 million in cash and stock, including more than $4 million in cash (the "Acquisition").  Immediately following and as a result of the transaction, former Cuattro Vet USA unit holders owned approximately 7.2% of the Company's Public Common Stock. The remaining minority position (45.4%) in Cuattro Vet USA is subject to purchase by Heska under performance-based puts and calls following calendar year 2015, 2016 and 2017.  Since the exercise of any put option is out of the Company’s control, authoritative guidance requires the non-controlling interest, which includes the value of the put option, to be displayed outside of the equity section of the Company’s consolidated balance sheet.  Should Heska undergo a change in control, as defined, prior to the end of 2017, Cuattro Vet USA minority unit holders will be entitled to sell their Cuattro Vet USA units to Heska at the highest call value they could have otherwise obtained.  The

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Company's position in Cuattro Vet USA is subject to premium repurchase or discounted sale under calls and puts expiring 18 months following the closing of the transaction.

Cuattro Vet USA was subsequently renamed Heska Imaging US, LLC ("Heska Imaging") and markets, sells and supports digital radiography and ultrasound products along with embedded software and support, data hosting and other services.

Shawna M. Wilson, Clint Roth, DVM, Steven M. Asakowicz, Rodney A. Lippincott, Kevin S. Wilson and Cuattro, LLC own approximately 29.75%, 8.39%, 4.09%, 3.07%, 0.05% and 0.05% of Heska Imaging, respectively.  Kevin S. Wilson is the President and Chief Operating Officer of the Company and the spouse of Shawna M. Wilson.  Steven M. Asakowicz serves as Executive Vice President, Companion Animal Health Sales for the Company.  Rodney A. Lippincott serves as Executive Vice President, Companion Animal Health Sales for the Company.  Mr. Wilson, Mrs. Wilson and trusts for their children and family own a 100% interest in Cuattro, LLC.

The aggregate position in Heska Imaging of the unit holders who hold the 45.4% of Heska Imaging that Heska Corporation does not own (the “Put Value”) is being accreted to its estimated redemption value in accordance with Heska Imaging’s Operating Agreement.  The adjustment to increase or decrease the Put Value to its expected redemption value each reporting period is recorded to retained earnings in accordance with United States Generally Accepted Accounting Principles.

The Company accounted for the acquisition pursuant to ASC No. 805, "Business Combinations." Accordingly, it recorded assets acquired, liabilities assumed and non-controlling interests at their fair values.  The following summarizes the aggregate consideration paid by the Company and the allocation of the purchase price based on current estimates as the Company continues to gather information to evaluate the appropriate accounting result (in thousands):

Consideration
	Cash		$	4,073
	Stock			3,571
		Total	$	7,644

Inventories		$	1,466
Note from Cuattro Veterinary, LLC, due March 15, 2016			1,360
Other tangible assets			1,278
Intangible assets			688
Goodwill			19,994
Notes payable and other borrowings			(1,527	)
Accounts payable			(1,424	)
Other assumed liabilities			(2,399	)
		$	19,436
Non-controlling interest			(11,792	)
	Total	$	7,644

Intangible assets and their amortization periods are as follows:

	Useful Life (in years)		Fair Value
Trade name		2.75	$	688
			$	688

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Cuattro Vet USA generated net revenue of $6.7 million and net loss of $1.0 million, inclusive of net loss of $464 thousand attributable to non-controlling interest, for the period from February 24, 2013 to September 30, 2013.  The following unaudited pro forma financial information presents the combined results of the Company and Cuattro Vet USA as if the Acquisition had closed on January 1, 2012.

		Nine Months Ended September 30,
		2012	2013
Revenue, net	$	59,308	$	55,735
Net income (loss) attributable to Heska Corporation		663		(2,830	)
Basic earnings (loss) per share attributable to Heska Corporation	$	0.12	$	(0.49	)
Diluted earnings (loss) per share attributable to Heska Corporation		0.11		(0.49	)

4.           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 nine months ended September 30, 2012 and 2013.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2013		2012	2013
Risk-free interest rate		0.35%		0.87%	0.37%		0.54%
Expected lives		3.0 years		3.2 years	2.9 years		3.4 years
Expected volatility		55%		44%	64%		51%
Expected dividend yield		4.44%		0%	3.39%		0%

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, 2012					Nine Months Ended September 30, 2013
		Options		Weighted Average Exercise Price			Options	Weighted Average Exercise Price
Outstanding at beginning of period			1,448,675		$	10.425	1,245,161		$	11.054
	Granted at market		137,950		$	9.534	69,330		$	8.046
	Cancelled		(118,330	)	$	11.373	(164,303	)	$	11.330
	Exercised		(223,134	)	$	5.863	(33,297	)	$	6.488
Outstanding at end of period			1,245,161		$	11.054	1,116,891		$	10.963
Exercisable at end of period			971,029		$	12.129	913,447		$	11.714

The estimated fair value of stock options granted during the nine months ended September 30, 2013 and 2012 was computed to be approximately $206 thousand and $167 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 nine months ended September 30, 2013 and 2012 was computed to be approximately $2.96 and $4.19, respectively.  The total intrinsic value of options exercised during the nine months ended September 30, 2013 and 2012 was approximately $42 thousand and $1.1 million, respectively.  The cash proceeds from options exercised during the nine months ended September 30, 2013 and 2012 were approximately $161 thousand and $243 thousand, respectively.

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The following table summarizes information about stock options outstanding and exercisable at September 30, 2013, excluding outstanding options to purchase an aggregate of 78.4 fractional shares resulting from the Company's December 2010 1-for-10 reverse stock split with a weighted average remaining contractual life of 1.50 years, a weighted average exercise price of $14.49 and exercise prices ranging from $4.40 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 September 30, 2013		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Number of Options Exercisable at September 30, 2013		Weighted Average Exercise Price
$  2.70 - $  6.76		231,048		5.89	$	5.030		194,647		$	4.973
$  6.77 - $  8.48		180,923		7.68	$	7.547		93,870		$	7.581
$  8.49 - $  9.02		239,067		4.87	$	8.687		163,651		$	8.738
$  9.03 - $15.90		250,780		2.92	$	13.147		246,206		$	13.192
$15.91 - $31.50		215,073		2.04	$	20.191		215,073		$	20.191
$  2.70 - $31.50		1,116,891		4.55	$	10.963		913,447		$	11.714

As of September 30, 2013, there was approximately $564 thousand of total unrecognized compensation cost related to outstanding stock options.  That cost is expected to be recognized over a weighted average period of 1.8 years, with approximately $74 thousand to be recognized in the three months ending December 31, 2013 and all the cost to be recognized as of September 2017, assuming all options vest according to the vesting schedules in place at September 30, 2013.  As of September 30, 2013, the aggregate intrinsic value of outstanding options was approximately $213 thousand and the aggregate intrinsic value of exercisable options was approximately $190 thousand.

5.           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.  The CCA segment also includes digital radiography and ultrasound products along with embedded software and support, data hosting and other services from Heska Imaging after February 24, 2013.  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.

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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
Nine Months Ended September 30, 2012:
Total  revenue	$	45,811		$	8,541	$	54,352
Operating income (loss)		883			555		1,438
Interest expense		68			20		88
Total assets		51,194			11,784		62,978
Net assets		39,286			9,085		48,371
Capital expenditures		429			476		905
Depreciation and amortization		622			649		1,271
Nine Months Ended September 30, 2013:
Total  revenue	$	46,015		$	8,820	$	54,835
Operating income (loss)		(4,565	)		380		(4,185	)
Interest expense		208			21		229
Total assets		78,419			12,014		90,433
Net assets		37,217			9,251		46,468
Capital expenditures		466			804		1,270
Depreciation and amortization		1,113			602		1,715

	Core Companion Animal Health				Other Vaccines, Pharmaceuticals and Products	Total
Three Months Ended September 30, 2012:
Total revenue	$	13,530		$	3,376	$	16,906
Operating income (loss)		(126	)		99		(27	)
Interest expense		21			8		29
Total assets		51,194			11,784		62,978
Net assets		39,286			9,085		48,371
Capital expenditures		194			169		363
Depreciation and amortization		213			197		410
Three Months Ended September 30, 2013:
Total revenue	$	14,515		$	3,080	$	17,595
Operating income (loss)		(374	)		449		75
Interest expense		80			2		82
Total assets		78,419			12,014		90,433
Net assets		37,217			9,251		46,468
Capital expenditures		105			431		536
Depreciation and amortization		417			209		626

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Item 2.

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 November 13, 2013, 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 85% of our revenue for the twelve months ended September 30, 2013 assuming we had consolidated Heska Imaging for the entire period (which we define as "Pro forma LTM") and Other Vaccines, Pharmaceuticals and Products ("OVP"), which represented 15% of Pro forma LTM revenue.

The CCA segment includes in-clinic blood testing and other non-imaging instruments and supplies, imaging hardware, software and services as well as single use diagnostic and other tests, pharmaceuticals and vaccines, primarily for canine and feline use.

Blood testing and other non-imaging instruments and supplies represented approximately 38% of our Pro forma 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 Pro forma LTM revenue resulted from the sale of such consumables to an installed base of instruments and approximately 9% of our Pro forma LTM 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 blood testing and other non-imaging 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 blood gas instruments and their affiliated operating consumables.  Revenue from products in these three areas, including revenues from consumables, represented approximately 34% of our Pro forma LTM revenue.

Imaging hardware, software and services represented approximately 16% of Pro forma LTM revenue.  Digital radiography is the largest product offering in this area, which also includes ultrasound instruments.  Digital radiography solutions typically consist of a combination of hardware and software placed with a customer, often combined with an ongoing service and support contract.  It has been our experience that most of the economic benefit is generated at the time of sale in this area, in contrast to the blood testing category discussed above where ongoing consumable revenue is often a larger component of economic value.

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 31% of our Pro forma 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 preventives, our allergy

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test kits, our allergy immunotherapy and our allergy diagnostic tests. Combined revenue from heartworm-related products and allergy-related products represented 27% of our Pro forma 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.

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 Intervet Inc., formerly known as Schering-Plough Animal Health Corporation ("Merck Animal Health"), a unit of Merck & Co., Inc., the sale of kits to conduct blood testing to third-party veterinary diagnostic laboratories and independent third-party distributors.  Revenue from direct sales and distribution relationships represented approximately 68% and 32%, respectively, of CCA Pro forma 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.  Pro forma LTM revenue in this segment increased 3% as compared to Pro forma revenue for the twelve months ended September 30, 2012 assuming we had consolidated Heska Imaging for the entire period.  We believe poor economic conditions over the past several years 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 an asset which could allow us to control our cost of goods on any vaccines and pharmaceuticals that we may commercialize in the future.  We have increased integration of this facility with our operations elsewhere.  For example, virtually all our U.S. inventory, excluding Heska Imaging, 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 developed a line of bovine vaccines that are licensed by the USDA.  We have an agreement which was assigned by a previous distributor, Agri Laboratories, Ltd., ("AgriLabs") to, and assumed by, Eli Lilly and Company acting through its Elanco Animal Health division ("Elanco") in November 2013, for the marketing and sale of certain of these vaccines which AgriLabs sold primarily under the TitaniumÒ and MasterGuardÒ brands.  This agreement has historically generated 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

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of those accounting policies that involve the most complex or subjective decisions or assessment.  We consider the following to be our critical policies.

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

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are fulfilled, as appropriate.  If the elements are determined to be separable, the revenue is allocated to the separate elements based on relative fair value and recognized separately for each element when the applicable revenue recognition criteria have been met.  In accounting for these multiple element arrangements, we must make determinations about whether elements can be accounted for separately and make estimates regarding their relative fair values.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts receivable based on client-specific allowances, as well as a general allowance.  Specific allowances are maintained for clients which are determined to have a high degree of collectability risk based on such factors, among others, as: (i) the aging of the accounts receivable balance; (ii) the client's past payment history; (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 excess/obsolescence inventory.  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.  For example, if we were to conclude we were not more likely than not to utilize deferred tax assets recognized on our balance sheet, we would increase the valuation allowance affiliated with these deferred tax assets and recognize an income tax expense of an equal magnitude in our statement of operations.

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Results of Operations

Revenue

Total revenue was $54.8 million for the nine months ended September 30, 2013, an increase of 1% as compared to $54.4 million in the corresponding period in 2012.  Total revenue was $17.6 million for the three months ended September 30, 2013, an increase of 4% as compared to $16.9 million in the corresponding period in 2012.

Revenue from our CCA segment was $46.0 million for the nine months ended September 30, 2013, a slight increase as compared to $45.8 million for the corresponding period in 2012.  The largest factor in the increase was $6.7 million in revenue from Heska Imaging, which represents the revenue from sales after our acquisition of Heska Imaging on February 24, 2013.  This was somewhat offset by lower revenue from sales of our heartworm diagnostic tests, both internationally and domestically, our international allergy business products, and our hematology instruments.  Revenue from our CCA segment was $14.5 million for the three months ended September 30, 2013, an increase of 7% as compared to $13.5 million for the corresponding period in 2012.  The impact of $2.1 million in revenue from Heska Imaging was the largest factor in the increase.  Increased revenue from domestic sales of our heartworm preventive to Merck Animal Health was another factor in the increase.  This was somewhat offset by lower revenue from domestic sales of our heartworm diagnostic tests and lower revenue related to placements of our chemistry instruments and our hematology instruments.

Revenue from our OVP segment was $8.8 million for the nine months ended September 30, 2013, an increase of 3% as compared to $8.5 million in the corresponding period in 2012.   Increased revenue from sponsored research and development projects, sales of bulk bovine biologicals, sales to a new customer and sales of small mammal products, somewhat offset by lower sales of cattle vaccines under our contract with AgriLabs and lower sales of bovine products for Canadian distribution, contributed to the increase.  Revenue from our OVP segment was $3.1 million for the three months ended September 30, 2013, a decrease of 9% as compared to $3.4 million in the corresponding period in 2012.  Lower sales of cattle vaccines under our contract with AgriLabs was a factor in the decrease.

Cost of Revenue

Cost of revenue totaled $34.6 million for the nine months ended September 30, 2013, an increase of $4.0 million or 13% as compared to $30.7 million for the corresponding period in 2012.  Gross profit decreased by $3.5 million to $20.2 million for the nine months ended September 30, 2013 as compared to $23.7 million in the prior year period.  Gross profit for the nine months ended September 30, 2013 includes $2.1 million in gross profit from Heska Imaging.  Gross Margin, i.e. gross profit divided by total revenue, decreased to 36.9% for the nine months ended September 30, 2013 from 43.6% in the prior year period.  In June 2013, we recognized a reserve (the "Roche Reserve") related to an agreement (the "Roche Agreement") with Roche Diagnostics Corporation ("Roche") related to our blood gas analyzers under which we would be relieved of any minimum purchase obligations other than the Roche Agreement and Roche would be obligated to supply us with consumables and spare parts for a shortened period of time.  The Roche Reserve was $1.1 million, as follows: $600 thousand recognized in cost of revenue related to required purchase of new instruments under the Roche Agreement, $168 thousand recognized in cost of revenue related to instruments already in inventory and accelerated depreciation on service units, $13 thousand recognized in sales and marketing expenses related to accelerated depreciation on demonstration units, $99 thousand recognized in research and development expenses related to the purchase of research and development equipment required under the Roche Agreement we would not have otherwise purchased and $243 thousand recognized in general and administrative expenses related to other anticipated costs related to the Roche Agreement.  In addition, in June 2013 we recognized a $453 thousand reserve (the "SpotChem Reserve") related to consumable and accessory inventory which we did not expect to sell.  The Roche Reserve and the SpotChem Reserve, as well as a shift in product mix to relatively lower margin product areas including our veterinary imaging business was a factor in the decline in Gross Margin for the nine months ended September 30, 2013 as compared to the prior year period.

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Cost of revenue totaled $10.2 million for the three months ended September 30, 2013, as compared to $10.2 million for the corresponding period in 2012.  Gross profit increased by $680 thousand to $7.4 million for the three months ended September 30, 2013 as compared to $6.7 million in the prior year period.  Gross profit for the three months ended September 30, 2013 includes $726 thousand in gross profit from Heska Imaging.  Gross Margin, i.e. gross profit divided by total revenue, increased to 42.1% for the three months ended September 30, 2013 from 39.8% in the prior year period.  A factor in the change was lower revenue and higher Gross Margin in our OVP segment.  Our OVP segment tends to have lower Gross Margin than our CCA segment.

Operating Expenses

Total operating expenses increased 10% to $24.4 million in the nine months ended September 30, 2013 from $22.3 million in the prior year period.  Total operating expenses increased 9% to $7.3 million in the three months ended September 30, 2013 from $6.8 million in the prior year period.

Selling and marketing expenses increased 4% to $14.6 million in the nine months ended September 30, 2013 as compared to $14.0 million in the corresponding period in 2012.  Heska Imaging sales and marketing expense of $2.1 million recognized in the nine months ended September 30, 2013 but not the prior year period was a key factor in the increase.  This was somewhat offset by lower spending on salaries and travel for members of our salesforce.  Selling and marketing expenses were $4.6 million in the three months ended September 30, 2013, a 5%  increase as compared to $4.4 million in the corresponding period in 2012.  Heska Imaging sales and marketing expense of $905 thousand recognized in the three months ended September 30, 2013 but not the prior year period was a key factor in the increase.  This was somewhat offset by lower spending on salaries and travel for members of our salesforce.

Research and development expenses were $1.2 million and included $115 thousand in expense from Heska Imaging in the nine months ended September 30, 2013, an increase of $480 thousand as compared to $717 thousand in the corresponding period in 2012.  Other key factors include a reserve for equipment that had been previously used in a project that was recently discontinued and expenses related to the Roche Reserve.  Research and development expenses were $324 thousand and included $49 thousand in expense from Heska Imaging in the three months ended September 30, 2013, an increase of $144 thousand as compared to $180 thousand in the corresponding period in 2012.  Greater expenses related to personnel as well as the recognition of costs related to other research and development projects were other important factors in the increase.

General and administrative expenses were $8.7 million and included approximately $815 thousand in expense from Heska Imaging in the nine months ended September 30, 2013, up 15% from $7.5 million in the prior year period.  In addition to expenses from and related to the acquisition of Heska Imaging, severance expenses related to the termination of certain employees and expenses related to the Roche Reserve were key factors in the increase.  These were somewhat offset by lower legal expenses and expenses related to arbitration matters.  General and administrative expenses were $2.4 million and included approximately $305 thousand in expense from Heska Imaging in the three months ended September 30, 2013, up 10% from $2.2 million in the prior year period.  Increased general and administrative expenses related to the consolidation of Heska Imaging were somewhat offset by lower legal expenses.

Interest and Other (Income) Expense, Net

Interest and other (income) expense, net was $134 thousand of expense in the nine months ended September 30, 2013, an increase of $65 thousand as compared to $69 thousand of expense in the prior year period.  The largest factor in the increase was primarily related to greater interest expense on debts at Heska Imaging, which were included in the nine months ended September 30, 2013 but not the prior year period as Heska Imaging was not consolidated in the prior year period, somewhat offset by a slight gain on foreign currency as opposed to a foreign currency loss in the prior year period.  In the three months ended September 30, 2013, this line item was a $93 thousand expense as opposed to $16 thousand in income in the prior year period.  

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A key factor in the increase relates to interest on debts at Heska Imaging, which were included in the three months ended September 30, 2013 but not the prior year period as Heska Imaging was not consolidated in the prior year period.  A loss on foreign currency as opposed to a foreign currency gain in the prior year period was another key factor in the increase.

Income Tax Expense

We recognized an income tax benefit of $1.5 million in the nine months ended September 30, 2013, a $2.0 million increase as compared to a tax expense of $555 thousand in the prior year period.  We recognized no net income tax expense in the three months ended September 30, 2013, as opposed to a tax expense of $21 thousand in the prior year period.

Current tax expense was $71 thousand in the nine months ended September 30, 2013, a decline of $27 thousand as compared to $98 thousand in the prior year period.  Current tax expense was $6 thousand in the three months ended September 30, 2013, a decrease of $10 thousand as compared to $16 thousand in the prior year period.  A lower level of pre-tax profit is a factor in the change in both cases.  Current tax expense represents taxes we are expected to pay in cash as a result of a given period's operations.

For the nine months ended September 30, 2013, deferred tax benefit was $1.6 million, a $2.0 million change from $457 thousand in tax expense in the prior year period.  The change is due to income before income taxes in the 2012 period as opposed to a loss before income taxes in the 2013 period.  For the three months ended September 30, 2013, deferred tax benefit was $6 thousand, an $11 thousand change from $5 thousand in tax expense in the prior year period.  Differences between the periods in the relationship of our accrued tax as compared with June 30 reported results is a factor in the change.

Net Income (Loss)

Net loss was $2.8 million in the nine months ended September 30, 2013, a decrease of approximately $3.7 million compared to $814 thousand net income in the prior year period.  The change was primarily due to lower Gross Margin and higher operating expenses.  Net loss was $18 thousand in the three months ended September 30, 2013, an improvement of approximately $14 thousand compared to a net loss of $32 thousand in the prior year period.  Higher revenue and Gross Margin, somewhat offset by higher operating expenses, were key factors in the change.

Net Income (Loss) attributable to Heska Corporation

Net loss attributable to Heska Corporation was $2.4 million in the nine months ended September 30, 2013, a decrease of approximately $3.2 million compared to $814 thousand net income in the prior year period.  Net income attributable to Heska Corporation was $241 thousand in the three months ended September 30, 2013, an increase of approximately $273 thousand compared to $32 thousand net loss in the prior year period.  The difference between this line item and "Net Income (Loss)" above is the net income or loss attributable to the minority interest in Heska Imaging, which was a loss of $464 thousand in the nine months ended September 30, 2013 and $259 thousand in the three months ended September 30, 2013.  There were no corresponding entries in periods ending in 2012 as Heska Imaging was not consolidated into our financial statements until February 24, 2013.

Liquidity and Capital Resources

We have incurred net cumulative negative cash flow from operations since our inception in 1988.  For the nine months ended September 30, 2013, we had a net loss of $2.8 million.  During the nine months ended September 30, 2013, our operations used cash of approximately $1.3 million.  At September 30, 2013, we had $6.3 million of cash and cash equivalents, $10.8 million of working capital, and $4.3 million of outstanding borrowings under our revolving line of credit, discussed below.

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Net cash used in operating activities was approximately $1.3 million for the nine months ended September 30, 2013 as compared to $1.0 million of cash provided by operating activities in the prior year period, a change of approximately $2.3 million.  Major factors in the decline were a $3.7 million change in net loss, an affiliated $2.0 million decrease in cash provided due to deferred tax effects, $1.1 million increase in cash used from inventories primarily related to increased transfer of inventories to PP&E related to customer lease agreements and a $1.4 million greater net cash usage from accounts payable and accrued liabilities.  This was somewhat offset by a $4.8 million increase in cash provided by accounts receivable as a large order that had shipped in the fourth quarter of 2012 was paid for in the first quarter of 2013 as compared to relatively lower sales in the fourth quarter of 2011 and relatively higher sales in the first quarter of 2012 which led to greater cash usage by accounts receivable in the 2012 period as compared to the 2013 period, and a $444 thousand increase in cash provided by depreciation and amortization with the acquisition and consolidation of Heska Imaging as a key factor in the change.

Net cash flows provided by investing activities were $731 thousand in the nine months ended September 30, 2013, an increase of approximately $1.6 million as compared to $905 thousand used during the corresponding period in 2012.  The major factor in the increase was $5.0 million of proceeds from disposition of property, including non-core vaccine-related intellectual property, which occurred in the 2013 period, but not the 2012 period.  This was somewhat offset by $3.0 million in cash paid as part of the acquisition of Heska Imaging in February 2013 as well as an increase of $365 thousand in capital expenditures in the 2013 period as opposed to the 2012 period.

Net cash flows provided by financing activities were $1.1 million during the nine months ended September 30, 2013, a $1.8 million change as compared to $759 thousand used in financing activities in the prior year period.  In the 2013 period, we borrowed $1.7 million under our asset-based revolving line of credit with Wells Fargo Bank, National Association ("Wells Fargo") and Heska Imaging made $893 thousand in net repayments of other debts with no cash outflows related to the payment of dividends.  In the 2012 period, we paid $1.1 million in dividends with no repayments of debt.  The cash outflows related to financing were somewhat offset by proceeds from the issuance of common stock of $254 thousand in the 2013 period and $307 thousand in the 2012 period.

At September 30, 2013, Heska Corporation had lent Heska Imaging $632 thousand, including accrued interest, and subsequent to September 30, 2013, Heska Corporation lent Heska Imaging an additional $1.3 million, all of which is currently outstanding and which eliminates upon consolidation of our financial statements.  These debts accrue interest at the same interest rate as Heska Corporation pays under its asset-based revolving line of credit with Wells Fargo, with the proceeds to be used to pay off other debt.

At September 30, 2013, we had a $1.7 million note receivable, including accrued interest, from Cuattro Veterinary, LLC.  The note is to pay interest at the same interest rate as Heska Corporation pays under its asset-based revolving line of credit with Wells Fargo and is due on March 15, 2016.  Cuattro Veterinary, LLC sells the same digital radiography solutions outside the United States that Heska Imaging sells in the United States.  The note is listed on our balance sheet as a note receivable – related party as Kevin S. Wilson, our President and Chief Operating Officer, Mrs. Wilson and trusts for their children and family hold a majority interest in Cuattro Veterinary, LLC.  This note was held by Heska Imaging at the time of our acquisition of Heska Imaging on February 24, 2013.

At September 30, 2013, we had a $15.0 million asset-based revolving line of credit with Wells Fargo which had a maturity date of December 31, 2015 as part of our credit and security agreement with Wells Fargo.  At September 30, 2013, we had $4.3 million in 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 September 30, 2013, interest on borrowings due was to be charged at a stated rate of three month LIBOR plus 3.75% and 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.  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

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impact our ability to borrow under the agreement.  We failed to comply with the net income covenant as of June 30, 2013, for which we obtained a waiver and subsequently negotiated new covenants as well as an extension of our asset-based revolving line of credit with Wells Fargo to December 31, 2015.  At September 30, 2013, we had $3.6 million of borrowing capacity based upon eligible accounts receivable and eligible inventory under our revolving line of credit.

At September 30, 2013, we had other borrowings outstanding totaling $634 thousand, all of which were obligations of Heska Imaging, as follows.  We had $532 thousand outstanding on loan from De Lage Landen Financial Services, Inc. ("DLL").  The note bears an interest rate of 6% and is due in monthly payments of $13 thousand through June 2017.  The note may be prepaid prior to maturity, but is subject to a surcharge in such a circumstance.  $131 thousand of principal associated with this note is listed as short term on our balance sheet as it is due within a year.  We also had $102 thousand in additional short term debt from DLL as of September 30, 2013 related to Heska Imaging's leasing activities.

At September 30, 2013, our balance sheet included $13.1 million in non-controlling interest.  This represents the value of the aggregate position in Heska Imaging of the unit holders of the 45.4% of Heska Imaging we do not own (the "Imaging Minority").  We estimated a weighted average valuation for this position and are accreting to this value over a three year period using a weighted average cost of capital of 18.65%.  The cost of capital assumptions was provided to us by a third party with expertise in estimating such items.  The accretion is to be recorded as a credit which will tend to increase this entry over time, with the corresponding debit to directly reduce retained earnings.  We intend to evaluate the value of this position every reporting period and adjust our accretion accordingly if necessary.

At September 30, 2013, our balance sheet included $2.4 million in Public Common Stock subject to redemption.  This represents the stock we issued to acquire our position in Heska Imaging, which may be used to meet the purchase obligation if a Cuattro 12-month Call Option or a Cuattro 18-month Call Option is exercised under the Amended and Restated Operating Agreement of Heska Imaging (the "Operating Agreement").  We intend to mark this line item to market every reporting period with the corresponding debit or credit taken directly to additional paid-in-capital.

Our financial plan for 2013 indicates that our available cash and cash equivalents, together with cash from operations and borrowings expected to be available under our revolving line of credit, will be sufficient to fund our operations through 2013 and into 2014.  However, our actual results may differ from this plan, and we may be required to consider alternative strategies.  We may be required to raise additional capital in the future.  If necessary, we expect to raise these additional funds through the increased sale of customer leases, the sale of equity securities or the issuance of new term debt secured by the same assets as the term loans which were fully repaid in 2010.  There is no guarantee that additional capital will be available from these sources on acceptable terms, if at all, and certain of these sources may require approval by existing lenders.  See "Risk Factors" in Item 1A of this Form 10-Q for a discussion of some of the factors that affect our capital raising alternatives.

Under the Operating Agreement, should Heska Imaging meet certain performance criteria, the Imaging Minority has been granted a put option to sell us some or all of the Imaging Minority's remaining 45.4% position in Heska Imaging following the audit of our financial statements in 2015, 2016 and 2017.  Furthermore, should Heska Imaging meet certain performance criteria, and the Imaging Minority fail to exercise an applicable put to sell us all of the Imaging Minority's position in Heska Imaging following the audit of our financial statements in 2015, 2016 and 2017, we would have a call option to purchase all, but not less than all, of the Imaging Minority's position in Heska Imaging.

We believe it is likely that Heska Imaging will meet the required performance criteria for its 2015 highest strike put in 2015.  In this case, the Imaging Minority would be granted a put following our 2015 audit which could require us to deliver up to $17.0 million, as well as 25% of Heska Imaging's cash, to purchase the 45.4% of Heska Imaging we do not own.  If this put is not exercised in full, we would have a call option to purchase all, but not less than all, of the Imaging Minority's position in Heska Imaging for $19.6 million, as well as 25% of Heska Imaging's cash.  In both cases, while we have the right to deliver up to 55% of the consideration in our Public Common Stock under certain circumstances, such stock is to be valued based on 90% of market value (the "Delivery Stock Value") and is limited to approximately 650 thousand shares in any case.  If the

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Delivery Stock Value is less than the market value of our stock at the time of the Acquisition, we do not have the right to deliver any Public Common Stock as consideration.

If Heska Imaging meets the required performance criteria for its 2015 highest strike put in 2015, we anticipate that either the Imaging Minority will exercise its put or we will desire to exercise our call, or perhaps both, following our 2015 audit in 2016.  While we intend to meet this payment obligation with funds provided by our ongoing operations and assets, likely supplemented by debt financing and potentially with equity financing, there can be no assurance our results will unfold according to our expectations.  This potential payment obligation in 2016 is an important consideration for us in our cash management decisions.

We would consider acquisitions if we felt they were consistent with our strategic direction.  We paid $1.6 million in dividends in 2012, and while we may consider paying dividends again in the long term, we do not anticipate the payment of any further dividends for the foreseeable future.  We conducted an odd lot tender offer in 2012 which could have led to the repurchase of approximately $400 thousand of our stock if all eligible holders had chosen to participate, and while we may consider stock repurchase alternatives again in the long term, we do not anticipate any stock repurchases in the foreseeable future.

Recent Accounting Pronouncements

None.

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Item 3.

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 currencies.  These exposures are directly related to our normal operating and funding activities.

Interest Rate Risk

At September 30, 2013, there was $4.3 million in debt outstanding on our line of credit with Wells Fargo and we had $634 thousand in additional borrowings.  We also had approximately $6.3 million of cash and cash equivalents at September 30, 2013, the majority of which was invested in liquid accounts.  We had no interest rate hedge transactions in place on September 30, 2013.  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 and such changes were reflected in all our investments, we would experience a decrease/increase in annual net interest expense of approximately $14 thousand based on our outstanding balances as of September 30, 2013.

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 September 30, 2013.

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 $237 thousand.

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Item 4.

(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 September 30, 2013, we were not a party to any legal proceedings that are expected, individually or in the aggregate, to have a material adverse 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 Public Common Stock could decline and you could experience losses on your investment.

Our February 2013 acquisition of a 54.6% majority interest (the "Acquisition") in Cuattro Veterinary USA, LLC, which has been renamed Heska Imaging US, LLC, is subject to various puts and calls and other provisions which could be detrimental to the interests of our shareholders.

Under the Operating Agreement for up to 18 months following the Acquisition, the Imaging Minority may repurchase our 54.6% interest in Heska Imaging at a premium to our Acquisition purchase price under a call option we have granted the Imaging Minority.  Through the first year anniversary of the Acquisition, such repurchase may be made at 1.3 times our purchase price and following the first year anniversary of the Acquisition and through the 18-month anniversary of the Acquisition, such repurchase may be made at 1.45 times our purchase price.  Furthermore, the Imaging Minority may deliver any Heska shares resulting from and held since the Acquisition as consideration, with such shares to be valued based on market value, although not less than $5 per share.  Should the Imaging Minority exercise this call, it could be significantly disruptive to our business and if Heska Imaging represents a significant portion of our revenue and earnings at the time of such exercise, our stock price could decline significantly following such exercise.  Furthermore, should Heska stock have appreciated significantly, the Imaging Minority might not have to repay some or all of the cash we paid in the Acquisition, or even deliver all the shares we issued in the Acquisition.  In addition, if our stock price has declined below $5 per share prior to the time of exercise, we may not realize the full economic premium (either 1.3 or 1.45), or any premium, anticipated in the repurchase.  In addition, should our stock price decline enough, we could be placed in a position where the repurchase is at an economic discount to our purchase price.

Under the Operating Agreement, should Heska Imaging meet certain performance criteria, the Imaging Minority has been granted a put option to sell us some or all of the Imaging Minority's position in Heska Imaging following the audit of our financial statements for 2015, 2016 and 2017.  Based on Heska Imaging's current ownership position, this put option could require us to deliver either up to $17.0 million following calendar year 2015, $25.5 million following calendar year 2016 or $36.9 million following calendar year 2017 as well as 25% of Heska Imaging's cash (any applicable payment in aggregate to be defined as the "Put Payment") to acquire the outstanding minority interest in Heska Imaging.  While we have the right to deliver up to 55% of the consideration in our Public Common Stock under certain circumstances, such stock is to be valued based on 90% of market value (the "Delivery Stock Value") and is limited to approximately 650 thousand shares in any case.  If the Delivery Stock Value is less than the market value of our Public Common Stock at the time of the Acquisition, we do not have the right to deliver any Public Common Stock as consideration.  Cash required under any Put Payment could put a significant strain on our financial position or require us to raise additional capital.  There is no guarantee that additional capital will be available in such a circumstance on reasonable terms, if at all.  We may be unable to obtain debt financing, the public markets may be unreceptive to equity financing and we may not be able to obtain financing from other alternative sources, such as private equity.  Any debt financing, if available, may include restrictive covenants and high interest rates and any equity financing would likely be dilutive to stockholders in this scenario.  If additional funds are required and are not available, it

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would likely have a material adverse effect on our business, financial condition and our ability to continue as a going concern.

Under the Operating Agreement, should Heska Imaging meet certain performance criteria, and the Imaging Minority fail to exercise an applicable put to sell us all of the Imaging Minority's position in Heska Imaging following the audit of our financial statements for 2015, 2016 and 2017, we would have a call option to purchase all, but not less than all, of the Imaging Minority's position in Heska Imaging.  Based on Heska Imaging's current ownership position, exercising this call option could require us to deliver up to $19.6 million following calendar year 2015, $29.4 million following calendar year 2016 or $42.4 million following calendar year 2017 as well as 25% of Heska Imaging's cash (any applicable payment in aggregate to be defined as the "Call Payment") to acquire the outstanding minority interest in Heska Imaging.  While we have the right to deliver up to 55% of the consideration in our Public Common Stock under certain circumstances, such stock is to be valued based on 90% of market value (the "Delivery Stock Value") and is limited to approximately 650 thousand shares in any case.  If the Delivery Stock Value is less than the market value of our stock at the time of the Acquisition, we do not have the right to deliver any Public Common Stock as consideration.  If we believe it is desirable to exercise any one of these calls, cash required under the Call Payment could put a significant strain on our financial position or require us to raise additional capital.  There is no guarantee that additional capital will be available in such a circumstance on reasonable terms, if at all.  If we believe it is desirable to exercise any such call, determine we are unable to economically finance the Call Payment and do not exercise the call as a result, we could be subject to a more expensive Put Payment less than a year in the future.  In this circumstance, unless there is a significant change in our financial position or market conditions, such a Put Payment could have a material adverse effect on our business, financial condition and our ability to continue as a going concern.

Under and as defined in the Operating Agreement, should we undergo a change in control prior to the end of 2017, the Imaging Minority will be entitled to sell their Heska Imaging units to us for cash at the highest call value they otherwise could have obtained (the "Change in Control Payment").  If Heska Imaging meets certain minimum performance criteria, this will be $42.4 million as well as 25% of Heska Imaging's cash until at least the end of 2015.  The Change in Control Payment may materially decrease the interest of third parties in acquiring the Company or a majority of the Company's shares, which could otherwise have occurred at a significant premium to the Company's then current market price for the benefit of some or all of our shareholders.  This could make some investors less likely to buy and hold our stock.

Under the terms of the Operating Agreement, Heska Imaging will be managed by a three-person board of managers, two of which are to be appointed by Heska Corporation and one of which is to be appointed by Kevin S. Wilson, who has been Heska Corporation's President and Chief Operating Officer since the Acquisition closing and is a founder of Heska Imaging.  The current board of managers consists of Robert B. Grieve, Ph.D., Heska Corporation's Chairman and Chief Executive Officer, Mr. Wilson and Jason A. Napolitano, Heska Corporation's Executive Vice President, Chief Financial Officer and Secretary.  Until the earlier of (1) our acquiring 100% of the units of Heska Imaging pursuant to the puts and/or calls discussed above or (2) the sixth anniversary of the acquisition, Heska Imaging may only take the following actions, among others, by unanimous consent of the board of managers: (i) issue securities, (ii) incur, guarantee, prepay, refinance, renew, modify or extend debt, (iii) enter into material contracts, (iv) hire or terminate an officer or amend the terms of their employment, (v) make a distribution other than a tax or liquidation distribution, (vi) enter into a material acquisition or disposition arrangement or a merger, (vii) lease or acquire an interest in real property, (viii) convert or reorganize Heska Imaging, or (ix) amend its certificate of formation or the Heska Imaging Agreement.  This unanimous consent provision may hinder our ability to optimize the value of its investment in Heska Imaging in certain circumstances.

Mr. Wilson's employment agreement with us requires that he devote 80% of his working hours' attention, skills, time and business efforts to Heska Corporation.  However, Mr. Wilson has business interests in Cuattro, LLC, Cuattro Software, LLC, Cuattro Medical, LLC and Cuattro Veterinary, LLC which may require a portion of his time, resources and attention in the remaining 20% of his working hours.  If Mr. Wilson is distracted by these or other business interests, he may not contribute as much as he otherwise would have to enhancing our business, to the detriment of our shareholder value.  In addition, including shares held by Mrs. Wilson and by trusts for the benefit of Mr. and Mrs. Wilson's children and family, Mr. Wilson also owns a 100% interest in Cuattro, LLC, the largest supplier to Heska Imaging.  While the terms of both the Amended and

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Restated Master License Agreement and the Supply Agreement between Heska Imaging and Cuattro, LLC were negotiated at arm's length as part of the Acquisition, Mr. Wilson has an interest in these agreements and any time and resources devoted to monitoring and overseeing this relationship may prevent us from deploying such time and resources on more productive matters.

Mrs. Wilson, Mr. Asakowicz, Mr. Lippincott, Mr. Wilson and Cuattro, LLC own approximately 29.75%, 4.09%, 3.07%, 0.05% and 0.05% of Heska Imaging, respectively, are each a member of Heska Imaging, and each have an interest in the puts and calls discussed above.  If Mr. Wilson, Mr. Asakowicz or Mr. Lippincott is distracted by these holdings or interests, they may not contribute as much as they otherwise would have to enhancing our business, to the detriment of our shareholder value.  While the Operating Agreement was negotiated at arm's length as part of the Acquisition, and requires that none of the members shall cause Heska Imaging to operate its business in any manner other than the ordinary course of business, any time and resources devoted to monitoring and overseeing this relationship may prevent us from deploying such time and resources on more productive matters.

In addition, like any acquisition, if Heska Imaging significantly underperforms our financial expectations, it may serve to diminish rather than enhance shareholder value.

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 we 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 it may be more difficult to obtain funding 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 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 unit of Zoetis Inc. ("Zoetis").  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 & Co., Inc. ("Merck"), Novartis AG, sanofi-aventis, Vétoquinol S.A., Virbac S.A. and Zoetis 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

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service organizations than we do.  Our competitors may offer broader product lines and have greater name recognition than we do.  For example, if Zoetis 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 currently one of our largest competitors, IDEXX, in effect prohibits all of its distributors except one from selling certain competitive products, including our blood testing instruments and heartworm diagnostic tests.  Another of our competitors, Abaxis, recently launched a veterinary diagnostic laboratory offering which may serve to intensify competition and lower our margins.

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.

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.

Revenue from Merck entities, including Merck Animal Health, represented approximately 12% and 11% of our consolidated revenue for the three months and nine months ended September 30, 2013.  No other single customer accounted for more than 10% of our consolidated revenue for the three months and nine months ended September 30, 2013 nor the three months and nine months ended September 30, 2012.  Novartis AG accounted for 15% of our accounts receivable at September 30, 2013.  No other single customer accounted for more than 10% of our consolidated accounts receivable at September 30, 2013 and September 30, 2012.

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.

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We believe that currently one of our largest competitors, IDEXX Laboratories, Inc. ("IDEXX"), in effect prohibits all of its distributors except for MWI Veterinary Supply, Inc. ("MWI") from selling certain competitive products, including our blood testing instruments and heartworm diagnostic tests.  This situation may hinder our ability to sell and market our products if these distributors are increasingly successful.  While we have an agreement with MWI to sell our blood testing instruments and heartworm diagnostic tests, there can be no assurance this agreement will prove to be ultimately successful in enhancing our profitability or market presence.

We may not be able to continue to achieve sustained profitability or increase profitability on a quarterly or annual basis.

Prior to 2005, we incurred net losses on an annual basis since our inception in 1988 and, as of December 31, 2012, we had an accumulated deficit of $170.0 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 generate an operating or net loss 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.

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.  Similarly, we must provide ourselves, or contract for the supply of certain services.  Such services must be provided in a timely and appropriate manner.  Failure to do any of the above could substantially harm our business.

We rely on third-party suppliers to manufacture those products we do not manufacture ourselves and to provide services we do not provide 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 key components of our point-of-care diagnostic tests as well as for the manufacture of other products.

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 Pro forma LTM revenue are Boule Medical AB, Cuattro, LLC, FUJIFILM Corporation and Quidel Corporation.  None of these suppliers sold us proprietary products which were responsible for more than 25% of our Pro forma LTM revenue, although the proprietary products of one of these suppliers was responsible for more than 20% of our Pro forma LTM revenue and one other was responsible for more than 10% of our Pro forma 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 major veterinary blood testing instruments and our digital radiography solutions we are typically entitled to non-exclusive access to consumable supplies, or ongoing non-exclusive access to products and services to meet the needs of an existing customer base, respectively, 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 and service 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:

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· 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.

· Loss of exclusivity.  In the case of our blood testing 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.  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.

· 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 effect 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.

· High switching costs. In our blood testing 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.

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· 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.

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 Merck Animal Health, which grants Merck Animal Health exclusive distribution and marketing rights for our canine heartworm preventive product, TRI-HEART Plus Chewable Tablets, ultimately sold to or through veterinarians in the United States.  Novartis Agro K.K., Tokyo ("Novartis Japan") markets and distributes our SOLO STEP CH heartworm test in Japan under an exclusive arrangement.  AgriLabs had the non-exclusive right to sell certain of our bovine vaccines in the United States, Africa and Mexico and has historically generated the majority of our sales of those vaccines in those territories under an agreement which was assigned to and assumed by Elanco in November 2013.  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 Merck Animal Health, represented 9% of our Pro forma LTM revenue.  If Merck Animal Health 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 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.

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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.

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 did not occur as we expected.

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.  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.  For example, we have experienced delays compared to our expectations in our development of products in collaboration with Rapid Diagnostek, Inc.

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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.  A legal dispute leading to an unfavorable ruling or settlement could have significant material adverse consequences on our business.

We may become subject to 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 proceedings 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.

Our stock price has historically experienced high volatility, and could do so in the future, including experiencing a material price decline resulting from a large sale in a short period of time.  In addition, our Public Common Stock has certain transfer restrictions which could reduce trading liquidity from what it otherwise would have been and have other undesired effects. Our recently completed 1-for-10 reverse stock split could also reduce liquidity in our stock.

According to the latest available filings with the SEC of which we are aware, we have one shareholder who controls more than 5% of our shares outstanding.  This shareholder holds approximately 9% of our shares outstanding.  Should  this shareholder or another relatively large shareholder decide to sell a large number of shares in a short period of time, it could lead to an excess supply of our shares available for sale and correspondingly result in a significant decline in our stock price.  For example, we had a shareholder who held over 16% of our shares outstanding as of September 30, 2011 sell all of its holdings in our stock on or before December 7, 2011 – and we believe this contributed to a corresponding decline in our stock price during this period.

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 September 30, 2013, our closing stock price has ranged from a low of $5.18 to a high of $9.54.  Fluctuations in the trading price or liquidity of our Public 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 Public Common Stock include:

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· stock sales by large stockholders or by insiders;

· changes in the outlook for our business;

· our quarterly operating results, including as compared to expected revenue or earnings 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.

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 Federal Net Operating Loss carryforward ("NOL").  In particular, the Amendment prevents the transfer of shares without the approval of our Board of Directors if, as a consequence, an individual, entity or groups of individuals or entities would become a 5-percent holder under Section 382 of the Internal Revenue Code of 1986, as amended, and the related Treasury regulations, and also prevents any existing 5-percent holder from increasing his or her ownership position in the Company without the approval of our Board of Directors.  This may cause certain individuals or entities who may have otherwise been willing and able to bid on our stock to not do so, reducing the class of potential acquirers and trading liquidity from what it otherwise might have been.  The Amendment could also have an adverse impact on the value of our stock if certain buyers who would otherwise have purchased our stock, including buyers who may not be comfortable owning stock with transfer restrictions, do not purchase our stock as a result of the Amendment.  In addition, because some corporate takeovers occur through the acquirer's purchase, in the public market or otherwise, of sufficient shares to give it control of a company, any provision that restricts the transfer of shares can have the effect of preventing a takeover.  The Amendment could discourage or otherwise prevent accumulations of substantial blocks of shares in which our 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.

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:

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· 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 or services 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.

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.  For example, we failed to comply with the net income covenant as of June 30, 2013, for which we obtained a waiver and subsequently negotiated new covenants.  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.

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 USDA, the FDA, the EPA and foreign and other regulatory authorities.  These regulations govern, among other things, the development, testing, manufacturing, labeling, storage, pre-market approval, advertising, promotion and sale of some of our products.  Satisfaction of these requirements can take several years and time needed to satisfy them may vary substantially, based on the type, complexity and novelty of the product.  The decision by a regulatory authority to regulate a currently non-regulated product or product area could significantly impact our revenue and have a corresponding adverse impact on our financial performance and position while we attempt to comply with the new regulation, if such compliance is possible at all.

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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.

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 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.  In addition, we have less than 300 recordholders, which would allow us to terminate voluntarily the registration of our common stock with the SEC and after which we would no longer be eligible to maintain the listing of our Public Common Stock on the Nasdaq Capital Market.

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 Public 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 Public Common Stock, which could severely limit market liquidity of the Public 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.

We have less than 300 recordholders as of our latest information, a fact which would make us eligible to terminate voluntarily the registration of our common stock with the SEC and therefore suspend our reporting obligations with the SEC under the Exchange Act and become a non-reporting company.  If we were to cease reporting with the SEC, we would no longer be eligible to maintain the listing of our common stock on the Nasdaq Stock Market, which we would expect to materially adversely affect the liquidity and market price for our common stock.

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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.             Mine Safety Disclosures

None.

Item 5.             Other Information

None.

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Item 6.             Exhibits

(a) Exhibits

Number                                       Description

10.1* Amendment No. 3 to Supply and License Agreement between Heska Corporation and Intervet Inc., effective as of July 30, 2013.

10.2* Twelfth Amendment to Third Amended and Restated Credit and Security Agreement and Waiver of Default between Heska Corporation, Diamond Animal Health, Inc., Heska Imaging US, LLC and Wells Fargo Bank, National Association, dated August 13, 2013.

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

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HESKA CORPORATION

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:	November 14, 2013	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:	November 14, 2013	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)

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Number                                       Description

10.1* Amendment No. 3 to Supply and License Agreement between Heska Corporation and Intervet Inc., effective as of July 30, 2013.

10.2* Twelfth Amendment to Third Amended and Restated Credit and Security Agreement and Waiver of Default between Heska Corporation, Diamond Animal Health, Inc., Heska Imaging US, LLC and Wells Fargo Bank, National Association, dated August 13, 2013.

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

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EX-10.1

Exhibit 10.1

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 NO 3

TO

SUPPLY AND LICENSE AGREEMENT

This Amendment No. 3 is entered into as of July 30th, 2013 by and between Heska Corporation, a Delaware corporation, having a principal place of business at 3760 Rocky Mountain Avenue, Loveland, CO 80538 ("Heska") and Intervet Inc., d/b/a Merck Animal Health a Delaware corporation, having a place of business at 556 Morris Avenue, Summit, New Jersey 07901-1330 ("Merck").

WHEREAS, Heska and Merck are parties to that certain Supply and License Agreement dated August 1, 2003, by and between Heska and Merck (formerly known as Schering-Plough Animal Health Corporation), as amended on August 31, 2005 and December 7, 2011  ("Original Agreement");

WHEREAS, Heska and Merck desire to amend the Original Agreement to clarify its term;

WHEREAS, capitalized terms used and not otherwise defined herein shall have the respective meanings ascribed thereto in the Original Agreement;

NOW, THEREFORE, in consideration of the mutual covenants set forth in this Amendment No. 3, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1.           Amendment to Original Agreement.  Notwithstanding any provision of the Original Agreement to the contrary, Section 7.1 of the Original Agreement is hereby amended by adding the following sentence to the end of Section 7.l:

“Notwithstanding any provision of this Agreement to the contrary, solely with

respect to the contract year commencing on August 1, 2014 and ending on

July 31, 2015, either Party may provide written notice of its intent not to renew

the term of this Agreement for such contract year and subsequent contract years

 no later than close of business on [***].”

2.           Effect of this Amendment.  This Amendment No. 3 is hereby incorporated by reference into the Original Agreement as if fully set forth therein.  The Original Agreement as amended by this Amendment No. 3 shall continue in full force and effect following execution and delivery hereof and references to the term "Agreement" therein shall include this Amendment No. 3.  In the event of any conflict between the terms and conditions of the Original Agreement and this Amendment No. 3, the terms and conditions of this Amendment No. 3 shall govern and control.

1

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.

IN WITNESS WHEREOF, the Parties have caused this Amendment No. 2 to be executed and delivered by their duly authorized representatives as of the date first above written.

HESKA CORPORATION	INTERVET INC.
	d/b/a Merck Animal Health
By: /s/ Michael J. McGinley	By:           [***]
Name:  Michael J. McGinley	Name:       [***]
Title:  President, Biologicals & Pharmaceuticals	Title:         [***]

[***]

2

EX-10.2

Exhibit 10.2

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.

TWELFTH AMENDMENT TO THIRD AMENDED AND RESTATED

CREDIT AND SECURITY AGREEMENT AND WAIVER OF DEFAULT

THIS AMENDMENT (this “Amendment”), dated August 13, 2013, is entered into by and among WELLS FARGO BANK, NATIONAL ASSOCIATION (“Lender”), and HESKA CORPORATION, a Delaware corporation (“Heska”), Diamond Animal Health, Inc., an Iowa corporation (“Diamond”), and HESKA IMAGING US, LLC,  a Delaware limited liability company (“Heska Imaging”) (each of Heska, Diamond and Heska Imaging may be referred to herein individually as a “Borrower” and collectively as the “Borrowers”).

Recitals

Borrowers Heska and Diamond and Lender are parties to a Third Amended and Restated Credit and Security Agreement dated as of December 30, 2005 (as amended from time to time, the “Credit Agreement”).

Each Borrower has requested that certain amendments be made to the Credit Agreement, including without limitation the addition of Heska Imaging, a newly-acquired subsidiary of Heska, as a Borrower, which amendments Lender is willing to make pursuant to the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows:

1.Defined Terms. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. In addition:

(a)Section 1.1 of the Credit Agreement is amended by adding or amending and restating, as the case may be, the following definitions:

“Bankruptcy Code” means title 11 of the United States Code, as in effect from time to time.

“Book Net Worth” of a Borrower means the aggregate of the common and preferred stockholders' equity in such Borrower, determined in accordance with GAAP, but excluding (a) the non-cash impact of expensing options, restricted stock or other stock-based compensation under APB 25, SFAS 123, SFAS 123R and/or SFAS 148, (b) the non-cash impact of income or expense relating to deferred tax assets and liabilities caused by the use of net loss carry-forwards, in each case after December 31, 2004, and (c) deferred tax assets.

“Borrower” means Heska, Diamond or Heska Imaging, and “Borrowers” means Heska, Diamond and Heska Imaging.

“Borrowing Base” for a Borrower means, at any time the lesser of:

(a)   the Maximum Line; or

(b)   subject to change from time to time in the Lender's sole discretion:

(i)   85% of Eligible Accounts of such Borrower, plus

(ii)   the lesser of (A) the sum of (1) Eligible Inventory of such Borrower consisting of raw materials multiplied by the Raw Materials Advance Rate plus (2) 55% of Eligible Inventory of such Borrower consisting of finished goods, or (B) the difference of (1) $6,500,000 less (2) the aggregate amount of Advances made to all Borrowers other than such Borrower in reliance on Eligible Inventory.

“Capital Lease” means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP.

“EBITDA” means, with respect to any fiscal period, the consolidated net income (or loss), of Borrowers and their Subsidiaries, minus extraordinary gains, interest income, non-operating income and income tax benefits and decreases in any change in LIFO reserves, plus non-cash extraordinary losses, non-cash impact of expensing options, restricted stock or other stock-based compensation under APB 25, SFAS 123, SFAS 123R and/or SFAS 148, Interest Expense, income taxes, depreciation and amortization and increases in any change in LIFO reserves for such period, in each case determined on a consolidated basis in accordance with GAAP.

“Fixed Charge Coverage Ratio” means, with respect to each Borrower and its Subsidiaries for any period, the ratio of (i) EBITDA for such period, plus all management, consulting, monitoring, and advisory fees paid during such period to the extent deducted in the calculation of net income of such Borrower and its Subsidiaries minus (a) Non-Financed Capital Expenditures made (to the extent not already incurred in a prior period) or incurred during such period, (b) cash taxes paid during such period, to the extent greater than zero, and (c) all Restricted Junior Payments consisting of Pass-Through Tax Liabilities, to (ii) Fixed Charges for such period.

“Fixed Charges” means, with respect to any fiscal period and with respect to each Borrower determined on a consolidated basis in accordance with GAAP, the sum, without duplication, of (a) cash Interest Expense paid during such period (other than interest paid-in-kind, amortization of financing fees, and other non-cash Interest Expense), (b) principal payments paid in cash in respect of Indebtedness paid during such period, including cash payments with respect to Capital Leases, but excluding principal payments made with respect to the Revolving Note, (c) all management, consulting, monitoring, and advisory fees

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paid during such period, and (d) all Restricted Junior Payments (other than Pass-Through Tax Liabilities) and other distributions paid in cash during such period.

“Hedge Agreement” means a “swap agreement” as that term is defined in Section 101(53B)(A) of the Bankruptcy Code.

           “Heska Imaging Revolving Note” means the Revolving Note of Heska Imaging and Heska in the form attached as Exhibit A to the Twelfth Amendment to this Agreement.

“Indebtedness” as to any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptances, or other financial products, (c) all obligations of such Person as a lessee under Capital Leases, (d) all obligations or liabilities of others secured by a Lien on any asset of such Person, irrespective of whether such obligation or liability is assumed, (e) all obligations of such Person to pay the deferred purchase price of assets (other than trade payables incurred in the ordinary course of business and repayable in accordance with customary trade practices), (f) all obligations of such Person owing under Hedge Agreements (which amount shall be calculated based on the amount that would be payable by such Person if the Hedge Agreement were terminated on the date of determination), (g) any Prohibited Preferred Stock of such Person, and (h) any obligation of such Person guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted, or sold with recourse) any obligation of any other Person that constitutes Indebtedness under any of clauses (a) through (g) above.  For purposes of this definition, (i) the amount of any Indebtedness represented by a guaranty or other similar instrument shall be the lesser of the principal amount of the obligations guaranteed and still outstanding and the maximum amount for which the guaranteeing Person may be liable pursuant to the terms of the instrument embodying such Indebtedness, and (ii) the amount of any Indebtedness described in clause (d) above shall be the lower of the amount of the obligation and the fair market value of the assets of such Person securing such obligation.

“Interest Expense” means, for any period, the aggregate of the interest expense of Borrowers and their Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP.

“Maturity Date” means December 31, 2015.

“Non-Financed Capital Expenditures” means Capital Expenditures not financed by the seller of the capital asset, by a third party lender or by means of any extension of credit by Lender other than by means of a Revolving Advance.

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           “Pass-Through Tax Liabilities” means the amount of state and federal income tax paid or to be paid by the owner of any Stock in a Borrower on taxable income earned by a Borrower and attributable to such owner of Stock as a result of such Borrower’s “pass-through” tax status, assuming the highest marginal income tax rate for federal and state (for the state or states in which any owner of Stock is liable for income taxes with respect to such income) income tax purposes, after taking into account any deduction for state income taxes in calculating the federal income tax liability and all other deductions, credits, deferrals and other reductions available to such owners of Stock from or through such Borrower.

“Preferred Stock” means, as applied to the Stock of any Person, the Stock of any class or classes (however designated) that is preferred with respect to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Stock of any other class of such Person.

“Prepayment Factor” means zero percent (0.0%).

“Pre-Tax Net Income” for a Borrower means, for any period, pre-tax net income from continuing operations (that is, not including extraordinary items, or gains or losses from unusual items or discontinued operations), in each case for such Borrower for such period, as determined in accordance with GAAP, but excluding (a) the non-cash impact of expensing options, restricted stock or other stock-based compensation under APB 25, SFAS 123, SFAS 123R and/or SFAS 148, and (b) the non-cash impact of income or expense relating to deferred tax assets and liabilities caused by the use of net loss carry-forwards.

“Prohibited Preferred Stock” means any Preferred Stock that by its terms is mandatorily redeemable or subject to any other payment obligation (including any obligation to pay dividends, other than dividends of shares of Preferred Stock of the same class and series payable in kind or dividends of shares of common stock) on or before a date that is less than 1 year after the Maturity Date, or, on or before the date that is less than 1 year after the Maturity Date, is redeemable at the option of the holder thereof for cash or assets or securities (other than distributions in kind of shares of Preferred Stock of the same class and series or of shares of common stock).

“Restricted Junior Payment” means (a) any declaration or payment of any dividend or the making of any other payment or distribution on account of Stock issued by any Borrower (including any payment in connection with any merger or consolidation involving any Borrower) or to the direct or indirect holders of Stock issued by any Borrower in its capacity as such (other than dividends or distributions payable in Stock (other than Prohibited Preferred Stock)) issued by any Borrower, or (b) any purchase, redemption, or other acquisition or retirement 

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for value (including in connection with any merger or consolidation involving any Borrower) of any Stock issued by any Borrower.

“Revolving Note” means the Heska Revolving Note, the Diamond Revolving Note or the Heska Imaging Revolving Note.

“Stock” means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock, or any other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act).

(b)Section 1.1 of the Credit Agreement is amended by deleting the terms Eligible Foreign Accounts, Foreign Accounts Eligibility Period, and FREP Sublimit and all references thereto in their entirety.

2. Revolving Advances.  The second sentence of Section 2.2, is hereby amended to read in its entirety as follows:

              “Lender shall have no obligation to make a Revolving Advance to a Borrower if, after giving effect to such requested Revolving Advance, (a) the sum of the outstanding and unpaid Revolving Advances to such Borrower exceeds such Borrower's Borrowing Base, (b) the sum of the outstanding and unpaid Revolving Advances would exceed the Aggregate Borrowing Base, or (c) the results of a collateral exam conducted pursuant to Section 2.9(b) of this Agreement within sixty (60) days after such Revolving Advance is requested are not satisfactory to Lender.”; and

the first sentence of Section 2.2(a) is hereby amended to read in its entirety as follows:

“(a) If no Revolving Advances are outstanding and no Letter of Credit has been issued for such Borrower, and in the case of Heska Imaging’s initial request for a Revolving Advance, such Borrower shall make each request for a Revolving Advance to Lender before 11:00 a.m. (Denver time) of the day that is at least sixty (60) days prior to the day of the Requested Revolving Advance; otherwise, such Borrower shall make each request for a Revolving Advance to Lender before 11:00 a.m. (Denver time) of the day of the requested Revolving Advance.”

3.Spread. Section 2.7 of the Credit Agreement is hereby amended to read it its entirety as follows:

   “Section 2.7    Spread.  The spread (the “Spread”) means the percentage set forth in the table below opposite the applicable prior-fiscal-year Net Income of the Borrowers, which percentage shall change annually effective as of the first day of the month following the month in which the Borrowers deliver to the Lender their audited financial statements for the prior fiscal year; provided, however, that in no case shall any decrease in the Spread occur during a Default Period:

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Prior Fiscal Year Net Income	Spread
Less than $0	3.75%
Greater than or equal to $0 but less than $2,500,000	3.25%
Greater than or equal to $2,500,000 but less than $5,000,000	2.75%
Greater than or equal to $5,000,000	2.25%”

4.Audit Fees.  Section 2.9(b) of the Credit Agreement is hereby amended to read in its entirety as follows:

“(b)           Audit Fees.  Each Borrower shall pay Lender fees in connection with any collateral exams, audits or inspections conducted by or on behalf of Lender of any Collateral or such Borrower’s operations or business at the rates established from time to time by Lender as its collateral exam fees (which fees are currently $1,000 per day per collateral examiner), together with all actual out-of-pocket costs and expenses incurred in conducting any such collateral examination or inspection; provided, however, that so long as no Default Period exists, Lender will not demand reimbursement for more than:  (i) two such collateral exams in any calendar year during which any Revolving Advances are outstanding or any Letter of Credit has been issued for such Borrower, and (ii) one such collateral exam in any calendar year during which no Revolving Advances are outstanding and no Letter of Credit has been issued for such Borrower.”

5.Foreign Receivables Eligibility Program Fee.  Section 2.9(e) of the Credit Agreement is hereby amended to read in its entirety as follows:

“(e)           Reserved.”

6.Issuance of Letters of Credit.  Section 2.18(a) of the Credit Agreement is hereby amended to read in its entirety as follows:

“(a)           Upon any Borrower's Request the Lender shall issue, from time to time until the Termination Date, one or more documentary or standby letters of credit (each, a "Letter of Credit") for such Borrower's account, provided that:

(i)           The Lender shall have no obligation to issue any Letter of Credit for the benefit of a Borrower if (A) a Default Period exists, (B) the face amount of the Letter of Credit to be issued would exceed the lesser of:

(1)           $200,000 less the Aggregate L/C Amount, or

(2)           such Borrower's Availability, or

6

(C) the results of a collateral exam conducted pursuant to Section 2.9(b) of this Agreement within sixty (60) days after such Letter of Credit is requested are not satisfactory to Lender.

Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered by the applicable Borrower and the Lender, completed in a manner satisfactory to the Lender.  The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but if the terms of any such L/C Application and the terms of this Agreement are inconsistent, the terms hereof shall control.”

7.Reporting.  Section 6.1(d) of the Credit Agreement is hereby amended to read in its entirety as follows:

“(d)           monthly, if there are no Revolving Advances or Letter of Credit outstanding, sales journals, collection reports and credit memos of each Borrower, otherwise weekly (or more frequently if Lender so requires).”

8.Past Due Payables.  Section 6.5 of the Credit Agreement is hereby amended to delete the last sentence thereof in its entirety.

9.Minimum Capital Changed to Minimum Consolidated Book Net Worth.  Section 6.12 of the Credit Agreement is hereby amended to read in its entirety as follows:

“Section 6.12 Minimum Consolidated Book Net Worth.  Heska shall maintain, on a consolidated basis, Book Net Worth:  (a) of not less than $16,000,000 as of the last day of each month during calendar year 2013, and (b) $15,000,000 as of the last day of each month during calendar year 2014.  Effective January 31, 2015, Heska no longer shall be required to test Book Net Worth on a consolidated basis and this Section 6.12 shall become [Reserved].”

10.Minimum Net Income Changed to Minimum Consolidated Pre-Tax Net Income.  Section 6.13 of the Credit Agreement is hereby amended to read in its entirety as follows:

“Section 6.13 Minimum Consolidated Pre-Tax Net Income.  Heska will achieve, on a consolidated basis, during each period described below, Pre-Tax Net Income in an amount not less than the amount set forth opposite such period (amounts in parentheses denote negative numbers):

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Period	Minimum Pre-Tax Net Income
Nine months ending September 30, 2013	($4,600,000)
Twelve months ending December 31, 2013	($4,100,000)
Three months ending March 31, 2014	($1,100,000)
Six months ending June 30, 2014	($1,500,000)
Nine months ending September 30, 2014	($700,000)
Twelve months ending December 31, 2014	$250,000”

Effective January 31, 2015, Heska no longer shall be required to test Pre-Tax Net Income on a consolidated basis and this Section 6.13 shall become [Reserved].”

11.Minimum Liquidity.  Section 6.14 of the Credit Agreement is hereby amended to read in its entirety as follows:

                 “Section 6.14 [Reserved].”

12.Minimum Individual Book Net Worth.  Section 6.15 of the Credit Agreement is hereby amended to read in its entirety as follows:

      “Section 6.15 Minimum Individual Book Net Worth. Each Borrower shall at all times maintain its Book Net Worth, calculated without regard to any Subsidiary or other Affiliate, at an amount greater than $1.00.”

13.Fixed Charge Coverage Ratio.  A new Section 6.16 is hereby added to the Credit Agreement to read in its entirety as follows:

     “Section 6.16 Fixed Charge Coverage Ratio.  Borrowers shall maintain, on a consolidated basis, a Fixed Charge Coverage Ratio, measured monthly on a trailing twelve-month basis at the end of each month, commencing with the month ended January 31, 2015, of not less than 1.50:1.00.”

14.Permitted Liens.  Section 7.1(b) of the Credit Agreement is hereby amended to read in its entirety as follows:

“(b)  Liens in existence on the date hereof, or in the case of Heska Imaging, on the date it became a Borrower, and listed in Schedule 7.1 hereto;”

15.Permitted Indebtedness.  Section 7.2(b) of the Credit Agreement is hereby amended to read in its entirety as follows:

“(b)  indebtedness of such Borrower in existence on the date hereof, or in the case of Heska Imaging, on the date it became a Borrower, and listed in Schedule 7.2 hereto;”

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16.Investments and Subsidiaries.  Section 7.4 of the Credit Agreement is hereby amended by amending clause (a)(v) thereof to read in its entirety as follows:

 “(v)           unless a Default Period exists or would exist immediately after or as a result of any such advance or contribution, advances or contributions by Heska to any Subsidiary that is not a Borrower; provided, however, that (A) both before and after such advance or contribution Heska's Tangible Net Worth must equal or exceed $100,000 and (B) all contributions and advances made in reliance on this subsection (v) shall not exceed $700,000 in the aggregate in any fiscal year that ends prior to January 31, 2015;” and

Further, with respect to Section 7.4(a)(x), Lender hereby confirms its consent to Heska’s investment that resulted in its new Subsidiary, Heska Imaging, without requiring delivery of all items set forth in Section 7.4(b)(1) concurrently with the closing of the investment.

17.Capital Expenditures.  Section 7.10 of the Credit Agreement is hereby amended to read in its entirety as follows:

“Section 7.10 Capital Expenditures.  Borrowers, together with any Affiliates, will not incur or contract to incur, in the aggregate, Capital Expenditures in the aggregate during the fiscal year-to-date period ending on any date described below in excess of the amount set forth opposite such period:

Date	Maximum Capital Expenditures
August 31, 2013	$2,000,000
September 30, 2013	$2,000,000
October 31, 2013	$2,000,000
November 30, 2013	$2,000,000
December 31, 2013	$2,000,000
January 1, 2014	$1,350,000
February 28, 2014	$1,350,000
March 31, 2014	$1,350,000
April 30, 2014	$1,350,000
May 31, 2014	$1,350,000
June 30, 2014	$1,350,000
July 31, 2014	$1,350,000
August 31, 2014	$1,350,000
September 30, 2014	$1,350,000
October 31, 2014	$1,350,000
November 30, 2014	$1,350,000
December 31, 2014	$1,350,000

Effective January 31, 2015, Borrowers no longer shall be required to test Capital Expenditures and this Section 7.10 shall become [Reserved].”

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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.

18.Address for Notices, Etc.  Section 9.5 of the Credit Agreement is hereby amended to read in its entirety as follows:

“Section 9.5  Addresses for Notices, Etc.  Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for under the Loan Documents shall be in writing and shall be (a) personally delivered, (b) sent by first class United States mail, (c) sent by overnight courier of national reputation, or (d) transmitted by telecopy, in each case addressed or telecopied to the party to whom notice is being given at its address or telecopier number as set forth below:

If to the Borrowers:

Heska Corporation

3760 Rocky Mountain Avenue

Loveland, Colorado 80538

Telecopier:  970-619-6003

Attention:  Chief Financial Officer

Diamond Animal Health, Inc.

c/o Heska Corporation

3760 Rocky Mountain Avenue

Loveland, Colorado 80538

Telecopier:  970-619-6003

Attention:  Chief Financial Officer

Heska Imaging US, LLC

c/o Heska Corporation

3760 Rocky Mountain Avenue

Loveland, Colorado 80538

Telecopier:  970-619-6003

Attention:  Chief Financial Officer

If to the Lender:

Wells Fargo Bank, National Association

[***]

[***]

[***]

Telecopier:  [***]

Attention:  [***]

or, as to each party, at such other address or telecopier number as may hereafter be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been given on (a) the date received if personally delivered, (b) when deposited in the mail if delivered by mail, (c) the date sent if sent by overnight courier, or (d) the date of transmission if

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delivered by telecopy, except that notices or requests to the Lender pursuant to any of the provisions of Article II shall not be effective until received by the Lender.

19.Compliance Certificate.  Exhibit B to the Credit Agreement is replaced in its entirety by Exhibit B to this Amendment.

20.Schedule 7.1.  Schedule 7.1 to the Credit Agreement is replaced in its entirety by Exhibit C to this Amendment.

21.Schedule 7.2.  Schedule 7.2 to the Credit Agreement is replaced in its entirety by Exhibit D to this Amendment.

22.No Other Changes.  Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder.

23.Waiver of Default.  Each of Heska and Diamond is in default of  the following provision of the Credit Agreement (the “Existing Default”):

Section/Covenant	Required Performance	Actual Performance
6.13/Minimum Net Income	($1,250,000)	($3,690,000)

Upon the terms and subject to the conditions set forth in this Amendment, Lender hereby waives the Existing Default.  This waiver shall be effective only in this specific instance and for the specific purpose for which it is given, and this waiver shall not entitle any Borrower to any other or further waiver in any similar or other circumstances.

24.Amendment Fee.  Each Borrower agrees, jointly and severally, to pay Lender as of the date hereof a fully earned, non-refundable fee in the amount of $30,000 in consideration of Lender’s execution and delivery of this Amendment.

25.Conditions Precedent.  This Amendment, and the waiver set forth in Paragraph 23 hereof, shall be effective when Lender shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to Lender:

(a)The Heska Imaging Revolving Note.

(b)A Second Amendment to Patent and Trademark Security Agreement.

(c) A Certificate of Authority of Heska Imaging certifying as to the resolutions of its governing body approving Heska Imaging becoming a Borrower and pledging its assets as Collateral.

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(d) A Certificate of Authority of each Borrower certifying as to the resolutions of such Borrower’s board of directors or other governing body, approving the execution and delivery of this Amendment.

(e)Payment of the fee described in paragraph 24.

(f)Such other matters as the Lender may require.

26.Representations and Warranties. The Borrowers hereby represent and warrant to the Lender as follows:

(a)The Borrowers have all requisite power and authority to execute this Amendment and any other agreements or instruments required hereunder, and to perform all of its obligations hereunder and thereunder, and this Amendment and such other agreements and instruments have been duly executed and delivered by the Borrowers and constitute the legal, valid and binding obligation of the Borrowers, enforceable in accordance with their terms.

(b)The execution, delivery and performance by the Borrowers of this Amendment and any other agreements or instruments required hereunder, have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrowers, or the articles of incorporation or by-laws of the Borrowers, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Borrower is a party or by which it or its properties may be bound or affected.

(c)All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date.

27.No Other Waiver.  Except as otherwise provided in Paragraph 23 hereof, the execution of this Amendment and the acceptance of all other agreements and instruments related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or a waiver of any breach, default or event of default under any Loan Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment.

28.Release. The Borrowers hereby absolutely and unconditionally release and forever discharge the Lender, and any and all participants, parent entities, subsidiary entities, affiliated entities, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents, attorneys and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law

12

or equity or upon contract or tort or under any state or federal law or otherwise, which any Borrower has had, now has or has made claim to have against any such Person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown.

29.Costs and Expenses. The Borrowers hereby reaffirm their agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Loan Documents, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrowers specifically agree to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrowers hereby agree that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrowers, make a loan to the Borrowers under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses and the fee required under Paragraph 24 of this Amendment.

30.Miscellaneous. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument.

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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.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above.

HESKA CORPORATION By    /s/ Jason Napolitano                                                           Its   Chief Financial Officer	DIAMOND ANIMAL HEALTH, INC. By     /s/ Jason Napolitano                                                                  Its   Chief Financial Officer
HESKA IMAGING US, LLC By     /s/ Jason Napolitano                                                   Its   Chief Financial Officer                                                      WELLS FARGO BANK, NATIONAL ASSOCIATION By[***]  [***], Authorized Signatory

Exhibit A to Twelfth Amendment

REVOLVING NOTE

(Heska Imaging)

$15,000,000 

Denver, Colorado

August  ____, 2013

           For value received, each of the undersigned, HESKA IMAGING US, LLC, a Delaware limited liability company, and HESKA CORPORATION, a Delaware corporation (collectively, the "Borrowers"), hereby jointly and severally promise to pay on the Termination Date under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in Denver, Colorado, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Fifteen Million Dollars ($15,000,000) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to Heska Imaging under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Third Amended and Restated Credit and Security Agreement dated as of December 30, 2005 (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") by and among the Lender, the Borrowers and Diamond Animal Health, Inc. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement.

           This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Heska Imaging Revolving Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements.

           Borrowers hereby, jointly and severally, agree to pay all costs of collection, including attorneys’ fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced.

           Presentment or other demand for payment, notice of dishonor and protest are expressly waived.

HESKA IMAGING US, LLC     By          Its _________________________________ HESKA CORPORATION By          Its _________________________________

A-1

Exhibit B to Twelfth Amendment

Compliance Certificate

To: ______________________

Wells Fargo Capital Finance

Date: __________________, 20__

Subject: Heska Corporation

Financial Statements

In accordance with our Third Amended and Restated Credit and Security Agreement dated as of December 30, 2005 (the “Credit Agreement”), attached are the financial statements of Heska Corporation (“Heska”) as of and for ________________, 20___ (the “Reporting Date”) and the year-to-date period then ended (the “Current Financials”). All terms used in this certificate have the meanings given in the Credit Agreement.

I certify that, to the best of my knowledge, the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and fairly present the Borrowers’ financial condition and the results of its operations as of the date thereof.

	Events of Default. (Check one):
o	The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit Agreement.
o	The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement and attached hereto is a statement of the facts with respect to thereto.
	I hereby certify to the Lender as follows:
o	The Reporting Date does not mark the end of one of the Borrowers’ fiscal quarters, hence I am completing all paragraphs below except paragraph 4.
o	The Reporting Date marks the end of one of the Borrowers’ fiscal quarters, hence I am completing all paragraphs below.

B-1

Financial Covenants. I further hereby certify as follows:

1.Spread. Pursuant to Section 2.7 of the Credit Agreement, as of the Reporting Date, Heska's prior-fiscal-year Net Income was, on a consolidated basis, $_________________, which determines a base Spread of ______% pursuant to the table below (amounts in parentheses denote negative numbers).

Prior Fiscal Year Net Income	Spread
Less than $0	3.75%
Greater than or equal to $0 but less than $2,500,000	3.25%
Greater than or equal to $2,500,000 but less than $5,000,000	2.75%
Greater than or equal to $5,000,000	2.25%

2.           Minimum Consolidated Book Net Worth. Pursuant to Section 6.12 of the Credit Agreement, as of the Reporting Date, Heska's Book Net Worth was, on a consolidated basis, $_________________, which  o  satisfies  o  does not satisfy the requirement that such amount be (a) not less than $16,000,000 as of the last day of each month during calendar year 2013, and (b) $15,000,000 as of the last day of each month during calendar year 2014.  Effective January 31, 2015, Heska no longer shall be required to test Book Net Worth on a consolidated basis or to complete this Section 2 of the Compliance Certificate.

B-2

3.           Minimum Consolidated Pre-Tax Net Income.  Pursuant to Section 6.13 of the Credit Agreement, as of the Reporting Date, Heska's Pre-Tax Net Income was, on a consolidated basis, $_________________, which o satisfies o does not satisfy the requirement that such amount be no less than $______________ on the Reporting Date, as set forth in the table below:

Period	Minimum Pre-Tax Net Income
Nine months ending September 30, 2013	($4,600,000)
Twelve months ending December 31, 2013	($4,100,000)
Three months ending March 31, 2014	($1,100,000)
Six months ending June 30, 2014	($1,500,000)
Nine months ending September 30, 2014	($700,000)
Twelve months ending December 31, 2014	$250,000

Effective January 31, 2015, Heska no longer shall be required to test Pre-Tax Net Income on a consolidated basis or to complete this Section 3 of the Compliance Certificate.

4.           Minimum Individual Book Net Worth.  Pursuant to Section 6.15 of the Credit Agreement, as of the Reporting Date, Heska's Book Net Worth was $_________________, Diamond's Book Net Worth was $_________________, and Heska Imaging’s Book Net Worth was $_________________, which o satisfies o does not satisfy the requirement that such amounts be no less than $1.00 on the Reporting Date.

5.           Fixed Charge Coverage Ratio.  Pursuant to Section 6.16 of the Credit Agreement, commencing with the month ended January 31, 2015, as of the Reporting Date, Borrowers’ Fixed Charge Coverage ratio was, on a consolidated basis, ___:1.00, which o satisfies o does not satisfy the requirement that such ratio be not less than 1.50:1.00.

6.           Maximum Contributions.  Pursuant to Section 7.4(a)(v) of the Credit Agreement, as of the Reporting Date, Heska's fiscal year-to-date aggregate contributions to non-Borrower Subsidiaries was $_________________, which o satisfies o does not satisfy the requirement that such amounts be no more than $700,000 during any fiscal year that ends prior to January 31, 2015.

B-3

7.           Capital Expenditures.  Pursuant to Section 7.10 of the Credit Agreement, for the fiscal year-to-date period ending on the Reporting Date, Heska's Capital Expenditures were, in the aggregate and on a consolidated basis, $_______________ which o satisfies o does not satisfy the requirement that such amount be not more than $_______________ during the period ending on the Reporting Date, as set forth in the table below and adjusted, if applicable, in accordance with Section 7.10:

Period	Maximum Capital Expenditures
August 31, 2013	$2,000,000
September 30, 2013	$2,000,000
October 31, 2013	$2,000,000
November 30, 2013	$2,000,000
December 31, 2013	$2,000,000
January 1, 2014	$1,350,000
February 28, 2014	$1,350,000
March 31, 2014	$1,350,000
April 30, 2014	$1,350,000
May 31, 2014	$1,350,000
June 30, 2014	$1,350,000
July 31, 2014	$1,350,000
August 31, 2014	$1,350,000
September 30, 2014	$1,350,000
October 31, 2014	$1,350,000
November 30, 2014	$1,350,000
December 31, 2014	$1,350,000

Effective January 31, 2015, Borrowers no longer shall be required to test Capital Expenditures or to complete this Section 7 of the Compliance Certificate.

Attached hereto are all relevant facts in reasonable detail to evidence the computations of the financial covenants referred to above. These computations were made in accordance with GAAP.

HESKA CORPORATION

By _____________________________________

     Its ___________________________________

B-4

Exhibit C to Twelfth Amendment

Schedule 7.1 to Third Amended and Restated Credit and Security Agreement

Permitted Liens

Borrower:  Heska Imaging US, LLC

Creditor	Collateral	Jurisdiction	Filing Date	Filing No.
De Lage Landen Financial Services, Inc.	Various Demo/Inventory per Ex. A to UCC-1	Delaware	06/27/2012	22484907
Esaote North America, Inc.	Various Inventory per UCC-1 Filing	Illinois	9/20/12	17612301

Other Borrowers:

None

C-1

Exhibit D to Twelfth Amendment

Schedule 7.2 to Third Amended and Restated Credit and Security Agreement

Permitted Indebtedness and Guaranties

Indebtedness

Heska Imaging US, LLC

Lender	Final Pmt Due	Type	Amt Due	Assets Secured
De Lage Landen Financial Services, Inc.	6/2017	Loan	$563,890	Demo/Inventory
De Lage Landen Financial Services, Inc.	Demand	ST Loan	$348,000	Specified Inventory
Esaote North America, Inc.	Demand	Loan	$509,372	Specified Inventory

Guaranties

Primary Obligor Amount and Description of Obligation Guaranteed Beneficiary of Guaranty

None

D-1

EX-31.1

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:           November 14, 2013	/s/  Robert B. Grieve
	ROBERT B. GRIEVE
	Chairman of the Board and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

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: November 14, 2013	/s/ Jason A. Napolitano
	JASON A. NAPOLITANO
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

EX-32.1

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, 2013 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:             November 14, 2013	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, 2013 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:             November 14, 2013	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.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Accounting Policies [Abstract]
Outstanding Options	$ 924,643	$ 1,154,275	$ 1,089,779	$ 527,438

XML

Condensed Consolidated Statements of Operations (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Revenue, net:
Core companion animal health	$ 14,515	$ 13,530	$ 46,015	$ 45,811
Other vaccines, pharmaceuticals and products	3,080	3,376	8,820	8,541
Total revenue, net	17,595	16,906	54,835	54,352
Cost of revenue	10,189	10,180	34,607	30,655
Gross profit	7,406	6,726	20,228	23,697
Operating expenses:
Selling and marketing	4,591	4,381	14,554	14,020
Research and development	324	180	1,197	717
General and administrative	2,416	2,192	8,662	7,522
Total operating expenses	7,331	6,753	24,413	22,259
Operating income (loss)	75	(27)	(4,185)	1,438
Interest and other (income) expense, net	93	(16)	134	69
Income (loss) before income taxes	(18)	(11)	(4,319)	1,369
Current tax expense	6	16	71	98
Deferred tax expense (benefit)	(6)	5	(1,553)	457
Total income tax expense (benefit)	0	21	(1,482)	555
Net income (loss)	(18)	(32)	(2,837)	814
Net income (loss) attributable to non-controlling interest	(259)	0	(464)	0
Net income (loss) attributable to Heska Corporation	$ 241	$ (32)	$ (2,373)	$ 814
Basic net income (loss) per share attributable to Heska Corporation	$ 0.04	$ (0.01)	$ (0.41)	$ 0.15
Diluted net income (loss) per share attributable to Heska Corporation	$ 0.04	$ (0.01)	$ (0.41)	$ 0.15
Weighted average outstanding shares used to compute basic net income (loss) per share attributable to Heska Corp.	5,826	5,350	5,727	5,314
Weighted average outstanding shares used to compute diluted net income (loss) per share attributable to Heska Corp	5,865	5,350	5,727	5,503

XML

CAPITAL STOCK

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

CAPITAL STOCK

4. 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 nine months ended September 30, 2012 and 2013.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2013		2012	2013
Risk-free interest rate		0.35%		0.87%	0.37%		0.54%
Expected lives		3.0 years		3.2 years	2.9 years		3.4 years
Expected volatility		55%		44%	64%		51%
Expected dividend yield		4.44%		0%	3.39%		0%

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, 2012					Nine Months Ended September 30, 2013
		Options		Weighted Average Exercise Price			Options	Weighted Average Exercise Price
Outstanding at beginning of period			1,448,675		$	10.425	1,245,161		$	11.054
	Granted at market		137,950		$	9.534	69,330		$	8.046
	Cancelled		(118,330	)	$	11.373	(164,303	)	$	11.330
	Exercised		(223,134	)	$	5.863	(33,297	)	$	6.488
Outstanding at end of period			1,245,161		$	11.054	1,116,891		$	10.963
Exercisable at end of period			971,029		$	12.129	913,447		$	11.714

The estimated fair value of stock options granted during the nine months ended September 30, 2013 and 2012 was computed to be approximately $206 thousand and $167 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 nine months ended September 30, 2013 and 2012 was computed to be approximately $2.96 and $4.19, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2013 and 2012 was approximately $42 thousand and $1.1 million, respectively. The cash proceeds from options exercised during the nine months ended September 30, 2013 and 2012 were approximately $161 thousand and $243 thousand, respectively.

The following table summarizes information about stock options outstanding and exercisable at September 30, 2013, excluding outstanding options to purchase an aggregate of 78.4 fractional shares resulting from the Company's December 2010 1-for-10 reverse stock split with a weighted average remaining contractual life of 1.50 years, a weighted average exercise price of $14.49 and exercise prices ranging from $4.40 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 September 30, 2013		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Number of Options Exercisable at September 30, 2013		Weighted Average Exercise Price
$  2.70 - $  6.76		231,048		5.89	$	5.030		194,647		$	4.973
$  6.77 - $  8.48		180,923		7.68	$	7.547		93,870		$	7.581
$  8.49 - $9.02		239,067		4.87	$	8.687		163,651		$	8.738
$9.03 - $15.90		250,780		2.92	$	13.147		246,206		$	13.192
$15.91 - $31.50		215,073		2.04	$	20.191		215,073		$	20.191
$  2.70 - $31.50		1,116,891		4.55	$	10.963		913,447		$	11.714

As of September 30, 2013, there was approximately $564 thousand of total unrecognized compensation cost related to outstanding stock options. That cost is expected to be recognized over a weighted average period of 1.8 years, with approximately $74 thousand to be recognized in the three months ending December 31, 2013 and all the cost to be recognized as of September 2017, assuming all options vest according to the vesting schedules in place at September 30, 2013. As of September 30, 2013, the aggregate intrinsic value of outstanding options was approximately $213 thousand and the aggregate intrinsic value of exercisable options was approximately $190 thousand.

XML

SUMMARY OF COMPANY STOCK OPTION PLANS (Details) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Summary Of Company Stock Option Plans Details
Outstanding at beginning of period	1,245,161	1,448,675
Outstanding at begining of period, Weighted Average Exercise Price	$ 11.054	$ 10.425
Granted at market, options	69,330	137,950
Granted at market, Weighted Average Exercise Price	$ 8.046	$ 9.534
Cancelled, Options	(164,303)	(118,330)
Cancelled, Weighted Average Excercise Price	11.330	11.373
Exercised, Options	$ (33,297)	$ (223,134)
Exercised, Weighted Average Exercise Price	$ 6.488	$ 5.863
Outstanding at end of period, Options	$ 1,116,891	$ 1,245,161
Outstanding at end of period, Weighted Average Exercise Price	$ 10.963	$ 11.054
Exercisable at end of period, Options	913,447	971,029
Exercisable at end of period, Weighted Average Exercise Price	$ 11.714	$ 12.129

XML

INVENTORIES (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Inventories Details
Raw materials	$ 5,550	$ 5,275
Work in process	3,593	3,342
Finished goods	6,344	4,671
Allowance for excess or obsolete inventory	1,918	805
Total Inventories	$ 13,569	$ 12,483

XML

SEGMENT REPORTING (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Total revenue	$ 17,595	$ 16,906	$ 54,835	$ 54,352
Operating income (loss)	75	(27)	(4,185)	1,438
Interest expense	82	29	229	88
Total assets	90,433	62,978	90,433	62,978	66,826
Net assets	46,468	48,371	46,468	48,371
Capital expenditures	536	363	(1,270)	(905)
Depreciation and amortization	628	410	1,715	1,271
CCA
Total revenue	14,515	13,530	46,015	45,811
Operating income (loss)	(374)	(126)	(4,565)	883
Interest expense	80	21	208	68
Total assets	78,419	51,194	78,419	51,194
Net assets	37,217	39,286	37,217	39,286
Capital expenditures	105	194	466	429
Depreciation and amortization	417	213	1,113	622
OVP
Total revenue	3,080	3,376	8,820	8,541
Operating income (loss)	449	99	380	555
Interest expense	2	8	21	20
Total assets	12,014	11,784	12,014	11,784
Net assets	9,251	9,085	9,251	9,085
Capital expenditures	431	169	804	476
Depreciation and amortization	$ 209	$ 197	$ 602	$ 649

XML

CAPITAL STOCK (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Notes to Financial Statements
Fair Value Of Stock Options Granted	$ 206	$ 167
Weighted Average Fair Value of Options	$ 2.96	$ 4.19
Intrinsic Value of Options Exercised	42	1,100
Cash Proceeds from Options Exercised	161	243
Fractional Shares of Outstanding Options	$ 78.4
Weighted Average Reamining Contractual Life	$ 1.50
Weighted Average Exercise Price	$ 14.49
Exercise Price Range Low	$ 4.40
Exercise Price Range High	$ 31.50
Unrecognized Compensation Costs of Options	564
Weighted Average Period of Unrecognized Cost	1.8
Option Compensation Costs to be Recognized this Year	74
Aggregate Intrinsic Value of Outstanding Options	213
Aggregate Intrinsic Value of Exercisable Options	$ 190

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STOCK OPTIONS OUTSTANDING (Details) (USD $)	Sep. 30, 2013	Dec. 31, 2012	Dec. 31, 2011
Stock options Outstanding		1,245,161	1,448,675
Weighted Average Exercise Price on Outstanding Options	$ 11.714	$ 12.129
Stock Options Exercisable		$ 11.054	$ 10.425
Weighted Average Exercise Price on Exercisable Options	$ 10.963	$ 11.054
$ 2.70 - $ 6.76
Stock options Outstanding	231,048
Average Remaining Contractual Life in Years	$ 5.89
Weighted Average Exercise Price on Outstanding Options	$ 5.034
Stock Options Exercisable	$ 194,647
Weighted Average Exercise Price on Exercisable Options	$ 4.973
$ 6.77 - $ 8.48
Stock options Outstanding	180,923
Average Remaining Contractual Life in Years	$ 7.68
Weighted Average Exercise Price on Outstanding Options	$ 7.547
Stock Options Exercisable	$ 93,870
Weighted Average Exercise Price on Exercisable Options	$ 7.581
$ 8.49 - $ 9.02
Stock options Outstanding	239,067
Average Remaining Contractual Life in Years	$ 4.87
Weighted Average Exercise Price on Outstanding Options	$ 8.687
Stock Options Exercisable	$ 163,651
Weighted Average Exercise Price on Exercisable Options	$ 8.738
$ 9.03 - $ 15.90
Stock options Outstanding	250,780
Average Remaining Contractual Life in Years	$ 2.92
Weighted Average Exercise Price on Outstanding Options	$ 13.147
Stock Options Exercisable	$ 246,206
Weighted Average Exercise Price on Exercisable Options	$ 13,192
$ 15.91 - $ 31.50
Stock options Outstanding	215,073
Average Remaining Contractual Life in Years	$ 2.04
Weighted Average Exercise Price on Outstanding Options	$ 20.191
Stock Options Exercisable	$ 215,073
Weighted Average Exercise Price on Exercisable Options	$ 20.191
$ 2.70 - $31.50
Stock options Outstanding	1,116,891
Average Remaining Contractual Life in Years	$ 4.55
Weighted Average Exercise Price on Outstanding Options	$ 10.963
Stock Options Exercisable	$ 913,447
Weighted Average Exercise Price on Exercisable Options	$ 11.714

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Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)	$ (2,837)	$ 814
Depreciation and amortization	1,715	1,271
Deferred tax expense (benefit)	(1,553)	457
Stock-based compensation	315	285
Unrealized (gain)/loss on foreign currency translation	13	(34)
Accounts receivable	3,896	(859)
Inventories	(1,975)	(897)
Other current assets	(108)	(515)
Other non-current assets	0	0
Accounts payable	(1,545)	677
Accrued liabilities	935	68
Deferred revenue and other liabilities	(116)	(250)
Net cash provided by (used in) operating activities	(1,260)	1,017
CASH FLOWS FROM PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Investment in subsidiary	(3,019)	0
Purchase of property and equipment	(1,270)	(905)
Proceeds from disposition of property and equipment	5,020	0
Net cash provided by (used in) investing activities	731	(905)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock	254	307
Proceeds from (repayments of) line of credit borrowings, net	1,728	0
Proceeds from (repayments of) debt, net	(893)	0
Dividends to shareholders	0	(1,066)
Net cash provided by (used in) financing activities	1,089	(759)
EFFECT OF EXCHANGE RATE CHANGES ON CASH	0	32
INCREASE IN CASH AND CASH EQUIVALENTS	560	(615)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	5,784	6,332
CASH AND CASH EQUIVALENTS, END OF PERIOD	6,344	5,717
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Dividends payable	0	536
Cash paid for interest	61	68
Cash paid for income taxes	0	0
Non-cash transfer of inventory to property and equipment	2,363	982
Accretion of non-controlling interest	$ 1,000	$ 0

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 September 30, 2013, the condensed consolidated statements of operations for the three months and nine months ended September 30, 2012 and 2013, the condensed consolidated statements of comprehensive income for the three months and nine months ended September 30, 2012 and 2013 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2012 and 2013 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, 2012, included in the Company's Annual Report on Form 10-K filed with the SEC on March 14, 2013.

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, in determining the need for, and the amount of, a valuation allowance on certain deferred tax assets and in determining the need for, and the amount of, an accrued liability for future payments related to minimum purchase obligations the Company may make in order to maintain certain product rights.

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, 2012			September 30, 2013
Raw materials	$	5,275		$	5,550
Work in process		3,342			3,593
Finished goods		4,671			6,344
Allowance for excess or obsolete inventory		(805	)		(1,918	)
	$	12,483		$	13,569

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 months ended September 30, 2013 and nine months ended September 30, 2012, the Company reported net income attributable to Heska Corporation 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 other than options to purchase fractional shares that were anti-dilutive for the three months ended September 30, 2013 and nine months ended September 30, 2012, and therefore excluded, were outstanding options to purchase 924,643 and 527,438 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 months ended September 30, 2013 and nine months ended September 30, 2012. For the nine months ended September 30, 2013 and three months ended September 30, 2012, the Company reported a net loss attributable to Heska Corporation and therefore all common stock equivalent securities would be anti-dilutive and were not included in the diluted earnings per share calculation for the period. Common stock equivalent securities other than options to purchase fractional shares that were anti-dilutive for the nine months ended September 30, 2013 and three months ended September 30, 2012, and therefore excluded, were outstanding options to purchase 1,089,779 and 1,154,275 shares of common stock, respectively. These securities are anti-dilutive due to the Company’s net loss attributable to Heska Corporation for the nine months ended September 30, 2013 and the three months ended September 30, 2012.

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SEGMENT REPORTING

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

SEGMENT REPORTING

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
Nine Months Ended September 30, 2012:
Total  revenue	$	45,811		$	8,541	$	54,352
Operating income (loss)		883			555		1,438
Interest expense		68			20		88
Total assets		51,194			11,784		62,978
Net assets		39,286			9,085		48,371
Capital expenditures		429			476		905
Depreciation and amortization		622			649		1,271
Nine Months Ended September 30, 2013:
Total  revenue	$	46,015		$	8,820	$	54,835
Operating income (loss)		(4,565	)		380		(4,185	)
Interest expense		208			21		229
Total assets		78,419			12,014		90,433
Net assets		37,217			9,251		46,468
Capital expenditures		466			804		1,270
Depreciation and amortization		1,113			602		1,715

	Core Companion Animal Health				Other Vaccines, Pharmaceuticals and Products	Total
Three Months Ended September 30, 2012:
Total revenue	$	13,530		$	3,376	$	16,906
Operating income (loss)		(126	)		99		(27	)
Interest expense		21			8		29
Total assets		51,194			11,784		62,978
Net assets		39,286			9,085		48,371
Capital expenditures		194			169		363
Depreciation and amortization		213			197		410
Three Months Ended September 30, 2013:
Total revenue	$	14,515		$	3,080	$	17,595
Operating income (loss)		(374	)		449		75
Interest expense		80			2		82
Total assets		78,419			12,014		90,433
Net assets		37,217			9,251		46,468
Capital expenditures		105			431		536
Depreciation and amortization		417			209		626

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ACQUISITION

9 Months Ended

Sep. 30, 2013

Business Combinations [Abstract]

Acquisition

3. ACQUISITION

Cuattro Veterinary USA, LLC

On February 24, 2013, the Company acquired a 54.6% interest in Cuattro Veterinary USA, LLC

("Cuattro Vet USA") for approximately $7.6 million in cash and stock, including more than $4 million in cash (the "Acquisition"). Immediately following and as a result of the transaction, former Cuattro Vet USA unit holders owned approximately 7.2% of the Company's Public Common Stock. The remaining minority position (45.4%) in Cuattro Vet USA is subject to purchase by Heska under performance-based puts and calls following calendar year 2015, 2016 and 2017. Since the exercise of any put option is out of the Company’s control, authoritative guidance requires the non-controlling interest, which includes the value of the put option, to be displayed outside of the equity section of the Company’s consolidated balance sheet. Should Heska undergo a change in control, as defined, prior to the end of 2017, Cuattro Vet USA minority unit holders will be entitled to sell their Cuattro Vet USA units to Heska at the highest call value they could have otherwise obtained. The Company's position in Cuattro Vet USA is subject to premium repurchase or discounted sale under calls and puts expiring 18 months following the closing of the transaction.

Cuattro Vet USA was subsequently renamed Heska Imaging US, LLC ("Heska Imaging") and markets, sells and supports digital radiography and ultrasound products along with embedded software and support, data hosting and other services.

Shawna M. Wilson, Clint Roth, DVM, Steven M. Asakowicz, Rodney A. Lippincott, Kevin S. Wilson and Cuattro, LLC own approximately 29.75%, 8.39%, 4.09%, 3.07%, 0.05% and 0.05% of Heska Imaging, respectively. Kevin S. Wilson is the President and Chief Operating Officer of the Company and the spouse of Shawna M. Wilson. Steven M. Asakowicz serves as Executive Vice President, Companion Animal Health Sales for the Company. Rodney A. Lippincott serves as Executive Vice President, Companion Animal Health Sales for the Company. Mr. Wilson, Mrs. Wilson and trusts for their children and family own a 100% interest in Cuattro, LLC.

The aggregate position in Heska Imaging of the unit holders who hold the 45.4% of Heska Imaging that Heska Corporation does not own (the “Put Value”) is being accreted to its estimated redemption value in accordance with Heska Imaging’s Operating Agreement. The adjustment to increase or decrease the Put Value to its expected redemption value each reporting period is recorded to retained earnings in accordance with United States Generally Accepted Accounting Principles.

The Company accounted for the acquisition pursuant to ASC No. 805, "Business Combinations." Accordingly, it recorded assets acquired, liabilities assumed and non-controlling interests at their fair values. The following summarizes the aggregate consideration paid by the Company and the allocation of the purchase price based on current estimates as the Company continues to gather information to evaluate the appropriate accounting result (in thousands):

Consideration
	Cash		$	4,073
	Stock			3,571
		Total	$	7,644

Inventories		$	1,466
Note from Cuattro Veterinary, LLC, due March 15, 2016			1,360
Other tangible assets			1,278
Intangible assets			688
Goodwill			19,994
Notes payable and other borrowings			(1,527	)
Accounts payable			(1,424	)
Other assumed liabilities			(2,399	)
		$	19,436
Non-controlling interest			(11,792	)
	Total	$	7,644

Intangible assets and their amortization periods are as follows:

	Useful Life (in years)		Fair Value
Trade name		2.75	$	688
			$	688

Cuattro Vet USA generated net revenue of $6.7 million and net loss of $1.0 million, inclusive of net loss of $464 thousand attributable to non-controlling interest, for the period from February 24, 2013 to September 30, 2013. The following unaudited pro forma financial information presents the combined results of the Company and Cuattro Vet USA as if the Acquisition had closed on January 1, 2012.

		Nine Months Ended September 30,
		2012	2013
Revenue, net	$	59,308	$	55,735
Net income (loss) attributable to Heska Corporation		663		(2,830	)
Basic earnings (loss) per share attributable to Heska Corporation	$	0.12	$	(0.49	)
Diluted earnings (loss) per share attributable to Heska Corporation		0.11		(0.49	)

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Statement of Financial Position [Abstract]
Accounts receivable, net of allowance for doubtful accounts	$ 212	$ 155
Preferred stock at par value	$ 0.01	$ 0.01
Preferred stock shares authorized	2,500	2,500
Common stock at par value	$ 0.01	$ 0.01
Common stock shares authorized	7,500	7,500
Public common stock at par value	$ 0.01	$ 0.01
Public common stock shares authorized	7,500	7,500
Public common stock shares issued	58	54
Public common stock shares outstanding	58	54

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ACQUISITION (Tables)

9 Months Ended

Sep. 30, 2013

Business Combinations [Abstract]

Aggregate consideration paid by the company

Consideration
	Cash		$	4,073
	Stock			3,571
		Total	$	7,644

Inventories		$	1,466
Note from Cuattro Veterinary, LLC, due March 15, 2016			1,360
Other tangible assets			1,278
Intangible assets			688
Goodwill			19,994
Notes payable and other borrowings			(1,527	)
Accounts payable			(1,424	)
Other assumed liabilities			(2,399	)
		$	19,436
Non-controlling interest			(11,792	)
	Total	$	7,644

Intangible asset amortization periods

Intangible assets and their amortization periods are as follows:

	Useful Life (in years)		Fair Value
Trade name		2.75	$	688
			$	688

Pro forma financial information

		Nine Months Ended September 30,
		2012	2013
Revenue, net	$	59,308	$	55,735
Net income (loss) attributable to Heska Corporation		663		(2,830	)
Basic earnings (loss) per share attributable to Heska Corporation	$	0.12	$	(0.49	)
Diluted earnings (loss) per share attributable to Heska Corporation		0.11		(0.49	)

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Condensed Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Income Statement [Abstract]
Net Income (loss)	$ (18)	$ (32)	$ (2,837)	$ 814
Other comprehensive income (expense):
Foreign currency translation	114	38	20	3
Minimum pension liability	0	0	0	0
Unrealized gain on available for sale investments	0	0	13	0
Comprehensive income (loss)	96	6	(2,804)	817
Comprehensive income (loss) attributable to Non-controlling interest	(259)	0	(464)	0
Comprehensive income (loss) attributable to Heska Corporation	$ 355	$ 6	$ (2,340)	$ 817

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 6,344	$ 5,784
Accounts receivable, net of allowance for doubtful accounts of $155 and $212, respectively	7,662	11,044
Inventories, net	13,569	12,483
Deferred tax asset, current	404	1,130
Other current assets	1,466	2,514
Total current assets	29,445	32,955
Property and equipment, net	8,444	6,005
Note receivable-related party	1,657	0
Goodwill and other intangible assets	21,619	1,120
Deferred tax asset, net of current portion	29,056	26,746
Other long-term assets	212	0
Total assets	90,433	66,826
Current liabilities:
Accounts payable	5,177	5,298
Accrued liabilities	5,301	4,132
Accrued compensation	0	0
Current portion of deferred revenue	3,664	2,407
Line of credit	4,281	2,552
Other short-term borrowings, including current portion of LT debt	232	0
Total current liabilities	18,655	14,389
Long-term note payable, net of current portion	402	0
Deferred revenue, net of current portion, and other	9,372	3,575
Total liabilities	28,429	17,964
Non-Controlling Interest	13,105	0
Public Common Stock subject to redemption	2,431	0
Stockholders' equity:
Preferred stock, $.01 par value, 2,500,000 shares authorized; none issued or outstanding	0	0
Common stock, $.01 par value, 7,500,000 shares authorized; none issued and outstanding	0	0
Public common stock, $.01 par value, 7,500,000 shares authorized; 5,372,336 and 5,835,603 shares issued and outstanding, respectively	58	54
Additional paid-in capital	218,949	218,544
Accumulated other comprehensive income	330	296
Accumulated deficit	(172,869)	(170,032)
Total stockholders' equity	46,468	48,862
Total liabilities and stockholders' equity	$ 90,433	$ 66,826

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FAIR VALUE OF EACH OPTION GRANT (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Fair Value Of Each Option Grant Details
Risk-free interest rate	87.00%	35.00%	54.00%	37.00%
Expected lives, in years	3.2	3.0	3.4	2.9
Expected volatility	44.00%	55.00%	51.00%	64.00%
Expected dividend yield	0.00%	444.00%	0.00%	339.00%

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

Inventories

Inventories, net consist of the following (in thousands):

	December 31, 2012			September 30, 2013
Raw materials	$	5,275		$	5,550
Work in process		3,342			3,593
Finished goods		4,671			6,344
Allowance for excess or obsolete inventory		(805	)		(1,918	)
	$	12,483		$	13,569

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SEGMENT REPORTING (Tables)

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Segment Reporting

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
Nine Months Ended September 30, 2012:
Total  revenue	$	45,811		$	8,541	$	54,352
Operating income (loss)		883			555		1,438
Interest expense		68			20		88
Total assets		51,194			11,784		62,978
Net assets		39,286			9,085		48,371
Capital expenditures		429			476		905
Depreciation and amortization		622			649		1,271
Nine Months Ended September 30, 2013:
Total  revenue	$	46,015		$	8,820	$	54,835
Operating income (loss)		(4,565	)		380		(4,185	)
Interest expense		208			21		229
Total assets		78,419			12,014		90,433
Net assets		37,217			9,251		46,468
Capital expenditures		466			804		1,270
Depreciation and amortization		1,113			602		1,715

	Core Companion Animal Health				Other Vaccines, Pharmaceuticals and Products	Total
Three Months Ended September 30, 2012:
Total revenue	$	13,530		$	3,376	$	16,906
Operating income (loss)		(126	)		99		(27	)
Interest expense		21			8		29
Total assets		51,194			11,784		62,978
Net assets		39,286			9,085		48,371
Capital expenditures		194			169		363
Depreciation and amortization		213			197		410
Three Months Ended September 30, 2013:
Total revenue	$	14,515		$	3,080	$	17,595
Operating income (loss)		(374	)		449		75
Interest expense		80			2		82
Total assets		78,419			12,014		90,433
Net assets		37,217			9,251		46,468
Capital expenditures		105			431		536
Depreciation and amortization		417			209		626

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

Basis of Presentation

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 September 30, 2013, the condensed consolidated statements of operations for the three months and nine months ended September 30, 2012 and 2013, the condensed consolidated statements of comprehensive income for the three months and nine months ended September 30, 2012 and 2013 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2012 and 2013 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, 2012, included in the Company's Annual Report on Form 10-K filed with the SEC on March 14, 2013.

Use of Estimates

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, in determining the need for, and the amount of, a valuation allowance on certain deferred tax assets and in determining the need for, and the amount of, an accrued liability for future payments related to minimum purchase obligations the Company may make in order to maintain certain product rights.

Inventories

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, 2012			September 30, 2013
Raw materials	$	5,275		$	5,550
Work in process		3,342			3,593
Finished goods		4,671			6,344
Allowance for excess or obsolete inventory		(805	)		(1,918	)
	$	12,483		$	13,569

Basic and Diluted Net Income Per Share

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 months ended September 30, 2013 and nine months ended September 30, 2012, the Company reported net income attributable to Heska Corporation 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 other than options to purchase fractional shares that were anti-dilutive for the three months ended September 30, 2013 and nine months ended September 30, 2012, and therefore excluded, were outstanding options to purchase 924,643 and 527,438 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 months ended September 30, 2013 and nine months ended September 30, 2012. For the nine months ended September 30, 2013 and three months ended September 30, 2012, the Company reported a net loss attributable to Heska Corporation and therefore all common stock equivalent securities would be anti-dilutive and were not included in the diluted earnings per share calculation for the period. Common stock equivalent securities other than options to purchase fractional shares that were anti-dilutive for the nine months ended September 30, 2013 and three months ended September 30, 2012, and therefore excluded, were outstanding options to purchase 1,089,779 and 1,154,275 shares of common stock, respectively. These securities are anti-dilutive due to the Company’s net loss attributable to Heska Corporation for the nine months ended September 30, 2013 and the three months ended September 30, 2012.

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ORGANIZATION AND BUSINESS

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

ORGANIZATION AND BUSINESS

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.

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Aggregate consideration paid, assets and liabilities acquired (Details) (Cuattro Veterinary USA, LLC, USD $) In Thousands, unless otherwise specified	Feb. 24, 2013
Cuattro Veterinary USA, LLC
Consideration
Cash	$ 4,073
Stock	3,571
Total	7,644
Acquired assets and liabilities
Inventories	1,466
Note from Cuattro Veterinary, LLC, due March 15, 2016	1,360
Other tangible assets	1,278
Intangible assets	688
Goodwill	19,994
Notes payable and other borrowings	(1,527)
Accounts payable	(1,424)
Other assumed liabilities	(2,399)
Total Assets and Liabilities Assumed	19,436
Non-controlling interest	(11,792)
Total	$ 7,644

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CAPITAL STOCK (Tables)

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Fair Value of each Option Grant

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2013		2012	2013
Risk-free interest rate		0.35%		0.87%	0.37%		0.54%
Expected lives		3.0 years		3.2 years	2.9 years		3.4 years
Expected volatility		55%		44%	64%		51%
Expected dividend yield		4.44%		0%	3.39%		0%

Summary of Company Stock Option Plans

		Year Ended December 31, 2012					Nine Months Ended September 30, 2013
		Options		Weighted Average Exercise Price			Options	Weighted Average Exercise Price
Outstanding at beginning of period			1,448,675		$	10.425	1,245,161		$	11.054
	Granted at market		137,950		$	9.534	69,330		$	8.046
	Cancelled		(118,330	)	$	11.373	(164,303	)	$	11.330
	Exercised		(223,134	)	$	5.863	(33,297	)	$	6.488
Outstanding at end of period			1,245,161		$	11.054	1,116,891		$	10.963
Exercisable at end of period			971,029		$	12.129	913,447		$	11.714

Stock Options Outstanding and Exercisable

	Options Outstanding						Options Exercisable
Exercise Prices	Number of Options Outstanding at September 30, 2013		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Number of Options Exercisable at September 30, 2013		Weighted Average Exercise Price
$  2.70 - $  6.76		231,048		5.89	$	5.034		194,647		$	4.973
$  6.77 - $  8.48		180,923		7.68	$	7.547		93,870		$	7.581
$  8.49 - $9.02		239,067		4.87	$	8.687		163,651		$	8.738
$9.03 - $15.90		250,780		2.92	$	13.147		246,206		$	13.192
$15.91 - $31.50		215,073		2.04	$	20.191		215,073		$	20.191
$  2.70 - $31.50		1,116,891		4.55	$	10.963		913,447		$	11.714

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Acquisition (Details) (Cuattro Veterinary USA, LLC, USD $) In Thousands, unless otherwise specified	7 Months Ended
	Sep. 30, 2013	Feb. 24, 2013
Cuattro Veterinary USA, LLC
Interest acquired in combination		54.60%
Cost of business acquisition in cash and stock		$ 7,644
Minimum cash paid for acquisition		4,073
Following acquisition, former Cuattro Vet unit holders retained Public Common Stock		7.20%
Remaining minority position of Cuattro Vet subject to purchase		45.40%
Cuattro contributed net revenue over period	6,700
Cuattro contributed net income	$ (1,000)
Shawna M. Wilson		2975.00%
Clint Roth, DVM		839.00%
Steven M. Asakowicz		409.00%
Rodney A. Lippincott		307.00%
Kevin S. Wilson		5.00%
Cuattro, LLC		5.00%

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Acquisition - Intangible asset amortization periods (Details) (USD $)	9 Months Ended
	Sep. 30, 2013
Fair Value	$ 688
Trade Name
Useful Life (in years)	2 years 9 months
Fair Value	$ 688

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Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Nov. 13, 2013
Document And Entity Information
Entity Registrant Name	Heska Corp
Entity Central Index Key	0001038133
Document Type	10-Q
Document Period End Date	Sep. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		5,837,403
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2013

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Acquisition - Pro forma financial information (Details) (USD $)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Business Combinations [Abstract]
Revenue, net	$ 55,735	$ 59,308
Net income (loss) attributable to Heska Corporation	$ (2,830)	$ 663
Basic earnings (loss) per share attributable to Heska Corporation	$ (0.49)	$ 0.12
Diluted earnings (loss) per share attributable to Heska Corporation	$ (0.49)	$ 0.11