
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~March 3031, ~~2022~~2023


☐			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 No.)
3760 Rocky Mountain Avenue Loveland, Colorado			80538
(Address of principal executive offices)			(Zip Code)
Registrant's telephone number, including area code: (970) 493-7272

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock, $0.01 par value	HSKA	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large Accelerated filer ☒			Accelerated filer ☐
Non-accelerated filer ☐			Smaller Reporting Company ☐
			Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

10,~~825~~913,~~586~~754 shares of the Registrant's Public Common Stock, $0.01 par value, were outstanding at ~~November~~April 426, ~~2022~~2023.

TABLE OF CONTENTS

			Page
PART I - FINANCIAL INFORMATION
	Item 1.	Financial Statements	1
		Condensed Consolidated Balance Sheets	1
		Condensed Consolidated Statements of Loss	2
		Condensed Consolidated Statements of Comprehensive Loss	3
		Condensed Consolidated Statements of Stockholders' Equity	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6
		Note 1, Operations and Summary of Significant Accounting Policies	6
		Note 1, Business Overview and Summary of Significant Accounting Policies	6
		Note 2, Revenue	10
		Note 3, Acquisitions and Related Party Items	12
		Note 4, Investments in Unconsolidated Affiliates	2021
		Note 5, Income Taxes	2122
		Note 6, Leases	2223
		Note 7, Earnings Per Share	2324
		Note 8, Goodwill and Other Intangibles	2425
		Note 9, Property and Equipment, Net	2526
		Note 10, Inventories	26
		Note 11, Accrued Liabilities	2627
		Note 12, Capital Stock	2627
		Note 13, Accumulated Other Comprehensive Income	27
		Note 13, Accumulated Other Comprehensive Loss	28
		Note 14, Commitments and Contingencies	2728
		Note 15, Interest and Other (Income) Expense, Net	2829
		Note 16, Convertible Notes	2829
		Note 17, Notes Receivable	3031
		Note 18, Segment Reporting	3132
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3334
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4745
	Item 4.	Controls and Procedures	4745
PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings	4846
	Item 1A.	Risk Factors	4846
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 6.	Exhibits	48
		Signatures	51

HESKA, scil, ALLERCEPT, HemaTrue, Solo Step, Element DC, Element HT5, Element POC, Element i, Element i+, Element COAG, Element COAG+, Element DC5X and Element RC, Element RCX, Element ~~RCX3~~RC3X, Element AIM, and scil vet, scil academy, scil vIP, scil ABC are registered trademarks of Heska Corporation ~~and/or its affiliates~~. DRI-CHEM is a registered trademark of FUJIFILM Corporation. TRI-HEART is a registered trademark of Intervet Inc., d/b/a Merck Animal Health, formerly known as Schering-Plough Animal Health Corporation ~~("Merck Animal Health")~~, which is a unit of Merck & Co., Inc., in the United States and is a registered trademark of Heska Corporation in other countries. Nu.Q is a registered trademark of Belgian Volition SPRL. This quarterly report on Form 10-Q also refers to trademarks and trade names of other organizations.

-i-

Our Certificate of Incorporation, as amended (the “Charter”), authorizes three classes of stock: Original Common Stock, Public Common Stock, and Preferred Stock. Pursuant to an NOL Protective Amendment to the Charter adopted in 2010, all shares of Original Common Stock then outstanding were automatically reclassified into shares of Public Common Stock. Our Public Common Stock trades on the Nasdaq Stock Market LLC. In this Quarterly Report on Form 10-Q, references to “Public Common Stock” and “Common Stock” are references to our Public Common Stock, unless the context otherwise requires.

-ii-

Statement Regarding Forward Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For this purpose, any statements contained herein that are not statements of current or historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "scheduled," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results could differ materially from those expressed or forecasted in any such forward-looking statements as a result of certain factors. Such factors are set forth in "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022, as well as in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q and include, among others, risks and uncertainties related to:

•the ~~impact~~effect of the ~~COVID-19~~Merger ~~pandemic~~Agreement and the pendency of the Merger (each as defined below) on our business, results of operations, ~~and~~ financial condition; and stock price;

•the ~~success~~timeline offor ~~third~~completing ~~parties~~the inMerger, ~~marketing~~including ~~our~~any ~~products~~significant delay or failure to complete the Merger;

•the effect of global economic conditions, including inflationary pressures and lingering economic effects of the COVID-19 pandemic;

•the success of third parties in marketing our products;

•our reliance on third party suppliers and collaborative partners;

•our dependence on key personnel and increased human capital costs;

•our dependence upon a number of significant customers;

•competitive conditions in our industry;

•our dependence on third parties to successfully develop new products;;

•our ability to market and sell our products successfully;

•expansion of our international operations;

•the impact of regulation on our business;

•the success of our acquisitions and other strategic development opportunities;

•our ability to develop, commercialize and gain market acceptance of our products;;

•cybersecurity incidents and related disruptions and our ability to protect our stakeholders’ privacy;

•product returns or liabilities;

•volatility of our stock price;

•our ability to service our convertible notes and comply with their terms.

Readers are cautioned not to place undue reliance on these forward-looking statements.

Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect the passage of time, any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based, except as otherwise required by applicable securities laws. These forward-looking statements apply only as of the date of this Form 10-Q.

-iii-

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

	September 30,		December 31,
	March 31,		December 31,
	2022		2021
	2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	~~161~~125,~~074~~209	$	~~223~~156,~~574~~618
Accounts receivable, net of allowance for losses of $1,130 and $874, respectively	26,415		27,995
Accounts receivable, net of allowance for losses of $1,190 and $1,129, respectively	26,054		29,493
Inventories	5764,~~477~~183		4960,~~361~~050
Net investment in leases, current, net of allowance for losses of $149 and $137, respectively	6,898		6,175
Net investment in leases, current, net of allowance for losses of $190 and $182, respectively	8,173		7,433
Prepaid expenses	56,~~269~~239		5,~~244~~514
Other current assets	5,681		7,206
Related party convertible note receivable, net	2,312		—
Total current assets	262,814		319,555
Other current assets	6,451		5,926
Property and equipment, net	31,059		33,413
Total current assets	238,621		265,034
Operating lease right-of-use assets	6,810		5,198
Property and equipment, net	55,030		32,171
Goodwill	129,960		118,826
Operating lease right-of-use assets	13,101		6,897
Other intangible assets, net	60,435		56,705
Goodwill	145,403		135,918
Deferred tax asset, net	23,763		19,429
Other intangible assets, net	65,813		62,393
Net investment in leases, non-current	23,782		20,128
Deferred tax asset, net	31,483		23,684
Investments in unconsolidated affiliates	4,330		5,424
Net investment in leases, non-current	29,605		27,499
Related party convertible note receivable, net	3,015		6,800
Investments in unconsolidated affiliates	592		3,959
Promissory note receivable from investee, net	13,196		8,448
Related party convertible note receivable, net	—		2,224
Other non-current assets	10,903		10,146
Promissory note receivable from investee, net	—		13,511
Total assets	$	570,067	$	604,072
Other non-current assets	13,067		12,526
Total assets	$	592,715	$	585,816
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1412,~~749~~246	$	1516,~~374~~403
Accrued liabilities	1420,~~292~~866		1915,~~424~~149
Operating lease liabilities, current	24,~~681~~049		2,~~227~~944
Deferred revenue, current, and other	45,~~869~~137		65,~~901~~081
Total current liabilities	3642,~~591~~298		4339,~~926~~577
Convertible note, non-current, net	84,~~357~~579		84,~~034~~467
Notes payable	1311,~~515~~130		1511,~~900~~130
Deferred revenue, non-current	35,~~603~~422		34,~~854~~096
Operating lease liabilities, non-current	49,~~713~~674		34,~~509~~528
Deferred tax liability	1516,~~436~~629		1216,~~667~~438
Other liabilities	35,~~953~~312		43,~~328~~372
Total liabilities	~~162~~175,~~168~~044		~~168~~163,~~218~~608
Commitments and contingencies (Note 14)
Stockholders' equity:
Preferred stock, $0.01 par value, 2,500,000 shares authorized, none issued or outstanding	—		—
Common stock, $0.01 par value, 20,000,000 shares authorized, respectively, none issued or outstanding	—		—
Common stock, $0.01 par value, 20,000,000 shares authorized, none issued or outstanding	—		—
Public common stock, $0.01 par value, 20,000,000 shares authorized, 10,824,291 and 10,712,347 shares issued and outstanding, respectively	108		107
Public common stock, $0.01 par value, 20,000,000 shares authorized, 10,915,679 and 10,829,518 shares issued and outstanding, respectively	109		108
Additional paid-in capital	~~593~~600,~~140~~126		~~579~~597,~~354~~139
Accumulated other comprehensive (loss) income	(21,037)		5,037
Accumulated other comprehensive loss	(3,906)		(6,506)
Accumulated deficit	(~~164~~178,~~312~~658)		(~~148~~168,~~644~~533)
Total stockholders' equity	~~407~~417,~~899~~671		~~435~~422,~~854~~208
Total liabilities and stockholders' equity	$	~~570~~592,~~067~~715	$	~~604~~585,~~072~~816

See accompanying notes to condensed consolidated financial statements.

-1-

HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF LOSS

(in thousands, except per share amounts)

(unaudited)

Three Months EndedSeptember 30,

Nine Months EndedSeptember 30,

Three Months Ended March 31,

2022

2021

2022

2021

2023

2022

Revenue, net

6162,~~492~~381

6064,~~240~~800

~~190,969~~

~~185,671~~

Cost of revenue

34,~~616~~982

3435,~~996~~655

~~107,621~~

~~107,685~~

Gross profit

2627,~~876~~399

2529,~~244~~145

~~83,348~~

~~77,986~~

Operating expenses:

Selling and marketing

1112,~~280~~449

1011,~~785~~997

~~35,042~~

~~34,141~~

Research and development

23,~~382~~088

112,~~955~~456

~~17,164~~

~~5,089~~

General and administrative

1322,~~885~~285

1416,~~937~~146

~~48,811~~

~~40,867~~

Total operating expenses

2737,~~547~~822

2740,~~677~~599

~~101,017~~

~~80,097~~

Operating loss

(~~671~~10,423)

(211,~~433~~454)

~~(17,669)~~

~~(2,111)~~

Interest and other expense (income), net

241

(30)

1,080

1,075

Interest and other (income) expense, net

(272)

359

Net loss before taxes and equity in losses of unconsolidated affiliates

(~~912~~10,151)

(211,~~403~~813)

~~(18,749)~~

~~(3,186)~~

Income tax (benefit) expense:

Current income tax expense (benefit)

235

(63)

450

614

Current income tax expense

690

158

Deferred income tax benefit

(1,~~069~~065)

(~~750~~2,366)

~~(4,625)~~

~~(4,043)~~

Total income tax benefit

(~~834~~375)

(~~813~~2,208)

~~(4,175)~~

~~(3,429)~~

Net (loss) income before equity in losses of unconsolidated affiliates

(78)

(1,590)

(14,574)

243

Net loss before equity in losses of unconsolidated affiliates

(9,776)

(9,605)

Equity in losses of unconsolidated affiliates

(~~358~~349)

(~~308~~381)

~~(1,094)~~

~~(837)~~

Net loss attributable to Heska Corporation

(~~436~~10,125)

(19,~~898~~986)

~~(15,668)~~

~~(594)~~

Basic loss per share attributable to Heska Corporation

(0.0497)

(0.1997)

~~(1.52)~~

~~(0.06)~~

Diluted loss per share attributable to Heska Corporation

(0.0497)

(0.1997)

~~(1.52)~~

~~(0.06)~~

Weighted average outstanding shares used to compute basic loss per share attributable to Heska Corporation

10,~~368~~390

10,~~195~~273

~~10,330~~

~~9,949~~

Weighted average outstanding shares used to compute diluted loss per share attributable to Heska Corporation

10,~~368~~390

10,~~195~~273

~~10,330~~

~~9,949~~

See accompanying notes to condensed consolidated financial statements.

-2-

HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended March 31,
	2022		2021		2022		2021
	2023		2022
Net loss attributable to Heska Corporation	$	(~~436~~10,125)	$	(19,~~898~~986)	$	~~(15,668)~~	$	~~(594)~~
Other comprehensive loss:
Other comprehensive income (loss):
Translation adjustments and losses from intra-entity transactions	(11,645)		(3,431)		(26,074)		(6,962)
Translation adjustments and gains (losses) from intra-entity transactions	2,600		(3,043)
Comprehensive loss attributable to Heska Corporation	$	(127,~~081~~525)	$	(513,~~329~~029)	$	~~(41,742)~~	$	~~(7,556)~~

See accompanying notes to condensed consolidated financial statements.

-3-

HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

(unaudited)

	Preferred Stock			Common Stock			AdditionalPaid-inCapital		AccumulatedOtherComprehensiveIncome (Loss)		AccumulatedDeficit		TotalStockholders'Equity
Three Months Ended September 30, 2021 and 2022	Shares	Amount		Shares	Amount
Three Months Ended March 31, 2023 and 2022	Shares	Amount		Shares	Amount
Balances, June 30, 2021	—	$	—	10,646	$	106	$	569,214	$	10,638	$	(146,192)	$	433,766
Net loss attributable to Heska Corporation	—	—		—	—		—		—		(1,898)		(1,898)
Issuance of common stock, net of shares withheld for employee taxes	—	—		55	1		1,000		—		—		1,001
Stock-based compensation	—	—		—	—		5,404		—		—		5,404
Other comprehensive loss	—	—		—	—		—		(3,431)		—		(3,431)
Balances, September 30, 2021	—	$	—	10,701	$	107	$	575,618	$	7,207	$	(148,090)	$	434,842
Balances, June 30, 2022	—	$	—	10,800	$	108	$	590,447	$	(9,392)	$	(163,876)	$	417,287
Net loss attributable to Heska Corporation	—	—		—	—		—		—		(436)		(436)
Issuance of common stock, net of forfeitures and shares withheld for employee taxes	—	—		24	—		372		—		—		372
Stock-based compensation	—	—		—	—		2,321		—		—		2,321
Other comprehensive loss	—	—		—	—		—		(11,645)		—		(11,645)
Balances, September 30, 2022	—	$	—	10,824	$	108	$	593,140	$	(21,037)	$	(164,312)	$	407,899
	Preferred Stock			Common Stock			AdditionalPaid-inCapital		AccumulatedOtherComprehensiveIncome (Loss)		AccumulatedDeficit		TotalStockholders'Equity
Nine Months Ended September 30, 2021 and 2022	Shares	Amount		Shares	Amount
Balances, December 31, 2020	—	$	—	9,476	$	95	$	423,650	$	14,169	$	(150,861)	$	287,053
Adoption of accounting standards	—	—		—	—		(29,834)		—		3,365		(26,469)
Balances, January 1, 2021	—	—		9,476	95		393,816		14,169		(147,496)		260,584
Net loss attributable to Heska Corporation	—	—		—	—		—		—		(594)		(594)
Issuance of common stock, net of forfeitures and shares withheld for employee taxes	—	—		284	3		2,764		—		—		2,767
Equity offering, net of issuance costs	—	—		941	9		164,177		—		—		164,186
Stock-based compensation	—	—		—	—		14,861		—		—		14,861
Other comprehensive loss	—	—		—	—		—		(6,962)		—		(6,962)
Balances, September 30, 2021	—	$	—	10,701	$	107	$	575,618	$	7,207	$	(148,090)	$	434,842
Balances, December 31, 2021	—	$	—	10,712	$	107	$	579,354	$	5,037	$	(148,644)	$	435,854
Net loss attributable to Heska Corporation	—	—		—	—		—		—		(159,~~668~~986)		(159,~~668~~986)
Issuance of common stock, net of forfeitures and shares withheld for employee taxes	—	—		~~112~~74	1		(23,~~385~~201)		—		—		(23,~~384~~200)
Stock-based compensation	—	—		—	—		125,~~311~~110		—		—		125,~~311~~110
Equity contingent consideration	—	—		—	—		3,860		—		—		3,860
Other comprehensive loss	—	—		—	—		—		(263,~~074~~043)		—		(263,~~074~~043)
Balances, September 30, 2022	—	$	—	10,824	$	108	$	593,140	$	(21,037)	$	(164,312)	$	407,899
Balances, March 31, 2022	—	$	—	10,786	$	108	$	585,123	$	1,994	$	(158,630)	$	428,595
Balances, December 31, 2022	—	$	—	10,830	$	108	$	597,139	$	(6,506)	$	(168,533)	$	422,208
Net loss attributable to Heska Corporation	—	—		—	—		—		—		(10,125)		(10,125)
Issuance of common stock, net of forfeitures and shares withheld for employee taxes	—	—		86	1		(90)		—		—		(89)
Stock-based compensation	—	—		—	—		3,077		—		—		3,077
Other comprehensive income	—	—		—	—		—		2,600		—		2,600
Balances, March 31, 2023	—	$	—	10,916	$	109	$	600,126	$	(3,906)	$	(178,658)	$	417,671

See accompanying notes to condensed consolidated financial statements.

-4-

HESKA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months EndedSeptember 30,
	Three Months EndedMarch 31,
	2022		2021
	2023		2022
Cash flows from operating activities:
Net loss attributable to Heska Corporation	$	(1510,~~668~~125)	$	(~~594~~9,986)
Adjustments to reconcile net loss to cash (used in) provided by operating activities:
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization	103,~~327~~974		103,~~084~~300
Non-cash impact of operating leases	~~2,012~~871		~~1,582~~673
Deferred tax benefit	(41,~~625~~065)		(42,~~043~~366)
Stock-based compensation	123,~~311~~077		145,~~861~~110
Change in fair value of contingent consideration	~~(315)~~8		(~~744~~236)
Provision for credit losses on convertible note receivable	3,499		—
Equity in losses of unconsolidated affiliates	349		381
Equity in losses of unconsolidated affiliates	1,094		837
Accretion of discounts and issuance costs	24		11
Accretion of discounts and issuance costs	29		48
Other losses (gains), net	703		(473)
Other losses (gains), net	1,233		1,057
Changes in operating assets and liabilities (net of the effect of acquisitions):
Accounts receivable	~~801~~4,399		52,~~504~~060
Inventories	(123,~~710~~112)		(96,~~286~~528)
Lease receivables	(52,~~152~~708)		(32,~~528~~248)
Other assets	(~~710~~1,908)		(~~3,357~~288)
Accounts payable	~~268~~(7,683)		(23,~~913~~069)
Other liabilities	~~(11~~4,~~045)~~035		(4,~~236~~006)
Net cash (used in) provided by operating activities	(18,651)		5,272
Net cash used in operating activities	(9,161)		(17,665)
Cash flows from investing activities:
Acquisition of Lacuna, net of cash acquired	—		(3,882)
Acquisition of LightDeck, net of cash acquired	(20,673)		—
Acquisition of VetZ, net of cash acquired	~~(28,956)~~—		—(29,509)
Acquisition of Biotech, net of cash acquired	—		(16,250)
Capital expenditures	(1,885)		(334)
Acquisition of BiEssA, net of cash acquired	—		(4,513)
Net cash used in investing activities	(22,558)		(29,843)
Promissory note receivable issuance	(4,700)		(9,000)
Purchases of property and equipment	(1,600)		(993)
Proceeds from disposition of property and equipment	—		42
Net cash used in investing activities	(35,256)		(34,596)
Cash flows from financing activities:
Payment of stock issuance costs	—		(314)
Proceeds from issuance of common stock	1		1,761
Proceeds from issuance of common stock	2,840		168,770
Payments for taxes related to shares withheld for employee taxes	(90)		(4,961)
Payments for taxes related to shares withheld for employee taxes	(5,224)		(1,503)
Repayments of other debt	(39)		(62)
Repayments of other debt	(158)		(821)
Net cash used in financing activities	(128)		(3,262)
Payments on Notes Payable	(2,385)		—
Foreign exchange effect on cash and cash equivalents	438		(60)
Net cash (used in) provided by financing activities	(4,927)		166,132
Net decrease in cash and cash equivalents	(31,409)		(50,830)
Foreign exchange effect on cash and cash equivalents	(3,666)		(242)
Cash and cash equivalents, beginning of period	156,618		223,574
Net (decrease) increase in cash and cash equivalents	(62,500)		136,566
Cash and cash equivalents, end of period	$	125,209	$	172,744
Cash and cash equivalents, beginning of period	223,574		86,334
Cash and cash equivalents, end of period	$	161,074	$	222,900
Supplemental disclosure of cash flow information:
Non-cash transfers of equipment between inventory and property and equipment, net	$	21,~~070~~297	$	~~3,678~~749
Contingent consideration for acquisitions	$	~~3,860~~—	$	3,~~290~~860
Notes payable	$	—	$	15,900
Settlement of Promissory Note and other preexisting relationships as part of acquisition	$	11,800	$	—
Indemnity holdback and net working capital adjustment for acquisitions	$	12,~~420~~550	$	~~346~~1,608

See accompanying notes to condensed consolidated financial statements.

-5-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ~~OPERATIONS~~BUSINESS OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Heska Corporation and its wholly-owned subsidiaries ("Heska", the "Company", "we" or "our") sell, ~~advanced~~manufacture, ~~veterinary~~market and support diagnostic and specialty products and solutions for veterinary practitioners. Our ~~offerings~~portfolio ~~include~~includes Point of Care ("POC") diagnostic laboratory instruments and consumables, ~~single-use~~including ~~offerings~~rapid ~~such~~assay asdiagnostic ~~in-clinic~~products ~~diagnostics~~and ~~tests;~~digital ~~Point~~cytology ofservices; ~~Care~~POC digital imaging diagnostic ~~instruments~~products; local and cloud-based data services; veterinary practice information management software solutions (“"PIMS”"); ~~digital~~and ~~cytology~~related ~~services;~~software ~~vaccines; local~~ and ~~cloud-based~~support; ~~data~~reference ~~services;~~laboratory testing; allergy testing and immunotherapy;; ~~and~~ heartworm preventive products; and vaccines. Our ~~core~~primary focus is on supporting companion animal veterinarians in ~~the~~providing ~~canine~~care ~~and~~to ~~feline~~their ~~healthcare space~~patients.

Proposed Merger

On March 31, 2023, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Antech Diagnostics, Inc., a California corporation (“Acquiror”), Helsinki Merger Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of Acquiror (“Merger Sub”), and, solely for purposes of Section 9.15 of the Merger Agreement, Mars, Incorporated, a Delaware corporation ("Mars").

The Merger Agreement provides that, subject to the terms and conditions set forth therein, at the effective time of the Merger, Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and wholly owned subsidiary of Acquiror, and each share of public common stock, par value $0.01 per share, of the Company (other than shares held in the treasury of the Company, shares held, directly or indirectly, by Mars, Acquiror or Merger Sub (or any of their subsidiaries) or any wholly-owned subsidiary of the Company immediately prior to the Effective Time, restricted stock of Heska (the treatment of which is described elsewhere in the Merger Agreement) or shares held by a holder who properly demands appraisal of such shares pursuant to, and who complies in all respects with, Section 262 of the Delaware General Corporation Law) will be automatically cancelled and converted into the right to receive $120.00 per share in cash, without interest.

Completion of the Merger is subject to customary closing conditions, including approval of the Company's shareholders and the receipt of required regulatory approvals. The parties expect the transaction to close in the second half of 2023. The Merger Agreement and the Merger are described in greater detail in the Preliminary Proxy Statement and other materials and documents filed with the SEC, all of which are available on the SEC's website at www.sec.gov.

During the quarter ended March 31, 2023, the Company incurred $5.1 million of costs related to the Merger Agreement, which are included within General and administrative on the Condensed Consolidated Statements of Loss.

Basis of Presentation and Consolidation

The accompanying interim Condensed Consolidated Financial Statements are unaudited. The interim unaudited Condensed Consolidated Financial Statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include normal, recurring adjustments, necessary to present fairly the financial position of the Company as of ~~September~~March 3031, ~~2022~~2023, and the results of our operations and statements of stockholders' equity for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2022~~2023 and ~~2021~~2022, and cash flows for the ~~nine~~three months ended ~~September~~March 3031, ~~2022~~2023 and ~~2021~~2022.

The unaudited Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. Our unaudited Condensed Consolidated Financial Statements include our accounts and the accounts of our wholly-owned subsidiaries since their respective dates of acquisitions. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year or any future period, particularly in light of the COVID-19 pandemic and its effects on the domestic and global economies as described below. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2021 and other financial information filed with the SEC.

Beginning in the first quarter of 2020, to limit the spread of COVID-19, governments took various actions including the issuance of stay-at-home policies and social distancing procedures and guidelines, causing some businesses to adjust, reduce or suspend business and operating activities. Veterinary care is widely recognized as an "essential" service for pet owners, and veterinarians continued to deliver essential medical care for sick and injured pets. We are unable to predict with certainty the effects of the COVID-19 pandemic on our customers, suppliers and vendors, as well as the actions of governments, and when and to what extent normal economic and operating conditions will return to pre-pandemic levels; these effects may differ from those assumed in our projected estimates. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business, mainly in our ability to place new capital equipment, primarily under long-term contracts, as a result of any economic impact that may occur in the future.

Use of Estimates

-6-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

~~during~~The ~~the~~unaudited ~~reporting~~Condensed ~~period.~~Consolidated ~~Actual~~Financial ~~results~~Statements ~~could~~included ~~differ~~herein ~~from~~have ~~those~~been ~~estimates.~~prepared ~~Significant~~pursuant ~~estimates~~to ~~are~~the ~~required~~rules ~~when~~and ~~establishing~~regulations of the ~~allowance~~Securities ~~for~~and ~~credit~~Exchange ~~losses~~Commission ("SEC"). Certain information and ~~the~~footnote ~~net~~disclosures ~~realizable~~normally ~~value~~included ofin ~~inventory;~~financial ~~determining~~statements ~~future~~prepared ~~costs~~in ~~associated~~accordance with ~~warranties~~accounting ~~provided;~~principles ~~determining~~generally accepted in the ~~period~~United ~~over~~States ~~which~~of ~~our~~America ~~obligations~~("GAAP") ~~are~~have ~~fulfilled~~been ~~under~~condensed ~~agreements~~or toomitted ~~license~~pursuant ~~product~~to ~~rights~~such rules and~~/or~~ ~~technology~~regulations. ~~rights;~~Our ~~evaluating~~unaudited ~~long-lived~~Condensed ~~and~~Consolidated ~~intangible~~Financial ~~assets~~Statements include our accounts and ~~investments~~the ~~for~~accounts ~~estimated~~of ~~useful~~our ~~lives~~wholly-owned ~~and~~subsidiaries ~~impairment;~~since ~~estimating~~their ~~the~~respective ~~useful~~dates ~~lives~~of ~~and~~acquisitions. ~~standalone~~All ~~selling~~intercompany ~~prices~~accounts ofand ~~instruments~~transactions ~~under~~have ~~leasing~~been ~~arrangements;~~eliminated ~~determining~~in ~~the~~consolidation. ~~allocation~~The results of ~~purchase~~operations ~~price~~for ~~under~~the ~~purchase~~three ~~accounting;~~months ~~estimating~~ended ~~the~~March 31, ~~expense~~2023 ~~associated~~are ~~with~~not ~~the~~necessarily ~~granting~~indicative of ~~stock;~~the ~~determining~~results ~~the~~to ~~need~~be expected for, ~~and~~ the ~~amount~~full ofyear aor ~~valuation~~any ~~allowance~~future onperiod. ~~deferred~~These ~~tax~~unaudited ~~assets;~~Condensed ~~determining~~Consolidated ~~the~~Financial ~~fair~~Statements ~~value~~should ofbe ~~our~~read ~~embedded~~in ~~derivatives;~~conjunction ~~and~~with ~~determining~~ the ~~value~~audited ofConsolidated ~~the~~Financial ~~non-controlling~~Statements ~~interest~~and inNotes athereto ~~business~~contained ~~combination.~~in ~~Our~~our ~~actual~~Annual ~~results~~Report ~~may~~on ~~differ~~Form 10-K ~~from~~for ~~these~~the ~~estimates~~year ~~and~~ended ~~there~~December ~~may~~31, be2022 ~~changes~~and toother ~~those~~financial ~~estimates~~information infiled ~~future~~with ~~periods.~~the SEC.

Use of Estimates

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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are required when establishing the allowance for credit losses and the net realizable value of inventory; determining future costs associated with warranties provided; determining the period over which our obligations are fulfilled under agreements to license product rights and/or technology rights; evaluating long-lived and intangible assets and investments for estimated useful lives and impairment; estimating the useful lives and standalone selling prices of instruments under leasing arrangements; determining the allocation of purchase price under purchase accounting; estimating the timing and probability of expense associated with the granting of performance-based stock awards; determining the need for, and the amount of a valuation allowance on deferred tax assets; determining the fair value of our embedded derivatives; determining the value of the contingent consideration in a business combination and determining the value of the non-controlling interest in a business combination. Our actual results may differ from these estimates and there may be changes to those estimates in future periods.

Fair Value of Financial Instruments

In accordance with ASC 820, Fair Value Measurements (“ASC 820”), the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Quoted prices in active markets for similar assets and liabilities, quoted prices for identically similar assets or liabilities in markets that are not active and models for which all significant inputs are observable either directly or indirectly.

Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs for inactive markets.

The Company's financial instruments consist of cash and cash equivalents, short-term trade receivables and payables, long-term note receivables with embedded derivative assets, contingent consideration liabilities, notes payable for acquisitions and its 3.75% Convertible Senior Notes due 2026 (the "Notes"). The carrying values of cash and cash equivalents and short-term trade receivables and payables approximate fair value because of the short-term nature of the instruments.

-7-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The ~~fair~~Company's ~~values~~financial ofinstruments ~~our~~consist ~~financial~~of ~~instruments~~cash atand ~~September 30~~cash equivalents, ~~2022~~short-term trade receivables and ~~December 31~~payables, ~~2021~~a ~~were~~short-term note receivable with an embedded derivative asset, and its 3.75% Convertible Senior Notes due 2026 (inthe ~~thousands~~"Notes"):. The carrying values of cash and cash equivalents and short-term trade receivables and payables approximate fair value because of the short-term nature of the instruments.

	Total		Level 1		Level 2		Level 3
2022
Financial Assets
Money market fund	$	120,000	$	120,000	$	—	$	—
Convertible note receivable embedded derivative	355		—		—		355
Promissory note receivable derivative	337		—		—		337
Financial Liabilities
BiEsseA contingent consideration	1,639		—		—		1,639
Balances, September 30, 2022	$	122,331	$	120,000	$	—	$	2,331
2021	Total		Level 1		Level 2		Level 3
Financial Assets
Convertible note receivable embedded derivative	$	888	$	—	$	—	$	888
Promissory note receivable embedded derivative	337		—		—		337
Financial Liabilities
BiEsseA contingent consideration	2,334		—		—		2,334
Balances, December 31, 2021	$	3,559	$	—	$	—	$	3,559

The fair values of our financial instruments at March 31, 2023 and December 31, 2022 were (in thousands):


	Total		Level 1		Level 2		Level 3
2023
Financial Assets
Money market fund	$	93,000	$	93,000	$	—	$	—
Convertible note receivable embedded derivative	177		—		—		177

Financial Liabilities
BiEsseA contingent consideration	453		—		—		453
Balances, March 31, 2023	$	93,630	$	93,000	$	—	$	630

2022	Total		Level 1		Level 2		Level 3

Financial Assets
Money market fund	$	95,000	$	95,000	$	—	$	—
Convertible note receivable embedded derivative	177		—		—		177
Financial Liabilities
BiEsseA contingent consideration	438		—		—		438
Balances, December 31, 2022	$	95,615	$	95,000	$	—	$	615

The Company's financial assets based upon Level 3 inputs include embedded derivatives relating to its notes receivable. The Company determined the redemption features of its convertible note receivable represent an embedded derivative. The estimated fair value of the ~~Company's~~embedded derivative asset is evaluated through Level 3~~.75%~~ ~~Convertible~~inputs ~~Senior~~using ~~Notes~~a ~~due~~probability-weighted inscenario ~~2026~~analysis. (The Company determined the ~~"Notes"),~~warrant isassociated ~~disclosed~~with atits ~~each~~promissory ~~reporting~~note ~~period~~receivable ~~and~~represents a derivative. The estimated fair value of the derivative asset is evaluated through Level 23 inputs, ~~with~~using ~~consideration~~an enterprise valuation model. The fair value of ~~quoted~~the ~~market~~warrant ~~prices~~was in$0 ~~less~~as ~~active~~of ~~markets~~December 31, 2022. The warrant was cancelled as of January 3, 2023, due to the LightDeck acquisition further discussed in Note 3. For additional information regarding the Company's ~~accounting~~notes ~~treatment~~receivable ~~for~~and ~~the issuance of the Notes~~derivatives, refer to Note 1617, ~~Convertible~~ Notes Receivable.

The ~~Company's~~estimated ~~financial~~fair ~~liabilities~~value ~~based upon Level 3 inputs include contingent consideration arrangements and notes payable relating to its acquisitions~~ of ~~Lacuna~~the ~~Diagnostics,~~Notes ~~Inc.~~is ~~("Lacuna"),~~disclosed ~~BiEsse~~at ~~A-Laboratorio~~each ~~die~~reporting ~~Analisi~~period ~~Veterinarie S.r.l. (“BSA”),~~ and ~~Biotech Laboratories U.S.A. LLC ("Biotech"). The Company~~ is ~~obligated~~evaluated tothrough ~~pay~~Level ~~contingent consideration payments of $~~2~~.0 million~~ ininputs ~~connection~~ with ~~the~~consideration ~~Lacuna acquisition based on the achievement~~ of ~~certain~~quoted ~~performance~~market ~~metrics~~prices ~~within a twelve month period ("Initial Earn Out Period"), reducing to $1.0 million if such metrics were met~~ in aless ~~twelve~~active ~~month period subsequent to the Initial Earn Out Period~~markets. ~~The~~For ~~fair~~additional ~~value~~information ofregarding the ~~Lacuna contingent consideration was $0 as of both December 31, 2021 and September 30, 2022. The~~ Company's isaccounting ~~obligated~~treatment tofor ~~pay~~the ~~contingent~~issuance ~~consideration payments~~ of ~~$2.6 million in connection with~~ the ~~BSA~~Notes, ~~acquisition~~refer ~~based on the achievement of certain revenue metrics within three annual periods after 2021. The Company is obligated~~ to ~~pay~~Note ~~contingent~~16, ~~notes~~Convertible ~~of up to $17~~Notes.~~5 million in connection with the Biotech acquisition based on the achievement of certain product development milestones~~

-8-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

orThe atCompany's afinancial ~~predetermined~~liabilities ~~date~~based upon Level 3 inputs include contingent consideration arrangements and notes payable relating to its acquisitions of Lacuna Diagnostics, Inc. ("Lacuna"), BiEsse A-Laboratorio die Analisi Veterinarie S.r.l. (“BSA”), and Biotech Laboratories U.S.A. LLC ("Biotech"). The Company is obligated to pay contingent consideration payments of $2.0 million in connection with the ~~future,~~Lacuna acquisition based on the achievement of ~~which~~certain performance metrics within a twelve month period ("Initial Earn Out Period"), reducing to $141.90 million if such metrics were met in a twelve month period subsequent to the Initial Earn Out Period. The twelve month period subsequent to the Initial Earn Out Period ended on March 31, 2023. The required performance metrics were not achieved, and no contingent consideration was ~~outstanding~~paid. asThe Company is obligated to pay contingent consideration payments of ~~September~~$2.7 million ~~30,~~in ~~2022~~connection with the BSA acquisition based on the achievement of certain revenue metrics within three annual periods after 2021. Refer to Note 3, Acquisitions and Related Party Items for further discussion.

The fair value of our contingent consideration and notes payable arrangements ~~are~~was determined at inception based on a probability-weighted outcome analysis. The fair value of the contingent consideration and notes payable liabilities associated with future payments were based on several factors, the most significant of which are the financial and product development performance of the acquired businesses. For the contingent consideration liabilities, the Company will update its assumptions each reporting period based on new developments and record such amounts at fair value based on the revised assumptions until the agreements expire. Changes in fair value are recorded in the Condensed Consolidated Statements of Loss within General and administrative expenses. The note payable associated with the Biotech acquisition is not adjusted to fair value each period.

The following table presents the changes of our Level 3 assets and liabilities as of ~~September~~March 3031, ~~2022~~2023 (in thousands):

	Derivative Assets		Contingent Consideration Liabilities		~~Contingent Consideration Liability~~
	Convertible note receivable		~~Promissory note receivable~~Lacuna		~~BSA~~BiEsseA
Balances, December 31, 2021	$	888	$	337	$	2,334
Balances, December 31, 2022	$	177	$	—	$	438
Acquisition value	—		—		—
Changes in fair value	—		—		8
Cash payments	—		—		—
Foreign currency impact	—		—		7
Changes in fair value	(533)		—		(315)
Balances, March 31, 2023	$	177	$	—	$	453
Foreign currency impact	—		—		(380)
Balances, September 30, 2022	$	355	$	337	$	1,639

Significant Accounting Policies

Our accounting policies are described in our audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022, and ~~other than the recently adopted accounting pronouncements and revenue recognition updates described below,~~ have not changed materially since such filing.

~~Revenue~~Accounting ~~Recognition~~Pronouncements Not Yet Adopted

~~With~~There ~~the~~have ~~acquisition~~been ofno ~~VetZ~~recent ~~GmbH~~accounting ~~(“VetZ”)~~pronouncements onissued ~~January~~and 3,not ~~2022,~~yet ~~the~~adopted ~~Company~~that ~~entered~~would ~~the~~have ~~market for veterinary practice information management software solutions (“PIMS”). Revenue for the sale of software licenses is recognized at~~ a ~~point~~material inimpact ~~time~~on ~~upon~~our ~~delivery~~financial ofposition ~~the~~or ~~software~~disclosures. The software has significant stand-alone functionality, and provides the customer with the right to use the intellectual property as it exists at the point in time at which the license is granted. Revenue for support services, cloud-based services, and installation and training is recognized over time as the services are performed. Refer to Note 3 for further details regarding the VetZ acquisition.

The Company may enter into contracts that represent a bill-and hold-arrangement, under which the Company bills a customer for product but retains physical possession of the product until some future point in time. For bill-and-hold arrangements, the Company recognizes revenue when control of the product transfers to the customer in accordance with the additional criteria in ASC 606-10-55-83.

-9-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Adoption of New Accounting Pronouncements

Effective January 1, 2022, we adopted ASU 2021-05, Leases (Topic 842), Lessors- Certain Leases with Variable Lease Payments. This guidance amends the lease classification accounting for lessors for certain leases with variable lease payments that do not depend on a reference index or a rate and would have resulted in the recognition of a loss at lease commencement if classified as a sale-type or direct financing lease. Under the new guidance, these leases will be classified as an operating lease. We evaluated the impact of the standard on our consolidated financial statements and the adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures.

Effective January 1, 2022, we early adopted ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This guidance requires an acquiring entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, the acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. We evaluated the impact of the standard on our consolidated financial statements and the adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures.

2. REVENUE

We separate our goods and services among two reportable segments, North America and International. The two segments consist of revenue originating from:

•North America: including the United States, Canada and Mexico

•International: all geographies outside North America, currently consisting primarily of Australia, France, Germany, Italy, Malaysia, Spain and Switzerland

Refer to Note 18 for further detail regarding the Company's reportable segments.

The following table summarizes our segment revenue (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

2022

2021

2022

2021

2023

2022

North America revenue:

POC lab instruments & other

34,~~630~~243

34,~~547~~647

~~11,821~~

~~10,017~~

POC lab consumables

1921,~~711~~006

1718,~~694~~637

~~58,685~~

~~53,942~~

POC imaging & informatics

75,~~688~~828

76,~~433~~051

~~19,641~~

~~21,222~~

PVD

5,~~343~~433

4,~~297~~576

~~16,758~~

~~17,370~~

OVP

32,~~957~~050

43,~~838~~463

~~11,702~~

~~13,063~~

Total North America revenue

4038,~~329~~560

37,~~809~~374

~~118,607~~

~~115,614~~

International revenue:

POC lab instruments & other

34,~~698~~785

3,~~800~~733

~~11,269~~

~~10,801~~

POC lab consumables

910,~~381~~545

11,~~223~~748

~~31,621~~

~~35,383~~

POC imaging & informatics

7,~~243~~674

510,~~849~~962

~~26,787~~

~~19,783~~

PVD

~~841~~817

~~1,559~~983

~~2,685~~

~~4,090~~

Total International revenue

2123,~~163~~821

2227,~~431~~426

~~72,362~~

~~70,057~~

Total revenue

6162,~~492~~381

6064,~~240~~800

~~190,969~~

~~185,671~~

-10-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Remaining Performance Obligations

Remaining performance obligations represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year which are fully or partially unsatisfied at the end of the period. Remaining performance obligations include noncancellable purchase orders, the non-lease portion of minimum purchase commitments under long-term supply arrangements, extended warranty, service and other long-term contracts. Remaining performance obligations do not include revenue from contracts with customers with an original term of one year or less, revenue from long-term supply arrangements with no minimum purchase requirements, revenue expected from purchases made in excess of the minimum purchase requirements, or revenue from instruments leased to customers. While the remaining performance obligations disclosure is similar in concept to backlog, the definition of remaining performance obligations excludes leases and contracts that provide the customer with the right to cancel or terminate for convenience with no substantial penalty, even if historical experience indicates the likelihood of cancellation or termination is remote. Additionally, the Company has elected to exclude contracts with customers with an original term of one year or less from remaining performance obligations.

As of ~~September~~March 3031, ~~2022~~2023, the aggregate amount of the transaction price allocated to remaining minimum performance obligations was approximately $~~200~~232.61 million. As of ~~September~~March 3031, ~~2022~~2023, the Company expects to recognize revenue as follows (in thousands):

Year Ending December 31,	Revenue
2022 (remaining)	$	12,620
2023 (remaining)	$	41,087
2023	48,180
2024	52,303
2024	43,058
2025	45,981
2025	36,803
2026	40,759
2026	31,678
2027	27,638
Thereafter	2824,~~296~~369
	$	~~200~~232,~~635~~137

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled contract assets, deferred revenue, and customer deposits and billings in excess of revenue recognized. In addition, the Company defers certain costs incurred to obtain contracts.

Contract Assets

Certain unbilled amounts related to long-term contracts for which we provide a free term to the customer are recorded in "Other current assets" and "Other non-current assets" on the accompanying Condensed Consolidated Balance Sheets. The collection of these balances occurs over the term of the underlying contract. The balances as of ~~September~~March 3031, ~~2022~~2023 were $1.69 million and $56.35 million for current and non-current assets, respectively, shown net of related unearned interest. The balances as of December 31, ~~2021~~2022 were $1.58 million and $5.19 million for current and non-current assets, respectively, shown net of related unearned interest. The increase in contract assets for the ~~nine~~three-month period ended ~~September~~March 3031, ~~2022~~2023 is primarily related to additional contract assets recorded for contracts with a free term, partially offset by payments received. The balances as of December 31, 2021 were $1.5 million and $5.1 million for current and non-current assets, respectively.

-11-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Contract Liabilities

The Company receives cash payments from customers for licensing fees or other arrangements that extend for a specified term. These contract liabilities are classified as either current or long-term in the Condensed Consolidated Balance Sheets based on the timing of when the Company expects to recognize revenue. As of ~~September~~March 3031, ~~2022~~2023, December 31, 2022, and December 31, 2021, contract liabilities were $78.74 million, $8.3 million, and $9.6 million, respectively, and are included within "Deferred revenue, current, and other" and "Deferred revenue, non-current" in the accompanying Condensed Consolidated Balance Sheets. The ~~decrease~~increase in the contract liability balance during the ~~nine~~three-month period ended ~~September~~March 3031, ~~2022~~2023 is attributable to approximately $72.9 5 million of ~~revenue~~additional ~~recognized~~deferred ~~during~~sales ~~the~~in ~~period and an exchange rate impact of $0.4 million~~2023, partially offset by approximately $52.5 4 million of ~~additional~~revenue ~~deferred~~recognized ~~sales~~during ~~in 2022, and~~ the ~~acquisition of VetZ contract liabilities of approximately $0~~period.~~9 million.~~ Contract liabilities are reported on the accompanying Condensed Consolidated Balance Sheets on a contract-by-contract basis.

3. ACQUISITIONS AND RELATED PARTY ITEMS

~~VetZ~~LightDeck Acquisition

On January 3, ~~2022~~2023, the Company acquired 100% of the ~~equity~~shares of ~~VetZ~~MBio ~~GmbH~~Diagnostics, Inc., d/b/a LightDeck Diagnostics (~~“VetZ”~~"LightDeck") for approximately $39.8 million, aof ~~European~~which ~~leader~~$13.7 million inwas ~~veterinary~~the ~~practice~~reacquisition ~~information~~of ~~management~~the ~~software~~Company's ~~solutions~~previously ~~(“PIMS”),~~held ~~for~~promissory annotes ~~aggregate~~discussed further in Note 17. The purchase price was decreased for the settlement of ~~approximately~~preexisting relationships, including $352.5 million. ~~The~~of ~~purchase~~payables ~~price~~due ~~consisted~~to ofLightDeck ~~approximately~~and a $310.62 million indiscount ~~cash~~on asthe ~~well~~promissory asnotes, ~~contingent~~offset ~~consideration~~by asa ~~described~~$0.8 million ~~below~~license fee further discussed in Note 4. The ~~cash~~agreement ~~purchase~~also ~~price~~included ~~includes~~ a general indemnity holdback of approximately $12.46 million. toThe bepreliminary ~~released~~cash ~~within~~purchase 18price ~~months~~is ofsubject ~~closing.~~to ~~The~~potential ~~cash~~ purchase price ~~was~~adjustments, ~~also~~and ~~reduced~~the byholdback amust ~~negative~~be ~~net~~released ~~working~~within ~~capital~~18 ~~adjustment~~months of ~~approximately~~the $0closing date.~~6 million.~~

As ~~additional~~further ~~consideration~~discussed ~~for~~in ~~the~~Note ~~acquisition~~4, ~~the~~prior ~~Company agreed~~ to athe ~~contingent~~acquisition ~~earn-out~~the ofCompany ~~91,039~~owned ~~shares~~preferred ~~of Heska~~ stock, ~~with a total value~~ of ~~$15.5 million~~LightDeck, which ~~will~~was beaccounted ~~issued~~for inas ~~tranches~~a ~~based on future financial and~~ non-~~financial~~marketable ~~milestones~~equity security. ~~The~~In ~~fair~~accordance ~~value~~with ofASC ~~the~~805, ~~contingent~~Business ~~consideration~~Combinations, ~~as of~~ the acquisition ~~date~~ was ~~approximately~~accounted ~~$3.9 million,~~for ~~determined~~as ~~using~~ a ~~Monte-Carlo~~business ~~simulation~~combination ~~model.~~achieved ~~The~~in ~~Company~~stages. ~~evaluated~~Accordingly, ~~whether~~ the ~~contingent~~original ~~earn-out~~$3.0 million ~~should~~investment bewas ~~treated~~remeasured asto afair ~~liability~~value oras ~~equity~~of inthe ~~accordance~~acquisition ~~with~~date ~~ASC 480, Distinguishing Liabilities from Equity (“ASC 480”),~~ and ~~ASC~~included ~~815,~~as ~~Derivatives~~part ~~and~~of ~~Hedging~~the ~~(“ASC~~purchase ~~815”)~~consideration. The ~~contingent~~fair ~~earn-out~~value ~~did~~was ~~not~~determined ~~meet~~based on the ~~ASC~~liquidation ~~480~~preference ~~definition~~ of ~~a liability as it is not mandatorily redeemable, is not an obligation to repurchase~~ the ~~Company’s~~preferred ~~shares~~stock, and it ~~can~~was ~~only~~determined bethat ~~settled~~the ~~with a fixed number of shares~~$3.0 million ~~Additionally,~~investment ~~the~~balance ~~Company~~approximated ~~noted~~ the ~~contingent~~fair ~~earn-out~~value ~~met the scope exception in ASC 815-10~~ as ~~the~~of ~~earn-out is indexed to~~ the ~~Company’s~~closing ~~own~~date. ~~shares~~As such, ~~and~~no ~~also~~gain ~~met~~or ~~the~~loss ~~criteria~~was inrecognized ~~ASC 815-40 to be classified~~ in ~~equity as~~ the ~~Company~~Condensed ~~has~~Consolidated ~~sufficient~~Statements ~~authorized~~of ~~and~~Loss. ~~unissued~~The ~~shares,~~total ~~the~~purchase ~~earn-out~~consideration ~~has~~was anallocated ~~explicit~~to ~~share limit, there are no required cash payments. As such~~ the ~~contingent~~assets ~~earn-out~~acquired ~~is classified in equity,~~ and isliabilities ~~not~~assumed ~~subsequently~~based ~~remeasured~~on ~~each~~their ~~reporting~~fair ~~period.~~values ~~Subsequent~~as ~~settlement~~ of ~~the~~January ~~obligation~~3, ~~will be accounted for within equity~~2023.

The total purchase ~~price~~consideration exceeded the fair value of the identifiable net assets acquired, resulting in ~~goodwill of~~ $228.14 million, ~~all~~ of goodwill, which isprimarily ~~attributable~~relates to ~~our~~the ~~International~~increase ~~segment.~~in ~~The~~our ~~goodwill~~intellectual ~~resulting~~property ~~from~~portfolio ~~this~~as ~~acquisition~~well ~~consists~~as ofour ~~new~~manufacturing ~~product~~and ~~offerings~~research ~~from~~and ~~entering~~development ~~the PIMS market~~capabilities. All of the goodwill is ~~tax~~allocated ~~deductible~~to ~~for~~the ~~purposes~~North ofAmerica ~~calculating~~segment ~~Controlled~~and ~~Foreign~~is ~~Corporation~~not ~~tested~~tax ~~income,~~deductible ~~which~~for ~~may~~income ~~result in a decrease to the Company's future U.S. federal~~ tax ~~liability~~purposes.

The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of January 3, 2022. The total purchase consideration is subject to customary working capital adjustments.

-12-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The information below represents the preliminary purchase price allocation as of the acquisition date (in thousands):

	January 3, 2022
	January 3, 2023
Purchase price in cash	$	3125,~~627~~000
Fair value of equity contingent consideration	3,860
Settlement of promissory notes	13,700
Total purchase consideration	$	35,487
Settlement of preexisting relationships	(1,900)
Cash and cash equivalents	$	1,251
Fair value of previously held equity interest	3,018
Inventory	359
Total purchase consideration	$	39,818
Accounts receivable	824
Cash and cash equivalents	$	1,777
Prepaid expenses and other assets	318
Accounts receivable	560
Property and equipment, net	602
Inventory	2,691
Operating lease right-of-use assets	2,962
Prepaid expenses	650
Intangible assets	18,504
Other current assets	313
Total assets acquired	24,820
Property and equipment	21,041
Accounts payable	520
Operating lease right-of-use assets	6,237
Accrued liabilities	1,260
Intangible assets	5,000
Operating lease liabilities, current	247
Deferred tax asset	6,787
Deferred revenue, current, and other	1,014
Other non-current assets	75
Operating lease liabilities, non-current	2,714
Total assets acquired	45,131
Deferred tax liabilities	5,408
Accounts payable	5,422
Other liabilities	318
Accrued liabilities	2,014
Net assets acquired	13,339
Operating lease liabilities, current	1,038
Goodwill	22,148
Operating lease liabilities, non-current	5,198
Total fair value of consideration transferred	$	35,487
Net assets acquired	31,459
Goodwill	8,359
Total fair value of consideration transferred	$	39,818

The Company's preliminary estimates of fair values of the net assets acquired are based on the information that was available at the date of the acquisition., ~~Purchase~~and ~~accounting for~~ the ~~transaction~~Company is ~~still~~continuing ~~open~~to asevaluate wethe ~~finalize~~underlying ~~annual~~inputs ~~tax~~and ~~accounting~~assumptions atused ~~the~~in ~~subsidiary~~its ~~level~~valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the date of the acquisition. A decrease in the fair value of assets acquired or an increase in the fair value of liabilities assumed in the acquisition from those valuations would result in a corresponding increase in the amount of goodwill from the acquisition.

Intangible assets acquired, amortization method and estimated useful life as of January 3, ~~2022~~2023, were as follows (dollars in thousands):

Weighted- Average Useful Life

Amortization Method

Fair Value

Useful Life

Amortization Method

Fair Value

Customer relationships

12 years

Straight-line

12,941

Developed technology

10 years

Straight-line

5,000

Trade name

8 years

Straight-line

1,816

Total intangible assets acquired

5,000

Developed technology

4.3 years

Straight-line

3,747

Total intangible assets acquired

18,504

~~VetZ~~LightDeck generated net revenue of $~~9.0~~33 ~~million~~thousand and a net loss of $13.54 million for the period from January 3, ~~2022~~2023 to ~~September 30~~March 31, ~~2022~~2023.

-13-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company incurred acquisition related costs of approximately $0 ~~million and $0~~.7 5 million for the three ~~and nine~~ months ended ~~September 30,~~March ~~2022~~31, ~~respectively~~2023, which are included within ~~general~~General and administrative expenses on our Condensed Consolidated Statements of Loss.

Unaudited Pro Forma Financial Information

The following table presents unaudited supplemental pro forma financial information as if the acquisition had occurred on January 1, ~~2021~~2022 (in thousands):

	Three Months EndedSeptember 30, 2021		Nine Months EndedSeptember 30, 2021
	Three Months EndedMarch 31, 2022
Revenue, net	$	6364,~~085~~821	$	~~194,148~~
Net (loss) income before equity in losses of unconsolidated affiliates	$	(1,230)	$	1,257
Net loss before equity in losses of unconsolidated affiliates	$	(14,371)
Net (loss) income attributable to Heska Corporation	$	(1,538)	$	420
Net loss attributable to Heska Corporation	$	(14,752)

~~Biotech~~VetZ Acquisition

On ~~September~~January 13, ~~2021~~2022, ~~Heska~~the Company acquired 65100% of the equity of ~~Biotech~~VetZ ~~Laboratories~~GmbH ~~U.S.A. LLC~~ (~~"Biotech"~~“VetZ”), a ~~developer~~European ofleader ~~rapid~~in ~~assay~~PIMS, ~~diagnostic~~for ~~testing,~~an inaggregate ~~exchange~~purchase ~~for~~price of approximately $1635.3 5 million ~~in cash~~. AsThe ~~part of the~~ purchase, ~~Heska~~price ~~entered~~consisted ~~into~~of ~~put~~approximately ~~and~~$31.6 million ~~call options~~ in ~~order~~cash toas ~~purchase~~well ~~the~~as ~~remaining~~contingent ~~35%~~consideration ~~ownership~~as indescribed ~~future years~~below. The ~~counterparty,~~cash ~~Chinta~~purchase ~~Lamichhane,~~price ~~DVM,~~includes ~~Ph.D,~~a ~~maintains~~general anindemnity ~~interest~~holdback inof ~~Biotech~~approximately ~~and~~$1.4 million isto anbe ~~employee~~released ofwithin ~~the~~18 ~~Company,~~months ~~thus~~of ~~commencing a related party relationship~~closing. ~~Aside~~The ~~from~~cash ~~the~~purchase ~~acquisition~~price ~~described~~was ~~herein,~~also ~~there~~reduced ~~were~~by noa ~~financial~~negative ornet ~~non-financial~~working ~~transactions~~capital ~~between~~adjustment ~~the~~of ~~Company~~approximately ~~and the counterparty~~$0.6 million.

InAs ~~conjunction~~additional ~~with~~consideration for the acquisition, the Company ~~entered~~agreed ~~into~~to ~~various~~a ~~put~~contingent ~~and~~earn-out ~~call~~of ~~options~~91,039 ~~which~~shares ~~are~~of ~~classified~~Heska onstock, ~~the~~with ~~Condensed~~a ~~Consolidated~~total ~~Balance~~value ~~Sheets~~of ~~as Notes Payable~~$15.5 million, ~~The~~which ~~written~~will ~~put options can~~ be ~~exercised~~issued ~~after~~in ~~June~~tranches ~~30,~~based ~~2024,~~on atfuture afinancial ~~valuation~~and ~~identical~~non-financial ~~to the initial purchase price~~milestones. The ~~written~~fair ~~call~~value ~~options~~of ~~can~~the becontingent ~~exercised~~consideration atas ~~any~~of ~~time~~the ~~prior~~acquisition todate ~~June~~was ~~30,~~approximately ~~2026~~$3.9 million, atdetermined anusing ~~amount~~a ~~equal~~Monte-Carlo tosimulation ~~two~~model. ~~times~~The ~~the~~Company ~~initial~~evaluated ~~valuation~~whether orthe ~~after~~contingent ~~June~~earn-out ~~30,~~should ~~2026,~~be attreated as a ~~valuation~~liability ~~identical~~or toequity ~~the~~in ~~initial~~accordance ~~purchase~~with ~~price.~~ASC ~~Additionally~~480, ifDistinguishing ~~certain~~Liabilities ~~product~~from ~~development~~Equity ~~milestones~~(“ASC ~~are met~~480”), ~~the~~and ~~shares~~ASC ~~may~~815, beDerivatives ~~exercised~~and inHedging ~~various~~(“ASC ~~tranches~~815”). atThe ~~two~~contingent ~~times~~earn-out ~~the~~did ~~initial~~not ~~valuation.~~meet ~~The Company evaluated~~ the ~~put~~ASC ~~and~~480 ~~call~~definition ~~options~~of ~~embedded~~a inliability ~~the~~as ~~shares~~it ~~representing~~is ~~the~~not ~~non-controlling~~mandatorily ~~interest~~redeemable, ~~under~~is ~~the~~not ~~guidance~~an inobligation ~~ASC~~to ~~480,~~repurchase ~~Distinguishing~~the ~~Liabilities~~Company’s ~~from Equity~~shares, and ~~determined~~it ~~the~~can ~~instrument~~only ~~met~~be ~~the~~settled ~~criteria~~with toa befixed ~~recorded~~number asof ashares. ~~liability~~Additionally, ~~because~~the Company noted the ~~fixed~~contingent ~~price~~earn-out ofmet the ~~put~~scope ~~and~~exception ~~call~~in ~~options~~ASC ~~are~~815-10 ~~identical~~as ~~starting~~the ~~after~~earn-out ~~June~~is ~~30,~~indexed ~~2026.~~to Asthe aCompany’s ~~result~~own shares, ~~the~~and ~~Company~~also ~~recorded~~met the ~~transaction~~criteria asin aASC ~~financing~~815-40 ~~arrangement~~to ofbe ~~the~~classified ~~purchase~~in ofequity as the ~~non-controlling~~Company ~~interest,~~has ~~and~~sufficient ~~will~~authorized ~~record~~and ~~100%~~unissued ofshares, the ~~income~~earn-out ~~and~~has ~~loss~~an ofexplicit ~~Biotech~~share inlimit, ~~our~~there ~~Condensed~~are ~~Consolidated~~no ~~Statements~~required ofcash ~~Loss~~payments. ~~The~~As ~~options~~such ~~were~~the ~~not~~contingent ~~redeemable~~earn-out asis ofclassified ~~the~~in ~~acquisition~~equity, ~~date.~~and Asis ofnot ~~the~~subsequently remeasured each reporting period. ~~ending~~On ~~September 30~~March 31, ~~2022~~2023, ~~one~~in ofconnection with the ~~product~~execution ~~development~~of ~~milestones~~the ~~was~~Merger ~~achieved.~~Agreement, ~~The~~the Company ~~made~~entered ainto ~~payment~~an ~~of $2.6 million~~amendment, ~~$2.4 million~~pursuant ~~was a reduction~~ to ~~Notes~~which ~~Payable~~the ~~and~~earnout ~~$0.2 million~~payment ~~was~~will ~~related~~be tosettled ~~interest~~in ~~expense.~~cash ~~The~~instead ~~Company~~of ~~acquired~~shares anand ~~additional~~a ~~5.25%~~portion ~~interest~~of ~~for~~the aearnout ~~majority~~payment ~~interest~~will ~~ownership~~be ofaccelerated ~~70.25%.~~and ~~The~~become ~~counterparty~~payable ~~owns~~within ~~the~~20 ~~remaining~~days ~~minority~~upon ~~interest~~closing of ~~29.75%.~~the ~~The~~Merger, ~~estimated~~with ~~fair~~the ~~value~~remainder ofto ~~the~~be ~~Notes~~paid ~~Payable~~out atupon the ~~acquisition~~achievement ~~date~~ of ~~$15.9~~one ~~million~~or ismore ~~inclusive~~earnout ofmilestones. ~~the~~The ~~probability~~amendment ~~weighted~~will ~~outcomes~~be ofautomatically ~~the~~terminated ~~options~~if ~~described~~the ~~herein~~Merger ~~and~~fails ~~was~~to ~~determined~~occur ~~using~~for ~~Level~~any 3reason, ~~inputs.~~including Asif of the ~~period~~Merger ~~ending~~Agreement ~~September 30,~~is ~~2022,~~terminated ~~the~~by ~~remaining~~either ~~value~~party ofthereto ~~the~~according ~~Notes~~to ~~Payable~~the isterms ~~$13~~thereof.~~5 million.~~

The ~~total~~ purchase ~~consideration~~price exceeded the fair value of the identifiable net assets ~~acquired~~, resulting in goodwill of $2522.8 0 million, all of which is attributable to our ~~North~~International ~~America~~ segment. InThe ~~connection~~goodwill ~~with~~resulting ~~the~~from this acquisition ~~and~~consists ~~pursuant~~of tonew ~~the~~product ~~elections~~offerings ~~under~~from ~~Section~~entering ~~754~~the PIMS market. All of the ~~Internal~~goodwill ~~Revenue~~is ~~Code,~~tax ~~the~~deductible ~~Company~~for ~~expects~~purposes toof ~~obtain~~calculating anControlled ~~increase~~Foreign ~~with~~Corporation ~~respect~~tested toincome, ~~the~~which ~~tax~~may ~~basis~~result in a decrease to the ~~assets~~Company's offuture ~~Biotech~~U.S. federal tax liability.

-14-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of ~~September~~January 13, ~~2021~~2022. The total purchase consideration is subject to customary working capital adjustments, which were finalized as of ~~September~~December 131, 2022.

The information below represents the purchase price allocation as of the acquisition date (in thousands):

	September 1, 2021
	January 3, 2022
Purchase price	$	16,250
Purchase price in cash	$	31,627
Notes payable	15,900
Fair value of equity contingent consideration	3,860
Total purchase consideration	$	3235,~~150~~487
Accounts receivables	18
Cash and cash equivalents	$	1,251
Other current assets	1
Inventory	359
Inventories	190
Accounts receivable	824
Property and equipment, net	148
Prepaid expenses and other assets	318
Operating lease right-of-use assets	1,033
Property and equipment, net	602
Other intangible assets, net	6,000
Operating lease right-of-use assets	2,962
Other non-current assets	15
Intangible assets	18,504
Total assets acquired	724,~~405~~820
Accounts payable	11520
Accrued liabilities	331,260
Operating lease liabilities, current	~~188~~247
Operating lease liabilities, non-current	845
Deferred revenue, current, and other	1,014
Net assets acquired	6,328
Operating lease liabilities, non-current	2,714
Goodwill	25,822
Deferred tax liabilities	5,246
Total fair value of consideration transferred	$	32,150
Other liabilities	318
Net assets acquired	13,501
Goodwill	21,986
Total fair value of consideration transferred	$	35,487

Intangible assets acquired, amortization method and estimated useful life as of ~~September~~January 13, ~~2021~~2022, were as follows (dollars in thousands):

Useful Life

Amortization Method

Fair Value

Weighted- Average Useful Life

Amortization Method

Fair Value

Development technology

6 years

Straight-line

6,000

Customer relationships

12 years

Straight-line

12,941

Total intangible assets acquired

6,000

Trade name

8 years

Straight-line

1,816

Developed technology

4.3 years

Straight-line

3,747

Total intangible assets acquired

18,504

Pro forma financial information related to the acquisition of Biotech has not been provided as it is not material to our consolidated results of operations.

-15-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

~~BiEsseA~~Biotech Acquisition

On ~~July~~September 1, 2021, ~~the~~Heska ~~Company~~acquired ~~completed~~65% of the ~~acquisition~~equity of ~~BiEsse~~Biotech ~~A-Laboratorio~~Laboratories ~~die Analisi Veterinarie~~ U.S.rA.l. LLC (~~“BSA”~~"Biotech"), a developer of rapid assay diagnostic testing, in exchange for approximately $16.3 ~~The~~million ~~Company~~in ~~acquired~~cash. ~~100%~~As part of the ~~issued~~purchase, ~~and~~Heska ~~outstanding~~entered ~~shares~~into ofput ~~BSA~~and ~~for~~call anoptions ~~aggregate~~in order to purchase ~~price~~the ofremaining $735% ownership in future years.~~2 million.~~ OnThe ~~January~~counterparty, 1Chinta Lamichhane, ~~2022~~DVM, ~~BSA~~Ph.D., ~~was~~maintains ~~merged~~an ~~into~~interest ~~scil~~in ~~animal~~Biotech ~~care~~and ~~company~~is ~~Srl~~an employee of the Company, thus commencing a ~~wholly~~related ~~owned~~party ~~subsidiary~~relationship. ofAside ~~scil~~from ~~animal~~the ~~care~~acquisition ~~company~~described ~~GmbH~~herein, ~~("scil")~~there were no financial or non-financial transactions between the Company and the counterparty.

AsIn ~~additional~~conjunction ~~consideration~~with ~~for~~the acquisition, the ~~shares~~Company entered into various put and call options, which are classified on the Condensed Consolidated Balance Sheets as Notes Payable. The Company ~~agreed~~is obligated to apay contingent ~~earn-out~~notes of up to $217.5 million based on the achievement of certain ~~performance~~product ~~metrics~~development ~~within~~milestones ~~three~~or ~~annual~~at ~~periods~~a predetermined date in the future. The written put options can be exercised after ~~2021~~June 30, ~~each~~2024, ofat ~~which~~a valuation identical to the initial purchase price. The written call options can ~~pay~~be upexercised at any time prior to ~~one~~June ~~third~~30, of2026, at an amount equal to two times the ~~total~~initial ~~earn-out~~valuation or after June 30, 2026, at a valuation identical to the initial purchase price. Additionally, if certain product development milestones are met, the shares may be bought in various tranches at two times the initial valuation. The ~~fair~~Company ~~value~~evaluated the put and call options embedded in the shares representing the non-controlling interest under the guidance in ASC 480, Distinguishing Liabilities from Equity, and determined the instrument met the criteria to be recorded as a liability because the fixed price of the ~~contingent~~put ~~consideration~~and ~~was~~call $2options are identical starting after June 30, 2026.~~3 million~~ As a result, the Company recorded the transaction as a financing arrangement of the ~~acquisition~~purchase ~~date~~of the non-controlling interest, and will record 100% of the income and loss of Biotech in our Condensed Consolidated Statements of Loss. The options were not redeemable as of the acquisition date. As of the period ending March 31, 2023, two of the product development milestones were achieved. During the year ended December 31, ~~2021~~2022, ~~and~~the ~~subsequently~~Company ~~decreased~~made payments of $5.3 million. $4.8 million was a reduction to Notes payable and $10.65 million aswas recorded to interest expense. The Company acquired an additional 10.50% interest for a majority interest ownership of ~~September~~75.50%. No additional payments have been made through March 3031, ~~2022~~2023. The counterparty owns the remaining minority interest of 24.50%. The estimated fair value of the Notes Payable at the acquisition date of $15.9 million is inclusive of the probability weighted outcomes of the options described herein and was determined using Level 3 inputs. As of the period ending March 31, 2023, the remaining value of the Notes Payable is $11.1 million.

The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in ~~$4.6 million~~goodwill of ~~goodwill~~$25.8 million, all of which is attributable to our ~~International~~North America segment. ~~All~~and primarily consists of opportunities to expand product offerings and the ~~goodwill~~experienced isworkforce ~~tax~~acquired. ~~deductible~~In ~~for~~connection ~~purposes~~with ofthe ~~calculating~~acquisition ~~Controlled~~and ~~Foreign~~pursuant ~~Corporation~~to ~~tested~~the ~~income,~~elections ~~which~~under ~~may~~Section ~~result~~754 inof athe ~~decrease~~Internal toRevenue Code, the Company's ~~future~~expects ~~U.S.~~to ~~federal~~obtain ~~income~~an increase with respect to the tax ~~liability~~basis in the assets of Biotech.

The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of ~~July~~September 1, 2021. The total purchase consideration is subject to customary working capital adjustments, which were finalized as of ~~December~~September 311, ~~2021~~2022.

Per the tax indemnification included in the purchase agreement of BSA, the seller has indemnified the Company for $0.5 million related to uncertain tax positions taken in prior years. The outcome of this arrangement will either be settled or expire due to lapse of statute of limitations by 2025. As of September 30, 2022, approximately $0.4 million of the indemnification agreement remains outstanding.

-16-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The information below represents the purchase price allocation as of the acquisition date (in thousands):

	July 1, 2021
	September 1, 2021
Purchase price	$	4,835
Purchase price in cash	$	16,250
Fair value of contingent consideration	2,334
Notes payable	15,900
Total purchase consideration	$	732,~~169~~150
Cash and cash equivalents	322
Accounts receivables	$	18
Accounts receivables	152
Other current assets	1
Other receivables	497
Inventories	190
Prepaid expenses	8
Property and equipment, net	148
Other current assets	275
Operating lease right-of-use assets	1,033
Property and equipment, net	89
Other intangible assets, net	6,000
Operating lease right-of-use assets	44
Other non-current assets	15
Other intangible assets, net	3,329
Total assets acquired	7,405
Total assets acquired	4,716
Accounts payable	11
Accounts payable	208
Accrued liabilities	33
Accrued liabilities	334
Operating lease liabilities, current	188
Operating lease liabilities, current	37
Operating lease liabilities, non-current	845
Deferred revenue, current, and other	85
Net assets acquired	6,328
Operating lease liabilities, non-current	20
Goodwill	25,822
Deferred tax liability	925
Total fair value of consideration transferred	$	32,150
Other liabilities	500
Net assets acquired	2,607
Goodwill	4,562
Total fair value of consideration transferred	$	7,169

Intangible assets acquired, amortization method and estimated useful life as of ~~July~~September 1, 2021, were as follows (dollars in thousands):

Useful Life

Amortization Method

Fair Value

Customer relationships

14 years

Straight-line

3,329

Development technology

6 years

Straight-line

6,000

Total intangible assets acquired

36,~~329~~000

~~Pro~~BiEsseA ~~forma financial information related to the acquisition of BSA has not been provided as it is not material to our consolidated results of operations.~~ Acquisition

On July 1, 2021, the Company completed the acquisition of BiEsse A-Laboratorio die Analisi Veterinarie S.r.l. (“BSA”). The Company acquired 100% of the issued and outstanding shares of BSA for an aggregate purchase price of $7.2 million, consisting of $4.8 million in cash and contingent consideration described below. On January 1, 2022, BSA was merged into scil animal care company Srl, a wholly owned subsidiary of scil animal care company GmbH ("scil").

As additional consideration for the shares, the Company agreed to a contingent earn-out of $2.7 million based on the achievement of certain performance metrics within three annual periods after 2021, each of which can pay up to one third of the total earn-out. The fair value of the contingent consideration was $2.3 million as of the acquisition date, and subsequently decreased to $0.5 million as of March 31, 2023.

-17-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in $4.6 million of goodwill, all of which is attributable to our International segment. The goodwill resulting from this acquisition consists largely of the Company's expected future product sales and synergies from combining operations. All of the goodwill is tax deductible for purposes of calculating Controlled Foreign Corporation tested income, which may result in a decrease to the Company's future U.S. federal income tax liability.

The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of July 1, 2021. The total purchase consideration is subject to customary working capital adjustments, which were finalized as of December 31, 2021.

Per the tax indemnification included in the purchase agreement of BSA, the seller has indemnified the Company for $0.5 million related to uncertain tax positions taken in prior years. The outcome of this arrangement will either be settled or expire due to lapse of statute of limitations by 2025. As of March 31, 2023, approximately $0.4 million of the indemnification agreement remains outstanding.

The information below represents the purchase price allocation as of the acquisition date (in thousands):


	July 1, 2021
Purchase price in cash	$	4,835
Fair value of contingent consideration	2,334
Total purchase consideration	$	7,169

Cash and cash equivalents	$	322
Accounts receivables	152
Other receivables	497
Prepaid expenses	8
Other current assets	275
Property and equipment, net	89
Operating lease right-of-use assets	44
Other intangible assets, net	3,329

Total assets acquired	4,716
Accounts payable	208
Accrued liabilities	334
Operating lease liabilities, current	37
Deferred revenue, current, and other	85
Operating lease liabilities, non-current	20
Deferred tax liability	925
Other liabilities	500
Net assets acquired	2,607
Goodwill	4,562
Total fair value of consideration transferred	$	7,169

-18-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Intangible assets acquired, amortization method and estimated useful life as of July 1, 2021, were as follows (dollars in thousands):

Useful Life

Amortization Method

Fair Value

Customer relationships

14 years

Straight-line

3,329

Total intangible assets acquired

3,329

Lacuna Acquisition

On February 1, 2021, the Company completed the acquisition of Lacuna Diagnostics, Inc. ("Lacuna"), a veterinary digital cytology company, to broaden the Company's point of care diagnostic offerings. The Company acquired 100% of the issued and outstanding shares of Lacuna for a purchase price of $4.3 million. The Company then dissolved Lacuna on February 1, 2021. In accordance with the purchase agreement, the Company is required to hold a $0.4 million general indemnity holdback that is intended to provide a non-exclusive source of funds for the payment of any losses identified and shall be released within 18 months of closing. ~~$0.3 million of the $0.4 million indemnification holdback was released during the quarter ended September 30, 2022.~~ As of ~~September~~December 3031, 2022, ~~$0.0 million of~~ the ~~indemnification~~full ~~holdback remains outstanding. As additional consideration for the shares, the Company agreed to a contingent earn-out of~~ $2.0 ~~million based on the achievement of certain performance metrics within a twelve month period ("Initial Earn Out Period"), reducing to $1~~.04 million ifindemnification ~~such~~holdback ~~metrics were met in a twelve month period subsequent to the Initial Earn Out Period. The fair value of the contingent consideration as of the acquisition date~~ was ~~$1.7 million,~~released and ~~subsequently~~none ~~decreased~~remains ~~to $0 as of September 30, 2022 and December 31, 2021~~outstanding.

As additional consideration for the shares, the Company agreed to a contingent earn-out of $2.0 million based on the achievement of certain performance metrics within a twelve month period ("Initial Earn Out Period"), reducing to $1.0 million if such metrics were met in a twelve month period subsequent to the Initial Earn Out Period. The fair value of the contingent consideration as of the acquisition date was $1.7 million, and subsequently decreased to $0 as of March 31, 2023. The twelve month period subsequent to the Initial Earn Out Period ended on March 31, 2023. The required performance metrics were not achieved, and no contingent consideration was paid.

The total purchase consideration exceeded the fair value of the identifiable net assets acquired, resulting in $4.2 million of goodwill, primarily related to expanded opportunities with our offerings. All of the goodwill is allocated to the North America segment and is not tax deductible for income tax purposes.

The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. As such, the total purchase consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of February 1, 2021. The total purchase consideration is subject to customary working capital adjustments, which were finalized as of February 1, 2022.

~~The~~-19- ~~information below represents the purchase price allocation as of the acquisition date (in thousands):~~

	February 1, 2021
Purchase price	$	4,255
Fair value of contingent consideration	1,700
Total purchase consideration	$	5,955
Cash and cash equivalents	$	3
Accounts receivable	170
Property and equipment, net	530
Other intangible assets, net	1,185
Total assets acquired	1,888
Deferred tax liability	133
Net assets acquired	1,755
Goodwill	4,200
Total fair value of consideration transferred	$	5,955

-18-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The information below represents the purchase price allocation as of the acquisition date (in thousands):


	February 1, 2021
Purchase price in cash	$	4,255
Fair value of contingent consideration	1,700
Total purchase consideration	$	5,955

Cash and cash equivalents	$	3
Accounts receivable	170
Property and equipment, net	530
Other intangible assets, net	1,185

Total assets acquired	1,888
Deferred tax liability	133
Net assets acquired	1,755
Goodwill	4,200
Total fair value of consideration transferred	$	5,955

Intangible assets acquired, amortization method and estimated useful life as of February 1, 2021, were as follows (dollars in thousands):

Useful Life

Amortization
Method

Fair Value

Developed technology

3 years

Straight-line

1,000

Customer relationships

6 months

Straight-line

150

Trade name

11 months

Straight-line

Total intangible assets acquired

1,185

Pro forma financial information related to the acquisition of Lacuna has not been provided as it is not material to our consolidated results of operations.

Other Related Party Activities

In connection with the VetZ acquisition, the Company entered into a related party building lease agreement with the former owners, who are now employees of the Company. The Company recorded operating lease expense of $4772 thousand and $~~199~~ 75 thousand related to this lease for the three ~~and nine~~ months ended ~~September~~March 3031, 2023 and 2022, respectively. The right-of-use asset and lease liability related to the building lease were approximately $2.26 million and $2.23 million as of ~~September~~March 3031, 2023 and December 31, 2022, respectively.

Prior to the closing of the VetZ acquisition, the former owners who are now employees of the Company purchased vehicles and bicycles from VetZ. As of January 3, 2022, a receivable of approximately $165 thousand was included in the preliminary purchase price allocation related to these transactions. These receivables were settled in full on January 7, 2022.

-1920-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The carrying values of investments in unconsolidated affiliates, categorized by type of investment, is as follows (in thousands):

	September 30, 2022		December 31, 2021
	March 31, 2023		December 31, 2022
Equity method investment	$	~~1,312~~592	$	~~2,406~~941
Non-marketable equity security investment	~~3,018~~—		3,018
Investments in unconsolidated affiliates	$	~~4,330~~592	$	53,~~424~~959

Equity Method Investment

On September 24, 2018, we invested approximately $5.1 million, including costs, to acquire an equity interest in a business as part of our product development strategy. As of ~~September~~March 3031, ~~2022~~2023, the Company's ownership interest in the business was 26.0%. In connection with the investment, the Company entered into a Manufacturing Supply Agreement that grants the Company global exclusivity to specified products to be delivered under the agreement for a 15-year period that begins upon the Company's receipt and acceptance of an initial order under the agreement. The Company accounts for this investment using the equity method of accounting. Under the equity method, the carrying value of the investment is adjusted for the Company's proportionate share of the investee's reported earnings or losses with the corresponding share of earnings or losses reported as Equity in losses of unconsolidated affiliates, listed below Net (loss) income before equity in losses of unconsolidated affiliates within the Condensed Consolidated Statements of Loss. The Company has a note receivable from the equity method investee. Refer to Note 17, Notes Receivable, for additional details.

Non-Marketable Equity Security Investment

On August 8, 2018, the Company invested approximately $3.0 million, including costs, in exchange for preferred stock of LightDeck. The Company’'s investment iswas a non-marketable equity security, recorded using the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes.

As part of the agreement, the Company entered into a Supply and License Agreement, which ~~provides~~provided that ~~the~~LightDeck ~~investee~~ produce and commercialize products that will enhance the Company's diagnostic portfolio. As part of this agreement, the Company made an upfront payment of $1.0 million related to a worldwide exclusive license agreement over a 20-year period, recorded in both short and long-term other assets as of December 31, 2022. In addition, the agreement ~~provides~~provided for an additional contingent payment of $10.0 million, relating to the successful achievement of sales milestones. This potential future milestone payment ~~has~~was not ~~yet~~accrued ~~been~~as ~~accrued~~of December 31, 2022, as it iswas not deemed by the Company to be probable ~~at this time~~.

~~Both~~The ~~parties~~Company inevaluated ~~this~~the ~~arrangement~~investment ~~are~~in ~~active~~LightDeck ~~participants~~as ~~and~~well ~~are~~as ~~exposed~~a toFirst ~~significant~~Promissory ~~risks~~Note and ~~rewards~~Second ~~dependent~~Promissory onNote, ~~the~~discussed ~~commercial~~in ~~success~~Note of17, ~~the~~to ~~activities~~determine ofwhether we met the ~~collaboration.~~requirement ~~The~~for ~~parties~~consolidation ~~are~~within ~~actively~~the ~~working~~Variable onInterest ~~developing~~Entity ("VIE") and ~~testing~~Voting ~~the~~Interest ~~product~~Entity as("VOE") ~~well~~models asprior ~~funding~~to the ~~research~~acquisition ~~and~~on ~~development~~January 3, 2023. ~~Heska~~In ~~classifies~~accordance with both the ~~amounts~~VIE ~~paid~~and ~~for~~VOE ~~research~~models, ~~and~~it ~~development~~was ~~work~~concluded ~~within~~that while the ~~North~~Company ~~America~~did ~~segment~~have ~~research~~a ~~and~~variable ~~development~~interest ~~operating~~in ~~expenses.~~LightDeck ~~Expense~~prior isto ~~recognized~~the ~~when~~acquisition, ~~incurred~~the Company did not assert control over LightDeck and intherefore ~~accordance~~should ~~with~~not consolidate their financial results prior to closing the ~~development~~merger ~~plan~~transaction.

OnAs ~~September~~of 9the acquisition on January 3, ~~2022~~2023, the ~~Company~~additional ~~entered~~$10.0 million ~~into~~milestone anpayment ~~agreement~~discussed ~~among~~above ~~the~~is ~~Company,~~no ~~MBio~~longer ~~Merger~~contingent ~~Sub~~or ~~("Merger Sub")~~payable, aand ~~wholly~~the ~~owned~~remaining ~~subsidiary~~$0.8 million oflicense ~~the~~fee ~~Company,~~was ~~MBio~~treated ~~Diagnostics,~~as ~~Inc.,~~an ~~d/b/a~~increase ~~LightDeck~~to ~~Diagnostics~~the ~~("LightDeck"),~~total ~~and~~purchase ~~Shareholder~~consideration ~~Representative~~and ~~Services~~removed ~~LLC,~~from ~~whereby~~short ~~the~~and ~~Company,~~long-term ~~Merger~~other assets.

-2021-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Sub and LightDeck enter into a business combination transaction pursuant to which Merger Sub will merge with and into LightDeck, Merger Sub will cease to exist and LightDeck will become a wholly owned subsidiary of the Company for approximately $38.7 million, in a mix of cash and debt forgiveness, subject to working capital and other adjustments. The merger is expected to close in the first half of 2023, subject to customary closing conditions. If the merger has not been consummated by July 15, 2023, each of the Company and LightDeck may terminate the Agreement.

The Company evaluated the investment in LightDeck as well as a First Promissory Note and Second Promissory Note, discussed in Note 17, to determine whether they meet the requirement for consolidation within the Variable Interest Entity ("VIE") and Voting Interest Entity ("VOE") models. In accordance with both the VIE and VOE models, it was concluded that while the Company does have a variable interest in the Investee, the Company does not assert control over the investee and therefore should not consolidate their financial results prior to closing a merger transaction.

5. INCOME TAXES

The Company's total income tax benefit for our (loss) ~~income~~ before income taxes ~~were~~was as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended March 31,
	2022		2021		2022		2021
	2023		2022
Loss before income taxes and equity in losses of unconsolidated affiliates	$	(~~912~~10,151)	$	(211,~~403~~813)	$	~~(18,749)~~	$	~~(3,186)~~
Total income tax benefit	$	(~~834~~375)	$	(~~813~~2,208)	$	~~(4,175)~~	$	~~(3,429)~~

There were cash payments for income taxes, net of refunds, of $1.~~0 million and $2.~~4 million for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2022~~2023, ~~respectively,~~ and there were cash payments of $0.45 million ~~and $1.6 million~~, ~~respectively,~~ for income taxes for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022. The Company had a tax benefit of $0.~~8 million and $~~4.2 million for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2022,~~2023 ~~respectively,~~ compared to the tax benefit of $02.82 million ~~and $3.4 million~~ for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021, respectively~~2022. The ~~increase~~decrease in tax benefit in the ~~nine~~three month period is due to antax ~~increased~~expense ~~loss~~from ~~for~~transaction ~~financial~~costs ~~reporting~~and ~~purposes~~employee stock compensation. The Company recognized $0.26 million in excess tax expense related to employee share-based compensation for the three months ended ~~September~~March 3031, ~~2022~~2023, compared to $0.76 million excess tax benefit recognized for the three months ended ~~September~~March 3031, ~~2021. The Company recognized $0.3 million in excess tax benefits related to employee share-based compensation for the nine months ended September 30,~~ 2022~~, compared to $1~~.7 ~~million for the nine months ended September 30, 2021.~~

As of December 31, ~~2021~~2022, the Company had a deferred tax asset of approximately $56.74 million from net operating losses and tax credits. The Company has a valuation allowance recorded on statutory deferred tax assets in Germany and a partial valuation allowance recorded on state net operating losses in the US. In the ~~third~~first quarter, the Company ~~forecasts~~forecasted an increase of approximately $0.95 million ofto the valuation allowance through the annual effective tax rate used to estimate income tax expense. The increase is due to forecasted future financial losses in Germany, Italy, and Spain. After the increase, the net valuation allowance is forecasted to be approximately $35.75 million as of December 31, ~~2022~~2023.

-2122-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

6. LEASES

Lessee Accounting

The Company leases buildings, office equipment, and vehicles. The following table summarizes the Company's operating and finance lease balances (in thousands):

Leases

Balance Sheet Location

~~September~~March 3031, ~~2022~~2023

December 31, ~~2021~~2022

Assets

Operating

Operating lease right-of-use assets

613,~~810~~101

56,~~198~~897

Finance

Property and equipment, net

1,~~368~~534

1,~~650~~471

Total Lease Assets

8,178

6,848

Total Leased Assets

14,635

8,368

Liabilities

Operating

Operating lease liabilities, current

24,~~681~~049

2,~~227~~944

Operating lease liabilities, non-current

49,~~713~~674

34,~~509~~528

Finance

Deferred revenue, current, and other

~~127~~152

~~200~~127

Other liabilities

~~290~~333

~~331~~307

Total Lease Liabilities

714,~~811~~208

67,~~267~~906

Lessor Accounting

The following table summarizes the profit recognized on the commencement date for sales-type leases and lease income for equipment-only operating leases (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended March 31,
	2022		2021		2022		2021
	2023		2022
Sales-type lease revenue	$	34,~~785~~995	$	34,~~086~~101	$	~~10,838~~	$	~~8,212~~
Sales-type lease cost of revenue	3,~~145~~959		23,~~417~~473		~~8,972~~		~~6,378~~
Profit recognized at commencement for sales-type leases	$	~~640~~1,036	$	~~669~~628	$	~~1,866~~	$	~~1,834~~
Operating lease income	$	~~400~~375	$	~~514~~503	$	~~1,286~~	$	~~1,655~~

-2223-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

7. EARNINGS PER SHARE

The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted earnings per share ("EPS") for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2022~~2023 and ~~2021~~2022 (in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended March 31,
	2022		2021		2022		2021
	2023		2022
Net loss attributable to Heska Corporation	$	(~~436~~10,125)	$	(19,~~898~~986)	$	~~(15,668)~~	$	~~(594)~~
Basic weighted-average common shares outstanding	10,~~368~~390		10,~~195~~273		~~10,330~~		~~9,949~~
Dilutive effect of stock options and restricted stock	—		—		—		—
Diluted weighted-average common shares outstanding	10,~~368~~390		10,~~195~~273		~~10,330~~		~~9,949~~
Basic loss per share attributable to Heska Corporation	$	(0.0497)	$	(0.1997)	$	~~(1.52)~~	$	~~(0.06)~~
Diluted loss per share attributable to Heska Corporation	$	(0.0497)	$	(0.1997)	$	~~(1.52)~~	$	~~(0.06)~~

The following potentially outstanding common shares from ~~convertible~~conversion ~~senior~~of ~~notes~~the Notes, stock options and restricted stock awards were excluded from the computation of diluted EPS because the effect would have been antidilutive (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	Three Months Ended March 31,
	2022	2021	2022	2021
	2023	2022
Convertible Senior Notes	996	996	~~996~~	~~996~~
Stock options and restricted stock	~~229~~217	~~404~~356	~~272~~	~~381~~
	1,225	1,400	1,268	1,377
	1,213	1,352

As more fully described in Note 16, the ~~Convertible Senior~~ Notes ~~(the "Notes")~~ are convertible under certain circumstances, as defined in the indenture, into a combination of cash and shares of the Company's common stock. The Company ~~early~~applies ~~adopted ASU 2020-06, effective January 1, 2021, which amends certain guidance on~~ the computation of EPS for convertible instruments. Prior to the adoption of ASU 2020-06, the Company used the treasury stock method when calculating the potential dilutive effect of the conversion feature of the Notes on earnings per share, if ~~any. Under ASU 2020~~-~~06, the treasury stock method is no longer available, and entities must apply the if-~~converted method for convertible instruments, and includes the effect of the potential share settlement ~~must be included~~ in the diluted earnings per share calculation when an instrument may be settled in cash or shares. To determine the dilutive effect to earnings per share using the if-converted method, interest expense on the outstanding Notes is added back to the diluted earnings per share numerator and all of the potentially dilutive shares are included in the diluted earnings per share denominator. For the three ~~and nine~~ months ended ~~September~~March 3031, ~~2022~~2023, and the three ~~and nine~~ months ended ~~September~~March 3031, ~~2021~~2022, all of the potentially issuable shares with respect to the Notes were excluded from the calculation of diluted net earnings per share because the effect was anti-dilutive.

-2324-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

8. GOODWILL AND OTHER INTANGIBLES

The following summarizes the change in goodwill during the ~~nine~~three months ended ~~September~~March 3031, ~~2022~~2023 (in thousands):

	North America		International		Total
Carrying amount, December 31, 2021	$	65,535	$	53,291	$	118,826
Carrying amount, December 31, 2022	$	64,912	$	71,006	$	135,918
Goodwill attributable to acquisitions (subject to change)	—8,359		~~22,148~~—		228,~~148~~359
Measurement period adjustment to prior year acquisition	(17)		—		(17)
Foreign currency adjustments	8		1,118		1,126
Foreign currency adjustments	(737)		(10,260)		(10,997)
Carrying amount, March 31, 2023	$	73,279	$	72,124	$	145,403
Carrying amount, September 30, 2022	$	64,781	$	65,179	$	129,960

Other ~~intangibles~~intangible assets, net consisted of the following (in thousands):

September 30, 2022

December 31, 2021

March 31, 2023

December 31, 2022

Gross Carrying Amount

Accum. Amortiz.

Net Carrying Amount

Gross Carrying Amount

Accum. Amortiz.

Net Carrying Amount

Intangible assets subject to amortization:

Customer relationships and other

5257,~~857~~641

(1317,~~775~~577)

3940,~~082~~064

4756,~~629~~900

(1116,~~145~~002)

3640,~~484~~898

Developed technology

1824,~~807~~217

(57,~~572~~366)

1316,~~235~~851

1519,~~633~~143

(36,~~218~~462)

12,~~415~~681

Trade names

1,~~672~~845

(~~251~~377)

1,~~421~~468

~~223~~1,818

(~~166~~319)

571,499

Intangible assets not subject to amortization:

Trade names

67,~~697~~430

—

67,~~697~~430

7,~~749~~315

—

7,~~749~~315

Total intangible assets

8091,~~033~~133

(1925,~~598~~320)

6065,~~435~~813

7185,~~234~~176

(1422,~~529~~783)

5662,~~705~~393

Amortization expense was $12.45 million and $12.62 million for the three months ended ~~September~~March 3031, ~~2022~~2023 and ~~2021, respectively. For the nine months ended September 30,~~ 2022 ~~and 2021 the amortization expense was $5.4 million and $4.6 million~~, respectively. During the three months ended September 30, 2022, the Company impaired customer relationship and trade name intangible assets as a result of entity rationalization due to acquisition activity. Impairment expense of $0.2 million was recorded to Sales and marketing within operating expenses.

The remaining weighted-average amortization period for intangible assets is approximately 7.86 years.

~~-24-~~Estimated amortization expense related to intangibles for each of the five years from 2023 (remaining) through 2027 and thereafter is as follows (in thousands):


Year Ending December 31,
2023 (remaining)	$	6,712
2024	8,456
2025	8,411
2026	8,011
2027	7,074
Thereafter	19,719
Total amortization related to finite-lived intangible assets	$	58,383
Indefinite-lived intangible assets	7,430
Net intangible assets	$	65,813

-25-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Estimated amortization expense related to intangibles for each of the five years from 2022 (remaining) through 2026 and thereafter is as follows (in thousands):

Year Ending December 31,
2022 (remaining)	$	2,133
2023	7,987
2024	7,405
2025	7,365
2026	7,005
Thereafter	21,843
Total amortization related to finite-lived intangible assets	$	53,738
Intangible assets not subject to amortization	6,697
Net intangible assets	$	60,435

9. PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consisted of the following (in thousands):

	September 30, 2022		December 31, 2021
	March 31, 2023		December 31, 2022
Land	$	2,~~029~~403	$	2,~~959~~182
Building	1011,~~787~~582		11,~~288~~558
Machinery and equipment	3842,~~218~~251		39,~~851~~141
Office furniture and equipment	2,~~145~~272		1,~~732~~951
Computer hardware and software	5,~~332~~657		5,~~285~~923
Leasehold and building improvements	10,~~878~~986		10,~~796~~854
Construction in progress	~~653~~20,980		~~286~~283
Property and equipment, gross	7096,~~042~~131		7271,~~197~~892
Less accumulated depreciation	(3841,~~983~~101)		(3839,~~784~~721)
Total property and equipment, net	$	3155,~~059~~030	$	3332,~~413~~171

The Company has subscription agreements whereby its instruments in inventory may be placed at a customer's location on a rental basis. For instruments classified as operating leases, the cost of these instruments is transferred to machinery and equipment and depreciated, typically over a 5 to 7 year period depending on the circumstance under which the instrument is placed with the customer. Our cost of instruments under operating leases as of ~~September~~March 3031, ~~2022~~2023 and December 31, ~~2021~~2022, was $1615.04 million and $15.17 million, respectively, before accumulated depreciation of $6.34 million and $56.85 million, respectively.

Depreciation expense was $1.46 million and $10.78 million for the three months ended ~~September~~March 3031, ~~2022~~2023 and ~~2021, respectively, and $3.3 million and $5.2 million for the nine months ended September 30,~~ 2022 ~~and 2021~~, respectively.

-25-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

10. INVENTORIES

Inventories consisted of the following (in thousands):

	September 30, 2022		December 31, 2021
	March 31, 2023		December 31, 2022
Raw materials	$	1923,~~392~~013	$	1620,~~094~~978
Work in process	35,~~474~~497		34,~~656~~102
Finished goods	3435,~~611~~673		2934,~~611~~970
Total inventories	$	5764,~~477~~183	$	4960,~~361~~050

Inventories are measured on a first-in, first-out basis and stated at lower of cost or net realizable value.

-26-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

11. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

	September 30, 2022		December 31, 2021
	March 31, 2023		December 31, 2022
Accrued payroll and employee benefits	$	67,~~623~~287	$	97,~~392~~908
Inventory in transit	2,206		1,605
Accrued property taxes	468		670
Accrued taxes	1,672		3,574
Accrued purchase orders	1,898		203
Interest accrual on Notes	111		1,464
Accrued taxes	1,558		2,123
Other	3,680		3,389
Inventory in transit	1,755		677
Total accrued liabilities	$	14,292	$	19,424
Accrued transaction costs	5,247		156
Other	2,653		3,412
Total accrued liabilities	$	20,866	$	15,149

Other accrued liabilities consist of items that are individually less than 5% of total current liabilities.

12. CAPITAL STOCK

During the ~~nine~~three months ended ~~September~~March 3031, ~~2022~~2023, the Company granted the following restricted stock awards and restricted stock units:

	Nine Months Ended September 30, 2022
	Three Months Ended March 31, 2023
	Awards/UnitsGranted	Weighted-Average Grant Date Fair Value (per award/unit)
Restricted stock awards	7689,~~941~~347	$	~~116~~81.6574
Restricted stock units	2523,~~853~~433	$	~~101~~92.3455

We valued the restricted stock awards and restricted stock units related to service and/or Company performance targets based on grant date fair value and will expense over the requisite service period when achievement of those conditions is deemed probable.

-2627-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

13. ACCUMULATED OTHER COMPREHENSIVE ~~INCOME (~~LOSS)

Accumulated other comprehensive ~~income (~~loss) consisted of the following (in thousands):

	Pension Adjustments		Foreign Currency Translation1		Foreign Currency (Loss) Gain on Intra-EntityTransactions2		Total Accumulated Other Comprehensive ~~Income~~ (Loss) Income
Balances at December 31, 2021	$	(279)	$	1,974	$	3,342	$	5,037
Balances at December 31, 2022	$	(180)	$	(4,900)	$	(1,426)	$	(6,506)
Current period other comprehensive loss	—		(14,007)		(12,067)		(26,074)
Current period other comprehensive income	—		1,234		1,366		2,600
Balances at September 30, 2022	$	(279)	$	(12,033)	$	(8,725)	$	(21,037)
Balances at March 31, 2023	$	(180)	$	(3,666)	$	(60)	$	(3,906)

1 Foreign currency gains and losses related to translation of foreign subsidiary financial statements.

2 The Company has intercompany loans of a long-term investment nature that are denominated in a foreign currency. These transactions are considered to be of a long-term nature if settlement is not planned or anticipated in the foreseeable future.

14. COMMITMENTS AND CONTINGENCIES

Warranties

The Company's current terms and conditions of sale include a limited warranty that its products and services will conform to published specifications at the time of shipment and a more extensive warranty related to certain products. The Company also sells a renewal warranty for certain of its products. The typical remedy for breach of warranty is to repair or replace any defective product, and if not possible or practical, the Company will accept the return of the defective product and refund the amount paid. Historically, the Company has incurred minimal warranty costs. The Company's warranty reserve was $0.43 million ~~and $0.5 million~~ as of ~~September~~both March 3031, ~~2022~~2023 and December 31, ~~2021~~2022, ~~respectively,~~ included in Accrued liabilities on the Condensed Consolidated Balance Sheets.

Litigation

From time to time, the Company may be involved in litigation relating to claims arising out of its operations. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred, and the amount can be reasonably estimated.

On February 18, 2020, a former managing director of scil filed a claim disputing the effective date of the termination of his management service agreement and the validity of the Company´s waiver of his two-year post-contractual non-compete obligation. The Company defended itself from the claim but ultimately reached a settlement agreement and paid $0.8 million to the defendant on April 28, 2022. The Company is indemnified by the scil acquisition agreement for this claim.

As of ~~September~~March 3031, ~~2022~~2023, the Company was not a party to any other legal proceedings that were expected, individually or in the aggregate, to have a material adverse effect on ~~its~~our business, financial condition, or operating results.

-2728-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Global Supply and Licensing Agreement

On March 28, 2022, the Company entered into a global supply and licensing agreement with VolitionRx Limited (“Volition”) to adapt and commercialize the Nu.Q® Vet Cancer Screening Test at the point of care for canines and felines on Heska’s technology. On March 30, 2022, the Company made an upfront milestone payment of $10 million to Volition in exchange for exclusive rights to develop the Nu.Q® Vet Cancer Screening Test for the point of care and non-exclusive rights for central reference lab testing. The $10 million payment was expensed to Research and development on the Condensed Consolidated Statements of Loss for the ~~nine~~three months ended ~~September 30~~March 31, 2022. The Company is obligated to pay an additional $13 million on or before December 31, 2024, if certain milestones are met, or to obtain an extended timeline to meet those milestones. If those milestones are not met by the agreed upon extension, the agreement may be terminated. However, if the $13 million milestones are met, the agreement will have a total term of 22 years for exclusivity in point of care testing. If the first milestones are met and the agreement does not terminate, there will be another $5 million payment due upon the achievement of an additional milestone within the remaining term of the agreement. These potential future milestone payments have not yet been accrued, as the Company has not deemed them probable at this time.

Off-Balance Sheet Commitments

We have no off-balance sheet arrangements. Refer to Note 4 for discussion of our variable interest entity.

Purchase Obligations

The Company has contractual obligations with suppliers for unconditional annual minimum inventory purchases through ~~2030~~2026 in the aggregate amount of $~~105~~45.04 million as of ~~September~~March 3031, ~~2022~~2023.

15. INTEREST AND OTHER (INCOME) EXPENSE, NET

Interest and other (income) expense, net, consisted of the following (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended March 31,
	2022		2021		2022		2021
	2023		2022
Interest income	$	(~~857~~1,362)	$	(~~479~~485)	$	~~(1,917)~~	$	~~(1,335)~~
Interest expense	~~1,172~~939		~~918~~925		~~3,028~~		~~2,760~~
Other (income) expense, net	(74)		(469)		(31)		(350)
Other expense (income), net	151		(81)
Total interest and other expense (income), net	$	241	$	(30)	$	1,080	$	1,075
Total interest and other (income) expense, net	$	(272)	$	359

Cash paid for interest for the three months ended ~~September~~March 3031, ~~2022~~2023 and ~~2021~~2022 was $1.6 million and $12.62 million, respectively. ~~Cash paid for interest for the nine months ended September 30, 2022 and 2021 was $3.8 million and $3.3 million, respectively.~~

-2829-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

16. CONVERTIBLE NOTES

Convertible Notes

On September 17, 2019, the Company issued $86.25 million aggregate principal amount of 3.750% Convertible Senior Notes due 2026 , which included the exercise in full of an $11.25 million purchase option, to certain financial institutions as the initial purchasers of the Notes (the "Initial Purchasers"). The Company pays interest on the Notes semiannually in arrears at a rate of 3.750% per annum on March 15 and September 15 of each year. The Notes are senior unsecured obligations of the Company. The Notes were issued pursuant to an Indenture, dated September 17, 2019, between the Company and U.S. Bank National Association, as trustee. The net proceeds from the sale of the Notes were approximately $83.7 million after deducting the Initial Purchasers' discounts and the offering expenses payable by the Company.

Refer to Note 16, Convertible Notes, in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company's ~~2021~~2022 Form 10-K for further information on the Notes.

No portion of the Notes was converted during the ~~nine~~three months ended ~~September~~March 3031, ~~2022~~2023 and the liability was classified as long-term debt on the Company's Condensed Consolidated Balance Sheet as of ~~September~~March 3031, ~~2022~~2023.

~~Effective~~Qualifying ~~January 1, 2021, the Company early adopted ASU 2020-06, which simplifies the accounting for certain~~ convertible ~~instruments. Under the new standard, qualifying convertible~~ debt is accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. AsThe ~~a result of ASU 2020-06, the~~ Company's ~~cash interest expense is not impacted, however, the Company's~~ non-cash interest accretion is limited to the amortization of debt issuance costs under ASC 835-30. The ~~new~~ effective interest rate of the Notes ~~post-adoption~~ is 4.35%. ~~The Company also reversed the conversion feature amount recorded in APIC and reversed the difference in non-cash interest expense via retained earnings.~~

The following table summarizes the net carrying amount of the Notes (in thousands):

	September 30, 2022		December 31, 2021
	March 31, 2023		December 31, 2022
Principal amount of the Notes	$	86,250	$	86,250
Unamortized debt discount	(1,~~893~~671)		(21,~~216~~783)
Net carrying amount	$	84,~~357~~579	$	84,~~034~~467

Interest expense related to the Notes is comprised of the amortization of debt discount and debt issuance costs and the contractual coupon interest as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	Three Months Ended March 31,
	2022		2021		2022		2021
	2023		2022
Interest expense related to contractual coupon interest	$	809	$	809	$	~~2,426~~	$	~~2,426~~
Interest expense related to amortization of the debt discount	~~109~~111		~~104~~107		~~323~~		~~310~~
	$	~~918~~920	$	~~913~~916	$	~~2,749~~	$	~~2,736~~

As of ~~September~~March 3031, ~~2022~~2023, the remaining period over which the unamortized discount will be amortized is 43.5 years.

The estimated fair value of the Notes was $113.4 million and $89.1 million as of March 31, 2023 and December 31, 2022, respectively, determined through consideration of quoted market prices in less active markets. The fair value measurement is classified as Level 2 in the fair value hierarchy, which is defined in ASC 820 as inputs other than quoted prices in active markets that are either directly or indirectly observable. Based on our closing stock price of $97.62 on March 31, 2023, the if-~~29-~~converted value exceeded the aggregate principal amount of the Notes by $10.9 million.

-30-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The estimated fair value of the Notes was $98.2 million and $194.3 million as of September 30, 2022 and December 31, 2021, respectively, determined through consideration of quoted market prices in less active markets. The fair value measurement is classified as Level 2 in the fair value hierarchy, which is defined in ASC 820 as inputs other than quoted prices in active markets that are either directly or indirectly observable. Based on our closing stock price of $72.92 on September 30, 2022, the if-converted value did not exceed the aggregate principal amount of the Notes.

17. NOTES RECEIVABLE

Convertible Promissory Note

On December 9, 2020, the Company's equity method investee (the “Equity Method Investee”), issued a Convertible Promissory Note to the Company (the “Convertible Promissory Note”) with a principal amount of $6.65 million and a stated interest rate of 3.0% per annum that is payable monthly. The Convertible Promissory Note has a maturity date of December 9, 2023, or otherwise upon qualified redemption event or in the event of a default. Refer to Note 4 for additional information on our equity method investment.

The conversion of the Convertible Promissory Note is contingent upon certain events. Due to the convertible debt features included in the Convertible Promissory Note, it is not an equity security and is therefore not considered an additional investment in our Equity Method Investee. The Company accounted for the transaction as a note receivable, included in Related party convertible note receivable, net on the Consolidated Balance Sheets. The note receivable will be measured at amortized cost and evaluated for credit losses each reporting period. The Company determined that the redemption features described above met the definition of an embedded derivative that requires bifurcation from the note receivable host. The Company measured the redemption features at fair value, with the residual proceeds paid allocated to the note receivable host, creating a discount to the note receivable. The discount will be amortized over the contractual term of the Convertible Promissory Note using the effective interest method. The effective interest rate of the Convertible Promissory Note is 8.69%, and the amortization of the discount will be included as interest income within Interest and other (income) expense, net on the Condensed Consolidated Statements of Loss. The fair value of the derivative will be remeasured each reporting period, with the mark-to-market adjustment to be included in Interest and other (income) expense, net on the Condensed Consolidated Statements of Loss.

The following table summarizes the net carrying amount of the note receivable, including the unamortized discount and allowance for expected credit losses, as well as the fair value of the embedded derivative asset (in thousands):

September 30, 2022

December 31, 2021

March 31, 2023

December 31, 2022

Principal amount

6,650

Unamortized discount

(~~425~~251)

(~~672~~339)

Allowance for expected credit losses

(34,~~565~~264)

(674,264)

Net carrying amount

2,~~660~~135

52,~~911~~047

Embedded derivative asset

~~355~~177

~~889~~177

Related party convertible note receivable, net

32,~~015~~312

62,~~800~~224

The allowance for expected credit losses ~~increased~~did ~~$3.5 million~~not change from December 31, ~~2021.~~2022 ~~The change reflects increased risk of collectability given the investee's current financial position and ability~~ to ~~achieve~~March ~~certain events required for conversion of the note~~31, ~~which are largely driven by more recent challenges and uncertainties in the macro-economic environment~~2023. ~~These factors increased the probability of default.~~

~~-30-~~Promissory Notes

On February 1, 2021, LightDeck issued a Promissory Note to the Company (the “First Promissory Note”) with a principal amount of $9.0 million and a stated interest rate of 10.0% per annum that is payable monthly. As discussed further in Note 3 and Note 4, the Company previously owned preferred stock in LightDeck that was accounted for as a non-marketable equity security until the Company acquired 100% of the shares of LightDeck on January 3, 2023.

The First Promissory Note has a maturity date of December 1, 2024 and provides for interest only payments through December 1, 2023. Beginning on January 1, 2024, the First Promissory Note requires repayment of

-31-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

the principal and interest over twelve consecutive monthly payments. As additional consideration, the Company was also issued a warrant to acquire securities of LightDeck that expires December 31, 2034. On September 19, 2022, a second Promissory ~~Notes~~Note (the "Second Promissory Note") was issued to the Company with a principal amount of $4.7 million and a stated interest rate of 10.0% per annum that is payable on December 31, 2023. The Second Promissory Note has a maturity date of the earlier of December 31, 2023 and a merger transaction with LightDeck. Both the First Promissory Note and Second Promissory Note were settled as part of the acquisition on January 3, 2023.

OnThe ~~February~~Company 1,evaluated ~~2021, one of~~ the ~~Company's~~accounting ~~equity~~treatment ~~investees~~of (the ~~"Investee"),~~warrant ~~which~~to ~~the~~acquire ~~Company~~securities ~~accounts~~and ~~for~~determined asit ais ~~non-marketable equity security, issued~~ a ~~Promissory~~freestanding ~~Note~~instrument tothat ~~the~~meets ~~Company (~~the ~~“First~~definition ~~Promissory~~of ~~Note”) with~~ a ~~principal~~derivative ~~amount~~under ofASC ~~$9.0 million~~815 and arequires ~~stated~~bifurcation ~~interest~~from ~~rate~~the ofnote 10receivable host.0% ~~per~~The ~~annum~~Company ~~that~~measured isthe ~~payable~~warrant ~~monthly.~~at ~~The~~fair ~~First~~value, ~~Promissory~~with ~~Note~~the ~~has~~residual aproceeds ~~maturity~~paid ~~date~~allocated ofto ~~December~~the 1note receivable host, ~~2024~~creating ~~and~~a ~~provides~~discount ~~for~~to ~~interest~~the ~~only~~note ~~payments~~receivable. ~~through~~The ~~December~~discount 1,will ~~2023.~~be ~~Beginning~~amortized onover ~~January~~the 1,contractual ~~2024,~~term of the ~~First~~ Promissory Note ~~requires~~using ~~repayment of~~ the ~~principal~~effective ~~and~~ interest ~~over~~method. ~~twelve~~The ~~consecutive~~effective ~~monthly~~interest ~~payments.~~rate Asof ~~additional consideration,~~ the ~~Company~~Promissory ~~was~~Note ~~also~~is ~~issued~~10.99%, aand ~~warrant~~the toamortization ~~acquire securities~~ of the ~~Investee~~discount ~~that~~will ~~expires~~be ~~December~~included ~~31,~~as ~~2034.~~interest Onincome ~~September~~within ~~19,~~Interest ~~2022,~~and aother ~~second Promissory Note~~ (~~the "Second Promissory Note"~~income) ~~was~~expense, ~~issued~~net toon the ~~Company~~Condensed ~~with~~Consolidated aStatements ~~principal amount~~ of $4Loss.~~7 million~~ ~~and~~The afair ~~stated~~value ~~interest rate~~ of ~~10.0%~~the ~~per~~derivative ~~annum~~was ~~that~~$0 isas ~~payable~~of on December 31, ~~2023~~2022. The ~~Second~~warrant ~~Promissory~~was ~~Note~~cancelled ~~has~~as ~~a maturity date~~ of the ~~earlier~~January ~~of December 31~~3, 2023 ~~and a merger transaction with the Investee~~acquisition. ~~Refer to Note 4 for additional information on our equity investments and the agreement for a merger transaction.~~

The following table summarizes the carrying value of the notes receivable, including the unamortized discount and allowance for expected credit losses (in thousands):

The Company evaluated the accounting treatment of the warrant to acquire securities and determined it is a freestanding instrument that meets the definition of a derivative under ASC 815 and requires bifurcation from the note receivable host. The Company measured the warrant at fair value, with the residual proceeds paid allocated to the note receivable host, creating a discount to the note receivable. The discount will be amortized over the contractual term of the Promissory Note using the effective interest method. The effective interest rate of the Promissory Note is 10.99%, and the amortization of the discount will be included as interest income within Interest and other (income) expense, net on the Condensed Consolidated Statements of Loss . The fair value of the derivative will be remeasured each reporting period, with the mark-to-market adjustment to be included in other Interest and other expense, net on the Condensed Consolidated Statements of Loss .


	March 31, 2023		December 31, 2022
Principal amount	$	—	$	13,700
Unamortized discount	—		(189)
Allowance for expected credit losses	—		—
Promissory notes receivable from investee, net	$	—	$	13,511

	September 30, 2022		December 31, 2021
Principal amount	$	13,700	$	9,000
Unamortized discount	(206)		(254)
Allowance for expected credit losses	(298)		(298)
Promissory notes receivable from investee, net	$	13,196	$	8,448

18. SEGMENT REPORTING

The Company’s two segments are North America and International. The North America segment is comprised of the Company's operations in the United States, Canada and Mexico and the International segment is comprised of geographies outside of North America, which are the Company's operations primarily in Australia, France, Germany, Italy, Malaysia, Spain and Switzerland. Certain expenses incurred at the Company’s headquarters located in the North America segment are allocated to each segment in a manner consistent with where the benefits from the expenses are derived. However, there are certain corporate expenses included in the North America segment that the Company does not allocate. Such expenses include research and development, and certain selling, marketing, general, and administrative costs that support the global organization. Sales and transfers between operating segments are accounted for at market-based transaction prices and are eliminated in consolidation. The Company's sales are determined by the country of origin where the sale occurred.

Our Chief Operating Decision Maker ("CODM") evaluates segment performance and allocates resources based on Revenue, Cost of Revenue, Gross Profit, Gross Margin and Operating Income. The CODM does not evaluate operating segments using asset information; however, we have included total asset information by segment below as there was a material change in total assets by segment as of March 31, 2023, due to the acquisition of LightDeck on January 3, 2023.

-3132-

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

evaluate operating segments using asset information; however, we have included total asset information by segment below as there was a material change in total assets by segment as of September 30, 2022, due to the acquisition of VetZ on January 3, 2022.

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

Three Months Ended September 30, 2022	North America			International			Total
Three Months Ended March 31, 2023	North America			International			Total
Total revenue	$	4038,~~329~~560		$	2123,~~163~~821		$	6162,~~492~~381
Cost of revenue	2120,~~584~~451			1314,~~032~~531			34,~~616~~982
Gross profit	$	18,~~745~~109		$	89,~~131~~290		$	2627,~~876~~399
Gross margin	4647		%	3839		%	44		%
Operating income (loss)	$	885		$	(1,556)		$	(671)
Operating loss	$	(9,206)		$	(1,217)		$	(10,423)

Three Months Ended September 30, 2021	North America			International			Total
Three Months Ended March 31, 2022	North America			International			Total
Total revenue	$	37,~~809~~374		$	2227,~~431~~426		$	6064,~~240~~800
Cost of revenue	2019,~~034~~466			1416,~~962~~189			3435,~~996~~655
Gross profit	$	17,~~775~~908		$	711,~~469~~237		$	2529,~~244~~145
Gross margin	4748		%	3341		%	4245		%
Operating loss	$	(1,645)		$	(788)		$	(2,433)
Operating (loss) income	$	(12,311)		$	857		$	(11,454)

Nine Months Ended September 30, 2022	North America			International			Total
Total revenue, net	$	118,607		$	72,362		$	190,969
Cost of revenue	63,158			44,463			107,621
Gross profit	$	55,449		$	27,899		$	83,348
Gross margin	47		%	39		%	44		%
Operating loss	$	(15,927)		$	(1,742)		$	(17,669)

Asset information by reportable segment as of March 31, 2023 is as follows (in thousands):

Nine Months Ended September 30, 2021	North America			International			Total
As of March 31, 2023	North America			International			Total
Total revenue, net	$	115,614		$	70,057		$	185,671
Total assets	$	377,259		$	215,456		$	592,715
Cost of revenue	60,908			46,777			107,685
Gross profit	$	54,706		$	23,280		$	77,986
Gross margin	47		%	33		%	42		%
Operating loss	$	(484)		$	(1,627)		$	(2,111)

Asset information by reportable segment as of ~~September 30~~December 31, 2022 is as follows (in thousands):

As of September 30, 2022

North America

International

Total

As of December 31, 2022

North America

International

Total

Total assets

~~370~~374,~~619~~737

~~199~~211,~~448~~079

~~570~~585,~~067~~816

~~Asset~~-33- ~~information by reportable segment as of December 31, 2021 is as follows (in thousands):~~

As of December 31, 2021						North America						International						Total
Total assets						$	441,234					$	162,838					$	604,072

-32-

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with 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 within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, that involve risks and uncertainties, and can generally be identified by our use of the words "scheduled," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions. Such statements, which include statements concerning future revenue sources and concentration, international market expansion, gross ~~profit margins~~margin, selling and marketing expenses, remaining minimum performance obligations, research and development expenses, general and administrative expenses, capital resources, financings or borrowings and additional losses, are subject to risks and uncertainties, including, but not limited to, those discussed under the caption "Risk Factors" contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 that could cause actual results to differ materially from those projected. The Risk Factors and others described in the Company’s periodic and current reports filed with the SEC from time to time are not necessarily all of the important factors that could cause the Company’s 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~~May 74, ~~2022~~2023 and we undertake no duty and do not intend to update this information, except as required by applicable laws. If we updated one or more forward looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. See “Statement Regarding Forward Looking Statements.”

Overview

We sell, ~~advanced~~manufacture, ~~veterinary~~market and support diagnostic and specialty products and solutions for veterinary practitioners. Our ~~offerings~~portfolio ~~include~~includes Point of Care ("POC") diagnostic laboratory instruments and consumables, ~~single-use~~including ~~offerings~~rapid ~~such~~assay asdiagnostic ~~in-clinic diagnostics tests~~products; ~~Point~~digital ofcytology ~~Care~~services; POC digital imaging diagnostic ~~instruments~~products; local and cloud-based data services; veterinary practice information management software solutions (“"PIMS”"); ~~digital~~and ~~cytology~~related ~~services;~~software ~~vaccines; local~~ and ~~cloud-based~~support; ~~data~~reference ~~services~~laboratory testing; allergy testing and immunotherapy; ~~and~~ heartworm preventive products; and vaccines. Our ~~core~~primary focus is on supporting companion animal veterinarians in ~~the~~providing ~~canine~~care ~~and~~to ~~feline~~their ~~healthcare space~~patients.

~~Point~~Our ofbusiness ~~Care~~is ~~laboratory~~composed ~~instruments~~of ~~and~~two ~~other~~operating ~~sales~~and ~~include~~reportable ~~outright~~segments: ~~instrument~~North ~~sales,~~America ~~revenue recognized from sales-type lease treatment,~~ and ~~other revenue sources, such as charges for repairs~~International. ~~Revenue~~North ~~from~~America ~~Point~~consists of ~~Care laboratory consumables primarily involves placing an instrument under contract in~~ the ~~field~~United ~~and generating future revenue from testing consumables~~States, ~~such~~Canada ~~as cartridges~~ and ~~reagents,~~Mexico. asInternational ~~that~~consists ~~instrument~~of isgeographies ~~used. Point~~outside of ~~Care~~North ~~laboratory~~America, ~~consumables~~primarily ~~also~~our ~~include~~operations ~~single-use~~in ~~diagnostic tests~~Germany, ~~such as those used for heartworm testing. Instruments placed under subscription agreements are considered operating or sales-type leases~~Italy, ~~depending on the duration and other factors of the underlying agreement. A loss of~~Spain, ~~or disruption in~~France, the supply of consumables we are selling to an installed base of instruments could substantially harm our business. All of our Point of Care laboratory and other non-imaging instruments and consumables are supplied by third partiesSwitzerland, ~~who~~Australia ~~typically own the product rights~~ and ~~supply~~Malaysia. ~~the~~The product togroups usdescribed ~~under~~below ~~marketing~~are ~~and/or~~offered ~~distribution agreements. In many cases, we have collaborated with a third party to adapt a human instrument for veterinary use. Major products~~ in ~~this~~both ~~area~~segments ~~include~~unless ~~our~~otherwise ~~instruments for chemistry, hematology, blood gas and immunodiagnostic testing and their affiliated operating consumable~~noted.

-3334-

~~Radiography~~POC isLaboratory ~~the~~Instruments ~~largest~~and ~~product~~Other ~~offering~~Sales ininclude ~~Point~~outright ofinstrument ~~Care~~sales, ~~imaging~~revenue &recognized ~~informatics,~~from ~~which~~sales-type ~~includes~~lease ~~digital~~treatment, and ~~computed~~other ~~radiography~~revenue sources, such as charges for repairs and ~~ultrasound~~reference ~~instruments~~laboratory sales. ~~Radiography~~Revenue ~~solutions~~from ~~typically~~our ~~consist~~POC oflaboratory consumables, a ~~combination~~recurring ofrevenue ~~hardware~~stream, primarily involves placing an instrument under contract in the field and ~~software~~generating ~~placed~~future ~~with~~revenue afrom ~~customer~~testing consumables, ~~often~~such ~~combined~~as ~~with~~cartridges anand ~~ongoing~~reagents, ~~service~~as ~~and~~that ~~support~~instrument ~~contract~~is used. ~~Our~~Instruments ~~experience~~placed ~~has~~under ~~been~~subscription ~~that~~agreements ~~most~~are ofconsidered ~~the~~operating ~~revenue~~or issales-type ~~generated~~leases, atdepending on the ~~time~~duration and other factors of ~~sale~~the inunderlying ~~this~~agreement. ~~area~~A loss of, or disruption in, ~~contrast~~the supply of consumables we are selling to ~~the~~an ~~Point~~installed base of ~~Care~~instruments ~~diagnostic~~could substantially harm our business. The majority of our POC laboratory ~~placements~~and ~~discussed~~other ~~above~~non-imaging ~~where~~instruments ~~ongoing~~and ~~consumable~~consumables ~~revenue~~are issupplied ~~often~~by athird ~~larger~~parties, ~~component~~who oftypically ~~economic~~own ~~value~~the asproduct arights ~~given~~and ~~instrument~~supply isthe ~~used~~product to us under marketing and/or distribution agreements. On ~~January~~Major 3products in this area include our instruments for chemistry, ~~2022~~hematology, weblood ~~acquired~~gas, ~~VetZ~~urine ~~GmbH~~fecal, aand ~~European~~immunodiagnostic ~~leader~~testing inand ~~veterinary~~their ~~practice~~affiliated ~~information~~operating ~~management~~consumable, ~~software~~as ~~solutions~~well as our rapid assay diagnostic tests and digital cytology services. More recently, ~~which~~the isCompany ~~now~~has ~~included~~developed asand/or aacquired ~~component~~product ~~within~~rights ~~Point~~pertaining ofto ~~Care~~our ~~imaging~~urine &fecal ~~informatics~~and immunodiagnostic platforms.

Radiography is the largest product offering in POC Imaging and Informatics, which includes digital and computed radiography, ultrasound instruments, and diagnostic data and support. Radiography solutions typically consist of a combination of hardware and software placed with a customer, often combined with an ongoing service and support contract. Our experience has been that most of the revenue is generated at the time of sale, in contrast to the POC diagnostic laboratory placements discussed above where ongoing consumable revenue is often a larger component of economic value as a given instrument is used. In 2022, the Company acquired VetZ, a provider of PIMS and other clinical practice-related applications, which are primarily offered in our International segment.

Pharmaceuticals, Vaccines and Diagnostic ("PVD") revenue primarily includes pharmaceuticals and biologicals as well as research and development, licensing and royalty 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 and services in this area include heartworm preventives and allergy test kits, allergy immunotherapy and testing.

Other Vaccines and Pharmaceuticals ("OVP") revenue is generated in our USDA, FDA and DEA 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 pharmaceuticals and vaccines that we may commercialize in the future. We have increased integration of this facility with our operations elsewhere. For example, virtually all of our U.S. inventory, excluding our imaging products, is stored at this facility and related fulfillment logistics are managed there. Our OVP revenue includes vaccines and pharmaceuticals produced for third parties. OVP is attributable only to the North America segment.

All of our products are ultimately sold primarily to or through veterinarians. In many cases, veterinarians will mark up their costs to their customers. The acceptance of our products by veterinarians is critical to our success. These products are sold directly to end users by us as well as through distribution relationships, such as the sale of kits to conduct blood testing to third-~~party veterinary diagnostic laboratories and sales to independent third~~35-party distributors. Revenue from direct sales and distribution relationships represented 79.9% and 20.1%, respectively, of revenue for the three months ended September 30, 2022 and 78.3% and 21.7%, respectively, for the nine months ended September 30, 2022. Revenue from direct sales and distribution relationships represented 72.3% and 27.7%, respectively, of revenue for the three months ended September 30, 2021 and 71.3% and 28.7%, respectively, for the nine months ended September 30, 2021.

~~Impact~~Our products are ultimately sold primarily to or through veterinarians. The acceptance of ~~COVID~~our products by veterinarians is critical to our success. These products are sold directly to end users by us as well as through distribution relationships, such as the sale of kits to conduct blood testing to third-19party ~~Pandemic~~veterinary diagnostic laboratories and ~~Current~~sales ~~Economic~~to ~~Environment~~independent third-party distributors. Revenue from direct sales and distribution relationships represented 82% and 18%, respectively, of revenue for the three months ended March 31, 2023. Revenue from direct sales and distribution relationships represented 80% and 20%, respectively, of revenue for the three months ended March 31, 2022.

~~Beginning~~On inMarch ~~the first quarter of 2020~~31, ~~to limit the spread of COVID-19~~2023, ~~governments~~we ~~took~~entered ~~various~~into ~~actions~~a ~~including~~Merger ~~the~~Agreement ~~issuance~~with ofAntech ~~stay-at-home policies and social distancing procedures and guidelines~~Diagnostics, ~~causing~~Inc. ~~some~~Refer ~~businesses~~ to ~~adjust,~~Note ~~reduce or suspend business and operating activities. Veterinary care is widely recognized as an "essential" service for pet owners~~1, ~~and~~Business ~~veterinarians~~Overview ~~continued to deliver essential medical care for sick~~ and ~~injured~~Summary ~~pets. We are unable to predict with certainty the effects~~ of ~~the~~Significant ~~COVID-19~~Accounting ~~pandemic~~Policies onin our ~~customers,~~Condensed ~~suppliers~~Consolidated ~~and~~Financial ~~vendors,~~Statements asincluded ~~well as the actions of governments, and when and to what extent normal economic and operating conditions will return to pre-pandemic levels; these effects may differ from those assumed~~ in ~~our~~Part ~~projected estimates. Even after the COVID-19 pandemic has subsided~~I, weItem ~~may~~1 ~~continue~~of tothis ~~experience~~Form ~~adverse impacts to our business, mainly in our ability to place new capital equipment, primarily under long~~10-~~term~~Q ~~contracts,~~for asdetails ~~a result~~ of ~~any economic impact that may occur in~~ the ~~future~~Merger.

~~Due~~Effects toof ~~our~~Certain ~~dependence~~Industry ~~on global suppliers, manufacturers~~ and ~~shipping~~Economic ~~routes,~~Factors ~~we are experiencing increased delays in receiving supply, increased shipping costs~~ and ~~some~~Trends ~~targeted~~on ~~increase~~Results ~~in materials cost. Because our long-term subscription programs, the commercial program~~ of ~~our largest revenue category, Point of Care~~ Operations

Industry Trends -~~34-~~ We continue to see demand for companion animal healthcare, which supported solid growth for POC laboratory diagnostic products and services. We have a healthy liquidity position with cash of $125.2 million as of March 31, 2023. We continue to be active in pursuits that support our growth in the companion animal healthcare space.

Supply Chain and Logistics - Due to our dependence on global suppliers, manufacturers and shipping routes, we are experiencing intermittent delays in receiving supply, increased shipping costs and some targeted increase in materials cost. Because our long-term subscription programs, the commercial program of our largest revenue category, POC laboratory instruments and consumables, include annual price adjustments at a greater of 4% or the consumer price index, we are able to mitigate some of these costs in this highly inflationary environment. Further, we have worked closely with our suppliers to evaluate and identify products with long-lead time parts and provided advanced purchase notification and have secured products in advance to further mitigate supply disruption.

~~With respect to foreign currency exchange rates~~Inflation, toForeign ~~the extent that the U.S. dollar is stronger in current or future periods relative to the exchange rates in effect in the corresponding prior periods~~Currency, ~~our~~Interest ~~growth~~Rate ~~rate~~Risk ~~will~~Impact be- ~~negatively affected.~~ Refer to Item 37A. Quantitative and Qualitative Disclosures about Market Risk ofin ~~this~~our ~~form~~Annual Report on Form 10-QK for the year ended December 31, 2022.

Our financial position remains strong as we have a cash balance of $161.1 million as of September 30, 2022. As a result, we have sufficient liquidity to sustain our operations. We will continue to actively seek opportunities that are consistent with our strategic direction, which may include a need to raise additional capital.

Results of Operations

Our analysis presented below is organized to provide the information we believe will facilitate an understanding of our historical performance and relevant trends going forward.

-36-

The following table sets forth, for the periods indicated, certain data derived from our unaudited Condensed Consolidated Statements of Loss (in thousands, except per share):

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31,
	2022			2021			2022			2021
	2023			2022
Revenue, net	$	6162,~~492~~381		$	6064,~~240~~800		$	~~190,969~~		$	~~185,671~~
Gross profit	2627,~~876~~399			2529,~~244~~145			~~83,348~~			~~77,986~~
Operating expenses	2737,~~547~~822			2740,~~677~~599			~~101,017~~			~~80,097~~
Operating loss	(~~671~~10,423)			(211,~~433~~454)			~~(17,669)~~			~~(2,111)~~
Interest and other expense (income), net	241			(30)			1,080			1,075
Interest and other (income) expense, net	(272)			359
Net loss before income taxes and equity in losses of unconsolidated affiliates	(~~912~~10,151)			(211,~~403~~813)			~~(18,749)~~			~~(3,186)~~
Income tax benefit	(~~834~~375)			(~~813~~2,208)			~~(4,175)~~			~~(3,429)~~
Net (loss) income before equity in losses of unconsolidated affiliates	(78)			(1,590)			(14,574)			243
Net loss before equity in losses of unconsolidated affiliates	(9,776)			(9,605)
Equity in losses of unconsolidated affiliates	(~~358~~349)			(~~308~~381)			~~(1,094)~~			~~(837)~~
Net loss attributable to Heska Corporation	$	(~~436~~10,125)		$	(19,~~898~~986)		$	~~(15,668)~~		$	~~(594)~~
Diluted loss per share attributable to Heska Corporation	$	(0.0497)		$	(0.1997)		$	~~(1.52)~~		$	~~(0.06)~~
Non-GAAP net income per diluted share(1)(2)	$	0.4117		$	0.2027		$	~~1.02~~		$	~~1.27~~
Adjusted EBITDA(1)	$	63,~~331~~263		$	57,~~640~~688		$	~~20,998~~		$	~~22,468~~
Net (loss) income margin(1)	(0.1)		%	(2.6)		%	(7.6)		%	0.1		%
Net loss margin(1)	(15.7)		%	(14.8)		%
Adjusted EBITDA margin(1)	105.32		%	911.49		%	~~11.0~~		%	~~12.1~~		%

(1) See “Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA to net (loss) ~~income~~ and Non-GAAP net income per diluted share to diluted loss per share attributable to Heska Corporation, the closest comparable GAAP measures, for each of the periods presented. Net (loss) ~~income~~margin and adjusted EBITDA margin are calculated as the ratio of net loss before equity in losses of unconsolidated affiliates and adjusted EBITDA, respectively, to revenue.

(2) Shares used in the diluted per share calculation for non-~~35-~~GAAP net income per diluted share are (in thousands): 10,521 for the three months ended March 31, 2023 compared to 10,605 for the three months ended March 31, 2022.

EBITDA margin are calculated as the ratio of net (loss) income before equity in losses of unconsolidated affiliates and adjusted EBITDA, respectively, to revenue.

(2) Shares used in the diluted per share calculation for non-GAAP net income per diluted share are (in thousands): 10,508 for the three months ended September 30, 2022 compared to 10,580 for the three months ended September 30, 2021 and 10,549 for the nine months ended September 30, 2022 compared to 10,321 for the nine months ended September 30, 2021.

Revenue

Total revenue ~~increased~~decreased 23.17% to $6162.54 million for the three months ended ~~September~~March 3031, ~~2022~~2023, compared to $6064.28 million for the three months ended ~~September~~March 3031, ~~2021. Total revenue increased 2.9% to $191.0 million for the nine months ended September 30,~~ 2022~~, compared to $185~~.~~7 million for the nine months ended September 30, 2021.~~ For the three months ended ~~September~~March 3031, ~~2022~~2023, the ~~increase~~decrease in revenue is driven by a 1220.46% ~~increase~~decrease in POC imaging & informatics, largely as a result of ~~the~~supply ~~acquisition~~chain ofdelays ~~VetZ,~~and ~~increased~~timing ~~consumable~~impacting ~~pricing and~~ the ~~introduction~~International ~~of Element AIM~~segment, ~~partially~~lower ~~offset~~contract bymanufacturing ~~impacts~~sales ~~from~~and unfavorable foreign exchange ~~due to the weakening of the Euro~~impacts. ~~For~~These ~~the~~decreases ~~nine~~are ~~months~~partially ~~ended~~offset ~~September 30, 2022 the increase is driven~~ by ~~growth~~increased inconsumable ~~POC~~sales, ~~imaging~~mainly ~~& informatics of 13.4% primarily~~ as a result of ~~our~~net ~~acquisition~~pricing ~~of VetZ. We also experienced a 10.9% growth in POC laboratory instruments as a result of the introduction of Element AIM and increased capital lease placements globally. Consumable price increases~~gains, particularly inwithin North America, ~~also~~and ~~contributed~~increased ~~to the growth. These increases were partially offset by declines in PVD of 9.4%, as a result of decreased demand for the production of Tri~~sales-~~Heart,~~type ~~declines~~lease ~~in OVP of 10.4% primarily due to timing of production~~placements, ~~and~~including ~~impacts~~increased ~~from~~placements ~~foreign exchange due to the weakening~~ of ~~the~~Element ~~Euro primarily impacting the POC product lines~~AIM.

-37-

Gross Profit

Gross profit ~~increased~~decreased 6.50% to $2627.94 million in the three months ended ~~September~~March 3031, ~~2022~~2023, compared to $2529.21 million in the three months ended ~~September~~March 3031, ~~2021. Gross profit increased 6.9% to $83.3 million in the nine months ended September 30,~~ 2022 ~~compared to $78~~.~~0 million in the nine months ended September 30, 2021.~~ Gross margin ~~increased~~percentage decreased to 43.79% in the three months ended ~~September~~March 3031, ~~2022~~2023, compared to 4145.90% in the three months ended ~~September~~March 3031, ~~2021. Gross margin increased to 43.6% in the nine months ended September 30,~~ 2022~~, compared to 42~~.~~0% in the nine months ended September 30, 2021.~~ The ~~increases~~decreases in both gross profit and gross margin percentage were ~~due~~driven toby ~~higher~~the ~~sales~~acquisition of ~~consumables~~LightDeck. Excluding ~~relative~~the toimpact ~~total~~of ~~sales~~the acquisition, ~~which~~gross ~~are~~profit ~~our~~was ~~highest~~approximately ~~margin~~in ~~products,~~line ~~further~~with ~~strengthened~~the byprior ~~product~~year ~~rationalization~~period. Gross ~~and~~margin ~~transition~~percentage, ~~effort~~excluding ~~within~~the ~~our~~impact ~~international~~of ~~segment~~the ~~and~~acquisition, ~~overall~~increased ~~annual~~to ~~price increases~~46.8%, ~~The~~driven ~~acquisition~~by ofincreased ~~VetZ~~consumable ~~also~~sales ~~favorably~~as ~~impacted~~well ~~gross~~as ~~profit~~favorable idle plant impacts and ~~gross~~product ~~margin.~~mix within our OVP business.

Operating Expenses

Selling and marketing expenses were $1112.34 million in the three months ended ~~September~~March 3031, ~~2022~~2023, compared to $1012.80 million in the three months ended ~~September~~March 3031, ~~2021, an increase of 4.6%. Selling and marketing expenses were $35.0 million in the nine months ended September 30,~~ 2022 ~~compared to $34.1 million in the nine months ended September 30~~, ~~2021,~~ an increase of 23.68%~~. The increase for the three months ended September 30~~, ~~2022 is~~ driven primarily by ~~recent acquisitions, which are in line with management's expectations, and~~ increased employee compensation costs, partially offset by lower stock-based compensation of $0.56 million and favorable foreign exchange impacts. The increase for the nine months ended September 30, 2022 is driven by the acquisition of VetZ of $2.3 million, increased travel and trade show expenses due to relaxing COVID restrictions and higher compensation costs, partially offset by lower stock compensation of $2.0 million and favorable foreign exchange impacts.

~~-36-~~Research and development expenses decreased to $3.1 million in the three months ended March 31, 2023, compared to $12.5 million in the three months ended March 31, 2022. The decrease is primarily driven by the prior year expense of $10.0 million for an exclusive global supply and licensing agreement to adapt and commercialize the Heska Nu.Q® vet cancer screening test. This is partially offset by increased developer costs associated with our Informatics business of $0.3 million and costs related to the acquisition of LightDeck of $0.2 million.

~~Research~~General and ~~development~~administrative expenses increased 38.0% to $222.43 million in the three months ended ~~September~~March 3031, ~~2022~~2023, compared to $216.01 million in the three months ended ~~September~~March 3031, ~~2021.~~2022 ~~Research~~driven ~~and~~primarily ~~development~~by ~~expenses~~ increased tonon-recurring ~~$17.2~~costs ~~million~~related into the ~~nine~~proposed ~~months~~Merger ~~ended~~of ~~September 30, 2022, compared to~~ $5.1 million in(refer ~~the~~to ~~nine~~Note ~~months~~1 ~~ended~~in ~~September 30,~~this ~~2021.~~Form ~~The~~10Q), ~~variance for~~ the ~~three~~acquisition ~~months~~of ~~ended~~LightDeck ~~September~~of ~~30,~~$1.1 ~~2022 is related to recent acquisitions~~million, partially offset by ~~lower~~prior ~~stock~~year non-~~based~~recurring ~~compensation~~costs of $01.30 million. ~~The~~primarily ~~increase~~related ~~for~~to the ~~nine~~acquisition ~~months~~of ~~ended~~VetZ. ~~September 30~~Additionally, ~~2022~~we isincurred ~~primarily~~higher ongoing costs related to athe ~~$10.0~~acquisition ~~million~~of ~~payment~~LightDeck ~~for~~of an$1.3 ~~exclusive~~million ~~global supply~~ and ~~licensing~~higher ~~agreement~~employee tocompensation ~~adapt~~costs ~~and~~of ~~commercialize~~approximately ~~the~~$0.7 ~~Heska Nu~~million.Q® ~~vet~~The ~~cancer~~increased ~~screening~~ongoing ~~test,~~costs asare ~~well~~partially asoffset ~~increased~~by ~~costs~~lower ~~associated~~stock-based ~~with~~compensation ~~recent~~costs ~~acquisitions~~of $1.5 million.

~~General~~Interest and ~~administrative~~Other expenses decreased 7.0% to $13.9 million in the three months ended September 30, 2022, compared to $14.9 million in the three months ended September 30, 2021. General and administrative expenses increased 19.4% to $48.8 million in the nine months ended September 30, 2022, compared to $40.9 million in the nine months ended September 30, 2021. The decrease for the three months ended September 30, 2022 is driven by lower stock-based compensation costs due to changes in probability determinations of $2.3 million, lower short-term incentive costs and favorable foreign exchange impacts, partially offset by increased costs related to recent acquisitions (~~including non-recurring items~~Income). ~~The increase for the nine months ended September 30~~Expense, 2022 is driven by the $3.5 million provision for credit losses on a convertible note receivable, increased costs related to recent acquisitions (including non-recurring items), and increased cash compensation costs.net

Interest and ~~Other~~other ~~Expense~~income, net, was $0.3 million in the three months ended March 31, 2023, compared to $0.4 million expense in the three months ended March 31, 2022. The income generated in the three months ended March 31, 2023 is primarily driven by interest income earned in the three months ended March 31, 2023 related to our short term investment in a money market fund.

Interest and other expense, net, was $0.2 million in the three months ended September 30, 2022, compared to $30.0 thousand income in the three months ended September 30, 2021. Interest and other expense, net, was $1.1 million in both the nine months ended September 30, 2022 and September 30, 2021.

Income Tax Benefit

For the three months ended ~~September~~March 3031, ~~2022~~2023, the Company had a total income tax benefit of $0.84 million, including $1.1 million of domestic deferred income tax benefit and $~~235~~0.7 ~~thousand~~million of current income tax expense. In the three months ended ~~September~~March 3031, ~~2021~~2022, the Company had a total income tax benefit of $02.82 million, including $02.84 million of domestic deferred income tax benefit and $630.2 ~~thousand~~million of current income tax expense. The Company recognized $0.26 million in excess tax expense related to employee share-based compensation in the three months ended ~~September~~March 3031, ~~2022~~2023, compared to $0.76 million in excess tax benefit recognized in the three months ended ~~September~~March 3031, ~~2021~~2022. ~~For~~The ~~the~~decrease ~~nine~~in ~~months ended September 30, 2022 the Company had a total income~~ tax benefit of $4.2 million, including $4.6 million of domestic deferred income tax benefit and $0.4 million of current income tax expense. In the nine months ended September 30, 2021, the Company had a total income tax benefit of $3.4 million, including $4.0 million of domestic deferred income tax benefit and $0.6 million of current income tax expense. The tax benefit for the ~~2022~~2023 period versus the ~~2021~~2022 period is due to antax ~~increased~~expense ~~loss~~from ~~for~~transaction ~~financial~~costs ~~reporting~~and employee stock compensation.

-38-

Net Loss Attributable to Heska Corporation

Net loss attributable to Heska was $010.41 million in the three months ended ~~September~~March 3031, ~~2022~~2023, compared to $110.90 million in the three months ended ~~September~~March 3031, ~~2021. Net loss attributable to Heska was $15.7 million in the nine months ended September 30,~~ 2022~~, compared to $0~~.6 ~~million in the nine months ended September 30, 2021.~~ The change for the three months ended ~~September~~March 3031, ~~2022~~2023 is due primarily to ~~increases~~the indilutive ~~revenue~~effect ~~and~~of ~~gross~~the ~~profit.~~acquisition ~~The~~of ~~change~~LightDeck ~~for~~as ~~the~~well ~~nine~~as ~~months~~lower ~~ended~~tax ~~September 30~~benefit, ~~2022~~mostly isoffset ~~due~~by tolower ~~the~~operating ~~$10~~costs, ~~million~~primarily ~~licensing~~due ~~payment,~~to ~~the~~lower ~~$3.5~~non-recurring ~~million~~costs ~~provision~~and ~~for~~lower ~~credit~~stock-based ~~losses~~compensation oncharges. ~~the~~Expanded ~~convertible~~research ~~note~~and ~~receivable,~~development ~~increased~~capabilities ~~cash~~and ~~compensation~~manufacturing ~~costs~~capacity, aswhich ~~well~~were aspart ~~non~~of our long-~~recurring~~term ~~and~~strategic ~~recurring~~rationale ~~costs~~for ~~associated~~the ~~with~~acquisition ~~recent~~of ~~acquisitions~~LightDeck, ~~partially~~will ~~offset~~continue byto ~~increases~~be dilutive in ~~revenue and gross profit~~2023.

-37-

Adjusted EBITDA

Adjusted EBITDA in the three months ended ~~September~~March 3031, ~~2022~~2023 was $63.3 million (105.32% adjusted EBITDA margin), compared to $57.67 million (911.49% adjusted EBITDA margin) in the three months ended ~~September~~March 3031, ~~2021~~2022. ~~Adjusted~~The ~~EBITDA~~decrease inis ~~the~~partially ~~nine~~driven ~~months~~by ~~ended~~the ~~September~~acquisition 30of LightDeck, ~~2022~~which ~~was~~reduced ~~$21.0 million (11.0%~~ adjusted EBITDA ~~margin),~~by ~~compared to~~ $222.54 million (~~12.1%~~and reduced adjusted EBITDA margin) inby ~~the~~390 ~~nine~~basis ~~months ended September 30, 2021~~points). ~~The~~ ~~increase~~Excluding in the ~~three~~impact ~~months~~of ~~ended~~the ~~September~~LightDeck 30acquisition, ~~2022~~adjusted isEBITDA ~~driven~~decreased by ~~increased~~$2.0 ~~revenue~~million (and ~~gross~~adjusted ~~profit,~~EBITDA ~~partially~~margin ~~offset~~declined by ~~increased~~approximately ~~recurring~~270 ~~costs~~basis ~~related~~points) due to ~~recent acquisitions, in line with management expectations. The decrease for the nine months ended September 30, 2022 is driven by~~ increased ~~recurring~~ operating expenses ~~related~~driven tolargely ~~acquisitions~~by ~~and~~ongoing ~~higher~~employee ~~cash~~ compensation costs~~, partially offset by increased revenue and gross profit~~. See “Non-GAAP Financial Measures” for a reconciliation of adjusted EBITDA to net loss ~~(income)~~, the closest comparable GAAP measure, for each of the periods presented.

Loss Per Share

Loss per share attributable to Heska was $0.0497 per diluted share in the three months ended ~~September~~March 3031, ~~2022~~2023, ~~compared to loss of $0.19 per diluted share~~ in ~~the~~line ~~three~~with ~~months ended September 30, 2021. Loss per share attributable to Heska was $1.52 per diluted share in~~ the ~~nine months ended September 30, 2022, compared to~~ loss ~~of $0.06~~ per diluted share in the ~~nine months ended September 30, 2021. For the~~ three months ended ~~September~~March 3031, 2022~~, the change is largely due to increased revenue and gross profit~~. For the nine months ended September 30, 2022, the loss is due to increased acquisition related, non-recurring items and extraordinary charges not indicative of ongoing operations, primarily the $10.0 million licensing payment, the $3.5 million provision for credit losses for a convertible note receivable as well as $0.5 million for the mark-to-market adjustment of the fair value of the embedded derivative on the convertible note receivable, as well as other increased operating expenses, partially offset by higher revenue and gross profit, as discussed above.

Non-GAAP Earnings Per Share

Non-GAAP EPS was income of $0.4117 per diluted share in the three months ended ~~September~~March 3031, ~~2022~~2023 compared to income of $0.2027 per diluted share in the three months ended ~~September~~March 3031, ~~2021. Non-GAAP EPS was income of $1.02 per diluted share in the nine months ended September 30,~~ 2022~~, compared to income of $1~~.27 ~~per diluted share in the nine months ended September 30, 2021.~~ The ~~increase~~decrease in the three months ended ~~September~~March 3031, ~~2022~~2023 is primarily driven by ~~increased~~the ~~revenue~~impact ~~and~~of ~~gross profit. The decrease in~~ the ~~nine~~acquisition ~~months~~of ~~ended~~LightDeck ~~September~~and ~~30,~~higher ~~2022~~ongoing ~~is primarily due to increased~~ operating ~~expenses,~~costs ~~partially~~related ~~offset by higher revenue and profit. See “Non-GAAP Financial Measures" for a reconciliation of non-GAAP EPS~~ to ~~net (loss) income attributable to Heska per diluted share, the closest comparable U~~compensation.~~S. GAAP measure, in each of the periods presented.~~

Non-GAAP Financial Measures

In addition to financial measures presented on the basis of accounting principles generally accepted in the U.S. (“U.S. GAAP”), we also present EBITDA, adjusted EBITDA, adjusted EBITDA margin, and non-GAAP net income ~~(loss)~~ per diluted share, which are non-GAAP measures.

These measures should be viewed as a supplement to, not substitute for, our results of operations presented under U.S. GAAP. The non-GAAP financial measures presented may not be comparable to similarly titled measures of other companies because they may not calculate their measures in the same manner. Management uses EBITDA, adjusted EBITDA, adjusted EBITDA margin and non-GAAP net income per diluted share as key profitability measures, which are included in ~~monthly~~our or quarterly analyses of our operating results to our senior management team, our annual budget and related goal setting and other performance measurements. We believe these non-GAAP measures enhance our investors' understanding of our business performance and that not adjusting for the items included in the reconciliations below would hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses.

-38-

senior management team, our annual budget and related goal setting and other performance measurements. We believe these non-GAAP measures enhance our investors' understanding of our business performance and that not adjusting for the items included in the reconciliations below would hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses.

The following tables reconcile our most directly comparable as-reported financial measures calculated in accordance with GAAP to our non-GAAP financial measures (in thousands, except percentages and per share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Net (loss) income(1)	$	(78)		$	(1,590)		$	(14,574)		$	243
Income tax benefit	(834)			(813)			(4,175)			(3,429)
Interest expense, net	315			439			1,111			1,425
Depreciation and amortization	3,501			3,404			10,327			10,084
EBITDA	$	2,904		$	1,440		$	(7,311)		$	8,323
Acquisition related and other non-recurring/extraordinary costs(2)	1,464			(896)			17,092			121
Stock-based compensation	2,321			5,404			12,311			14,861
Equity in losses of unconsolidated affiliates	(358)			(308)			(1,094)			(837)
Adjusted EBITDA	$	6,331		$	5,640		$	20,998		$	22,468
Net (loss) income margin(3)	(0.1)		%	(2.6)		%	(7.6)		%	0.1		%
Adjusted EBITDA margin(3)	10.3		%	9.4		%	11.0		%	12.1		%

(1) Net (loss) income used for reconciliation represents the "Net (loss) income before equity in losses of unconsolidated affiliates."

(2) To exclude the effect of acquisition related costs, non-recurring items and extraordinary charges not indicative of ongoing operations of $1.5 million charge and $17.1 million charge for the three and nine months ending September 30, 2022, and $0.9 million benefit and $0.1 million charge for the three and nine ending September 30, 2021. The costs for the three months ended September 30, 2022 are primarily related to acquisition costs. The costs for the nine months ended September 30, 2022 were incurred primarily as a result of the $3.5 million provision for credit losses for a convertible note receivable, the $0.5 million mark-to-market adjustment of the fair value of the embedded derivative on the convertible note receivable, and a $10.0 million licensing payment. The remainder of the costs in both periods were incurred as a result of acquisition related charges.

(3) Net (loss) income margin and adjusted EBITDA margin are calculated as the ratio of net (loss) income and adjusted EBITDA, respectively, to revenue.

-39-

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
GAAP loss attributable to Heska per diluted share	$	(0.04)	$	(0.19)	$	(1.52)	$	(0.06)
Acquisition related and other non-recurring/extraordinary costs(1)	0.14		(0.08)		1.62		0.01
Amortization of acquired intangibles(2)	0.14		0.15		0.51		0.45
Purchase accounting adjustments related to inventory and fixed asset step-up(3)	0.05		0.01		0.16		0.03
Stock-based compensation	0.22		0.51		1.17		1.44
Loss on equity investee transactions	0.03		0.03		0.10		0.08
Estimated income tax effect of above non-GAAP adjustments(4)	(0.13)		(0.23)		(1.02)		(0.68)
Non-GAAP net income per diluted share	$	0.41	$	0.20	$	1.02	$	1.27
Shares used in non-GAAP diluted per share calculations	10,508		10,580		10,549		10,321

(1) To exclude the effect of acquisition related costs, non-recurring items and extraordinary charges not indicative of ongoing operations of $1.5 million charge and $17.1 million charge for the three and nine months ending September 30, 2022, and $0.9 million benefit and $0.1 million charge for the three and nine months ending September 30, 2021. The costs for the three months ended September 30, 2022 are primarily related to acquisition costs. The costs for the nine months ended September 30, 2022 were incurred primarily as a result of the $3.5 million provision for credit losses for a convertible note receivable, the $0.5 million mark-to-market adjustment of the fair value of the embedded derivative on the convertible note receivable, and a $10.0 million licensing payment. The remainder of the costs in both periods were incurred as a result of acquisition related charges.


	Three Months Ended March 31,
	2023			2022
Net loss(1)	$	(9,776)		$	(9,605)
Income tax benefit	(375)			(2,208)
Interest (income) expense, net	(423)			440
Depreciation and amortization	3,974			3,300
EBITDA	$	(6,600)		$	(8,073)
Acquisition related and other non-recurring/extraordinary costs(2)	7,135			11,032
Stock-based compensation	3,077			5,110
Equity in losses of unconsolidated affiliates	(349)			(381)
Adjusted EBITDA	$	3,263		$	7,688
Net loss margin(3)	(15.7)		%	(14.8)		%
Adjusted EBITDA margin(3)	5.2		%	11.9		%

(21) ToNet ~~exclude~~loss ~~the~~used ~~effect~~for ofreconciliation ~~amortization~~represents ~~of acquired intangibles of $1.4 million and $5.4 million in~~ the ~~three~~"Net ~~and~~loss ~~nine~~before ~~months~~equity ~~ended September 30, 2022, compared to $1.6 million and $4.6 million~~ in ~~the~~losses ~~three and nine months ended September 30, 2021. These costs were incurred as part~~ of ~~the~~unconsolidated ~~purchase accounting adjustments for recent acquisitions~~affiliates."

(32) To exclude the effect of ~~purchase~~acquisition ~~accounting~~related ~~adjustments~~costs, ~~for~~non-recurring ~~inventory~~items ~~step~~and upextraordinary ~~amortization~~charges not indicative of ongoing operations of $07.61 million charge for the three months ended March 31, 2023, and $111.70 million charge for the three ~~and nine~~ months ~~ended~~ending ~~September~~March 3031, 2022. The costs for the three months ended March 31, ~~compared~~2023 are primarily related to ~~$0.~~the proposed Merger (refer to Note 1 ~~million~~of this Form 10Q) and $0the acquisition of LightDeck.3 ~~million~~The incosts for the three ~~and nine~~ months ended ~~September 30~~March 31, ~~2021~~2022 are primarily related to a $10.0 million licensing expense as well as acquisition-related charges.

(43) ~~Represents~~Net ~~income~~loss ~~tax~~margin ~~expense utilizing an estimated effective tax rate that adjusts for non-GAAP measures including: acquisition related, non-recurring~~ and ~~extraordinary~~adjusted ~~costs~~EBITDA ~~(excluding~~margin ~~items which~~ are ~~not~~calculated ~~deductible~~as ~~for tax of $0 and $0.1 million expense for~~ the ~~three~~ratio ~~and nine months ended September 30, 2022, respectively, compared to $0.7 million benefit and $0.6 million benefit for the three and nine months ended September 30, 2021, respectively), amortization~~ of ~~acquired~~net ~~intangibles,~~loss ~~purchase accounting adjustments, amortization of debt discount~~ and ~~issuance~~adjusted ~~costs~~EBITDA, and stock-based compensation. This incorporates the discrete tax related to stock-based compensation of $0.2 million expense and $0.3 million benefit for the three and nine months ended September 30, 2022, respectively, ~~compared~~ to ~~benefits of $0~~revenue.7 million and $1.7 million for the three and nine months ended September 30, 2021, respectively. This also includes the tax benefits related to R&D tax credit of $0.1 million and $1.1 million for the three and nine months ended September 30, 2022, respectively, compared to $0 for each of the three and nine ended September 30, 2021 respectively. Adjusted effective tax rates are approximately 25% for both periods presented.

Impact of Inflation


	Three Months Ended March 31,
	2023		2022
GAAP loss attributable to Heska per diluted share	$	(0.97)	$	(0.97)
Acquisition related and other non-recurring/extraordinary costs(1)	0.68		1.04
Amortization of acquired intangibles(2)	0.24		0.21
Purchase accounting adjustments related to fixed asset step-up(3)	0.05		0.05
Stock-based compensation	0.29		0.48
Loss on equity investee transactions	0.03		0.04
Estimated income tax effect of above non-GAAP adjustments(4)	(0.15)		(0.58)
Non-GAAP net income per diluted share	$	0.17	$	0.27

Shares used in non-GAAP diluted per share calculations	10,521		10,605

In(1) ~~recent~~To ~~years~~exclude the effect of acquisition related costs, ~~inflation~~non-recurring ~~has~~items ~~not~~and ~~had~~extraordinary acharges ~~significant~~not ~~impact~~indicative onof ~~our~~ongoing operations of $7.1 ~~Refer~~million tocharge ~~Impact~~for ofthe ~~COVID-19~~three ~~Pandemic~~months ended March 31, 2023, and ~~Current~~$11.0 ~~Economic~~million ~~Environment~~charge ~~section~~for ~~included~~the ~~within~~three ~~Item~~months 2ended March 31, 2022. ~~Management's~~The ~~Discussion~~costs ~~and~~for ~~Analysis~~the three months ended March 31, 2023 are primarily related to the proposed Merger (refer to Note 1 of this Form 10Q) and the acquisition of LightDeck. The costs for the three months ended March 31, 2022 are primarily related to a $10.0 million licensing expense as well as acquisition-Qrelated charges.

-40-

(2) To exclude the effect of amortization of acquired intangibles of $2.5 million in the three months ended March 31, 2023, compared to $2.2 million in the three months ended March 31, 2022. These costs were incurred as part of the purchase accounting adjustments for recent acquisitions.

(3) To exclude the effect of purchase accounting adjustments for step up amortization of $0.5 million for the three months ended March 31, 2023, compared to $0.6 million in the three months ended March 31, 2022.

(4) Represents income tax expense utilizing an estimated effective tax rate that adjusts for non-GAAP measures including: acquisition related, non-recurring and extraordinary costs (excluding items which are not deductible for tax of $5.2 million for the three months ended March 31, 2023, compared to $0.1 million for the three months ended March 31, 2022), amortization of acquired intangibles, purchase accounting adjustments, amortization of debt discount and issuance costs, and stock-based compensation. This incorporates the discrete tax related to stock-based compensation of $0.6 million expense for the three months ended March 31, 2023, compared to benefits of $0.6 million for the three months ended March 31, 2022. This also includes the tax benefits related to R&D tax credit of $0 for the three months ended March 31, 2023, compared to $0.8 million for the three months ended March 31, 2022. Adjusted effective tax rates are approximately 25% for both periods presented.

Analysis by Segment

The North America segment includes sales and costs from the United States, Canada and Mexico. The International segment includes sales and costs from Australia, France, Germany, Italy, Malaysia, Spain, and Switzerland.

The North America segment represented approximately 6561.68% ~~and 62.1%~~ of our revenue and the International segment represented approximately 3438.42% ~~and 37.9%~~ of our revenue for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2022~~2023, respectively.

The following sections and tables set forth, for the periods indicated, certain data derived from our unaudited Condensed Consolidated Statements Loss (in thousands).

North America Segment

	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	Three Months Ended March 31,						Change
	2022			2021			Dollar Change		% Change		2022			2021			Dollar Change		% Change
	2023			2022			Dollar Change		% Change
Point of Care laboratory:	$	23,341		$	21,241		$	2,100	9.9	%	$	70,506		$	63,959		$	6,547	10.2	%
Point of Care Laboratory:	$	25,249		$	23,284		$	1,965	8.4	%
Instruments & Other	34,~~630~~243			34,~~547~~647			83(404)		2(8.37)	%	~~11,821~~			~~10,017~~			~~1,804~~		~~18.0~~	%
Consumables	1921,~~711~~006			1718,~~694~~637			2,~~017~~369		1112.47	%	~~58,685~~			~~53,942~~			~~4,743~~		~~8.8~~	%
Point of Care imaging & informatics	7,688			7,433			255		3.4	%	19,641			21,222			(1,581)		(7.4)	%
Point of Care Imaging & Informatics	5,828			6,051			(223)		(3.7)	%
PVD	5,~~343~~433			4,~~297~~576			~~1,046~~857		2418.37	%	~~16,758~~			~~17,370~~			~~(612)~~		~~(3.5)~~	%
OVP	32,~~957~~050			43,~~838~~463			(~~881~~1,413)		(1840.28)	%	~~11,702~~			~~13,063~~			~~(1,361)~~		~~(10.4)~~	%
Total North America revenue	$	40,329		$	37,809		$	2,520	6.7	%	$	118,607		$	115,614		$	2,993	2.6	%
Total North America Revenue	$	38,560		$	37,374		$	1,186	3.2	%
North America Gross Profit	$	18,~~745~~109		$	17,~~775~~908		$	~~970~~201	51.51	%	$	~~55,449~~		$	~~54,706~~		$	~~743~~	~~1.4~~	%
North America Gross Margin	4647.50		%	47.09		%					~~46.8~~		%	~~47.3~~		%
North America Operating Income (Loss)	$	885		$	(1,645)		$	2,530	NM		$	(15,927)		$	(484)		$	(15,443)	NM
North America Operating Loss	$	(9,206)		$	(12,311)		$	3,105	(25.2)	%
North America Operating Margin	2(23.29)		%	(432.49)		%					~~(13.4)~~		%	~~(0.4)~~		%

North America segment revenue increased 3.2% to $38.6 million for the three months ended March 31, 2023, compared to $37.4 million for the three months ended March 31, 2022. The $1.2 million increase was driven by a 12.7% increase in POC laboratory consumables, mostly driven by price favorability, partially offset by a 40.8% decrease in OVP sales due to timing.

-41-

~~North~~Gross ~~America~~profit ~~segment~~for ~~revenue~~the ~~increased~~North ~~6.7%~~America tosegment was $4018.31 million ~~for the three months ended September 30, 2022,~~ compared to $3717.89 million for the three months ended ~~September~~March 3031, ~~2021.~~2023 ~~The $2.5 million increase was driven by a 11.4% increase in POC laboratory consumables, mostly driven by price favorability,~~ and ~~a 24.3% increase in PVD primarily as a result of timing of raw materials for the production of Tri-Heart. This is partially offset by lower OVP sales of 18.2%~~2022, ~~primarily driven by timing~~respectively. ~~North~~ ~~America~~Gross ~~segment~~margin ~~revenue~~was ~~increased 2~~47.60% ~~to $118.6 million~~ for the ~~nine~~three months ended ~~September~~March 3031, ~~2022~~2023, compared to ~~$115~~47.69% ~~million~~in ~~for~~ the ~~nine~~three months ended ~~September 30~~March 31, ~~2021~~2022. The ~~$3.0~~acquisition ~~million~~of ~~increase~~LightDeck ~~was~~unfavorably ~~driven~~impacted byboth agross ~~10.2%~~profit ~~increase~~by in$1.8 ~~POC~~million ~~laboratory instruments~~ and ~~consumables,~~gross inmargin ~~part driven~~ by ~~introduction~~460 ofbasis ~~Element~~points. Excluding ~~AIM,~~the ~~which~~impact ~~was~~of ~~not present in~~ the ~~prior year period~~acquisition, asgross ~~well~~profit ~~as increased capital lease placements~~ and ~~favorable~~gross ~~price~~margin onpercentage ~~consumables~~favorability ~~due~~were todriven ~~annual~~by ~~price~~increased ~~escalators.~~revenue ~~This~~as isa ~~partially~~result ~~offset~~of byhigher ~~lower~~consumables ~~POC~~pricing ~~imaging~~and &favorable ~~informatics~~idle ~~sales~~plant ~~of 7.4%~~ and ~~lower~~mix ~~OVP~~impacts ~~sales~~within ofour ~~10.4%,~~OVP ~~partially due to timing~~business.

~~Gross profit for the~~ North America ~~segment~~had ~~was~~ $189.72 million ~~compared~~operating toloss ~~$17.8~~in ~~million for~~ the three months ended ~~September 30~~March 31, ~~2022 and 2021~~2023, ~~respectively.~~compared ~~Gross~~to ~~margin~~operating ~~was~~loss 46of $12.5%3 ~~for~~million in the three months ended ~~September 30~~March 31, 2022,. ~~compared~~The toreduction ~~47.0%~~in operating loss in the three months ended ~~September~~March 3031, ~~2021.~~2023 ~~The~~is ~~increase in gross profit was~~ driven by increased revenue, ~~while~~and ~~the~~profit ~~decrease in gross margin was driven by unfavorable product mix primarily related to our imaging product line~~ as well as ~~the~~lower ~~impact~~non-recurring ofand ~~low~~stock-based ~~margin~~compensation ~~Element AIM instrument placements~~costs, partially offset by ~~higher consumable sales and pricing. Gross profit was $55.4 million for nine months ended September 30, 2022 compared to $54.7 million for~~ the ~~nine~~acquisition ~~months~~of ~~ended~~LightDeck ~~September 30,~~and ~~2021. Gross margin was 46.8% for the nine months ended September 30, 2022, compared to 47.3% for the nine months ended September 30, 2021. The increase in gross profit was driven by~~ increased ~~revenue~~employee ~~while~~compensation the decrease in gross margin was driven by unfavorable product mix primarily related to low margin Element AIM instrument placements in the current period and product mix within our OVP product line, partially offset by higher consumable marginscosts.

North America had $0.9 million operating income and $15.9 million operating loss in the three and nine months ended September 30, 2022, compared to operating loss of $1.6 million and $0.5 million in the three and nine months ended September 30, 2021. The income in the three months ended September 30, 2022 is driven by increased revenue and gross profit, as well as lower operating costs, primarily driven by lower stock-based compensation. The loss in the nine months ended September 30, 2022 is due to increased operating expenses, primarily due to higher acquisition related costs, non-recurring items and extraordinary charges not indicative of ongoing operations including a $3.5 million provision for credit losses on a convertible note receivable, a $10.0 million licensing payment and higher cash-based compensation expenses, partially offset by increased revenue and gross profit as well as lower stock-based compensation.

-42-

International Segment

	Three Months Ended September 30,						Change				Nine Months Ended September 30,						Change
	Three Months Ended March 31,						Change
	2022			2021			Dollar Change		% Change		2022			2021			Dollar Change		% Change
	2023			2022			Dollar Change		% Change
Point of Care laboratory:	$	13,079		$	15,023		$	(1,944)	(12.9)	%	$	42,828		$	46,184		$	(3,356)	(7.3)	%
Point of Care Laboratory:	$	15,330		$	15,481		$	(151)	(1.0)	%
Instruments & Other	34,~~698~~785			3,~~800~~733			~~(102)~~1,052		(228.7)2	%	~~11,268~~			~~10,801~~			~~467~~		~~4.3~~	%
Consumables	910,~~381~~545			11,~~223~~748			(1,~~842~~203)		(1610.42)	%	~~31,560~~			~~35,383~~			~~(3,823)~~		~~(10.8)~~	%
Point of Care imaging & informatics	7,243			5,849			1,394		23.8	%	26,849			19,783			7,066		35.7	%
Point of Care Imaging & Informatics	7,674			10,962			(3,288)		(30.0)	%
PVD	~~841~~817			~~1,559~~983			(~~718~~166)		(4616.19)	%	~~2,685~~			~~4,090~~			~~(1,405)~~		~~(34.4)~~	%
Total International revenue	$	21,163		$	22,431		$	(1,268)	(5.7)	%	$	72,362		$	70,057		$	2,305	3.3	%
Total International Revenue	$	23,821		$	27,426		$	(3,605)	(13.1)	%
International Gross Profit	$	89,~~131~~290		$	711,~~469~~237		$	~~662~~(1,947)	8(17.93)	%	$	~~27,899~~		$	~~23,280~~		$	~~4,619~~	~~19.8~~	%
International Gross Margin	3839.40		%	3341.30		%					~~38.6~~		%	~~33.2~~		%
International Operating Loss	$	(1,556)		$	(788)		$	(768)	(97.5)	%	$	(1,742)		$	(1,627)		$	(115)	(7.1)	%
International Operating (Loss) Income	$	(1,217)		$	857		$	(2,074)	NM
International Operating Margin	(75.41)		%	(3.5)1		%					~~(2.4)~~		%	~~(2.3)~~		%

International segment revenue was $2123.28 million compared to $2227.4 million for the three months ended ~~September~~March 3031, ~~2022~~2023 and ~~2021~~2022, respectively., ~~The decrease is~~ driven by ~~unfavorable~~a ~~foreign exchange impact of $2~~30.90% ~~million,~~decline ~~partially~~in ~~offset~~POC byImaging ~~the~~& ~~sales~~Informatics ~~from~~due ~~the~~to ~~acquisition~~supply ofchain ~~VetZ~~delays ~~within~~and ~~POC~~timing, ~~imaging~~lower &consumable ~~informatics.~~sales ~~International~~and ~~segment~~unfavorable ~~revenue~~foreign ~~was~~exchange ~~$72.4~~impact ~~million~~of ~~compared to~~ $701.1 million ~~for the nine months ended September 30~~, ~~2022~~partially ~~and~~offset ~~2021,~~by ~~respectively~~28. ~~The~~2% increase ~~for~~in ~~the~~instrument ~~nine~~sales ~~months ended September 30, 2022 is primarily~~ due to aElement ~~$7.1~~AIM ~~million~~rollout ~~increase~~ in ~~sales~~International inmarkets ~~POC~~subsequent ~~imaging~~to ~~& informatics, which includes~~ the ~~acquisition~~first quarter of ~~VetZ,~~2022 ~~partially~~as ~~offset~~well byas ~~unfavorable~~higher ~~foreign~~capital ~~exchange~~lease ~~impact of $7~~placements.~~3 million.~~

Gross profit for the International segment was $89.13 million compared to $711.52 million for the three months ended ~~September~~March 3031, ~~2022~~2023 and ~~2021, respectively. Gross profit for the International segment was $27.9 million compared to $23.3 million for the nine months ended September 30,~~ 2022 ~~and 2021~~, respectively. Gross margin for the International segment was 3839.40% for the three months ended ~~September~~March 3031, ~~2022~~2023 compared to 3341.30% for the three months ended ~~September~~March 3031, ~~2021. Gross margin for the International segment was 38.6% for the nine months ended September 30,~~ 2022~~, compared to 33~~.2% ~~for the nine months ended September 30, 2021.~~ The ~~increase~~decrease in gross profit and gross margin for both periods is driven by ~~increased~~decreased revenue, ~~excluding foreign exchange impacts,~~ as well as ~~favorable~~unfavorable product mix, ~~particularly~~associated ~~within~~with ~~POC~~increased ~~laboratory~~capital ~~consumables.~~lease ~~The acquisition of VetZ also favorably impacted gross margin~~placements.

~~-43-~~International segment operating loss was $1.2 million for the three months ended March 31, 2023, compared to $0.9 million income for the three months ended March 31, 2022. The operating loss for the three months ended March 31, 2023 is driven by lower revenue and gross profit.

International segment operating loss was $1.6 million for the three months ended September 30, 2022, compared to $0.8 million for the three months ended September 30, 2021. International segment operating loss was $1.7 million for the nine months ended September 30, 2022, compared to $1.6 million for the nine months ended September 30, 2021. The increased operating loss for the three months ended September 30, 2022 is driven by increased operating expenses for the development of new technology related to the acquisition of VetZ; partially offset by higher gross profit. The increased operating loss for nine months ended September 30, 2022 is primarily driven by increased operating expenses for the development of new technology related to the acquisition of VetZ, partially offset by increased revenue and gross profit. -42-

Liquidity, Capital Resources and Financial Condition

We believe that adequate liquidity and cash generation is important to the execution of our strategic initiatives. Our ability to fund our operations, acquisitions, capital expenditures, and product development efforts may depend on our ability to access other forms of capital as well as our ability to generate cash from operating activities, which is subject to future operating performance, as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control, including but not limited to effects of the COVID-19 pandemic. Our primary source of liquidity is our available cash of $~~161~~125.12 million.

-44-

A summary of our cash from operating, investing and financing activities is as follows (in thousands):

	Nine Months EndedSeptember 30,				Change
	Three Months EndedMarch 31,				Change
	2022		2021		Dollar Change		% Change
	2023		2022		Dollar Change		% Change
Net cash (used in) provided by operating activities	$	(18,651)	$	5,272	$	(23,923)	NM
Net cash used in operating activities	$	(9,161)	$	(17,665)	$	8,504	48.1	%
Net cash used in investing activities	(3522,~~256~~558)		(3429,~~596~~843)		~~(660)~~7,285		(124.9)4	%
Net cash (used in) provided by financing activities	(4,927)		166,132		(171,059)		NM
Net cash used in financing activities	(128)		(3,262)		3,134		96.1	%
Foreign exchange effect on cash and cash equivalents	~~(3,666)~~438		(~~242~~60)		~~(3,424)~~498		~~(1,414.9)~~NM	%
(Decrease) increase in cash and cash equivalents	(62,500)		136,566		(199,066)		NM
Decrease in cash and cash equivalents	(31,409)		(50,830)		19,421		38.2	%
Cash and cash equivalents, beginning of the period	~~223~~156,~~574~~618		86223,~~334~~574		~~137~~(66,~~240~~956)		~~159~~(29.09)	%
Cash and cash equivalents, end of the period	$	~~161~~125,~~074~~209	$	~~222~~172,~~900~~744	$	(6147,~~826~~535)	(27.75)	%

For the ~~nine~~three months ended ~~September~~March 3031, ~~2022~~2023 and ~~September~~March 3031, ~~2021~~2022, cash flow (used in) ~~provided by~~ operations was $~~(18~~9.7)2 million and $517.37 million, respectively, which was primarily the result of (in thousands):

	Nine Months EndedSeptember 30,				Change
	Three Months EndedMarch 31,				Change
	2022		2021		Dollar Change		% Change
	2023		2022		Dollar Change		% Change
Net loss	$	(1510,~~668~~125)	$	(~~594~~9,986)	$	(~~15,074~~139)	(~~2,537~~1.74)	%
Non cash expenses and other adjustments	257,~~565~~941		236,~~682~~400		1,~~883~~541		824.01	%
Change in accounts receivable	~~801~~4,399		52,~~504~~060		(42,~~703)~~339		~~(85~~113.4)5	%
Change in inventories, net	(123,~~710~~112)		(96,~~286~~528)		(3,~~424)~~416		~~(36~~52.9)3	%
Change in lease receivables	(52,~~152~~708)		(32,~~528~~248)		(~~1,624~~460)		(4620.05)	%
Change in other assets	(~~710~~1,908)		(~~3,357~~288)		2(1,~~647~~620)		78(562.95)	%
Change in accounts payable	~~268~~(7,683)		(23,~~913~~069)		3(4,~~181~~614)		NM(150.3)	%
Change in other liabilities	~~(11~~4,~~045)~~035		(4,~~236~~006)		(68,~~809)~~041		~~(160.7)~~NM	%
Net cash (used in) provided by operating activities	$	(18,651)	$	5,272	$	(23,923)	NM
Net cash used in operating activities	$	(9,161)	$	(17,665)	$	8,504	48.1	%

-4543-

For the ~~nine~~three months ended ~~September~~March 3031, ~~2022~~2023 and ~~September~~March 3031, ~~2021~~2022, cash flow used in investing activities was $3522.36 million and $3429.68 million, respectively, which was primarily used for (in thousands):

	Nine Months EndedSeptember 30,				Change
	Three Months EndedMarch 31,				Change
	2022		2021		Dollar Change		% Change
	2023		2022		Dollar Change		% Change
Acquisition of Biotech	$	—	$	(16,250)	$	16,250	NM
Acquisition of LightDeck, net of cash acquired	$	(20,673)	$	—	$	(20,673)	NM
Acquisition of VetZ, net of cash acquired	~~(28,956)~~—		—(29,509)		~~(28~~29,~~956)~~509		NM
Acquisition of Lacuna, net of cash acquired	—		(3,882)		3,882		NM
Capital expenditures	(1,885)		(334)		(1,551)		(464.4)	%
Acquisition of BiEssA, net of cash acquired	—		(4,513)		4,513		NM
Net cash used in investing activities	$	(22,558)	$	(29,843)	$	7,285	24.4	%
Promissory note receivable issuance	(4,700)		(9,000)		4,300		47.8	%
Purchases of property and equipment	(1,600)		(993)		(607)		(61.1)	%
Proceeds from disposition of property and equipment	—		42		(42)		NM
Net cash used in investing activities	$	(35,256)	$	(34,596)	$	(660)	(1.9)	%

For the three months ended March 31, 2023 and March 31, 2022, cash flow used in financing activities was $0.1 million and $3.3 million, respectively, which was the result of (in thousands):

	Nine Months EndedSeptember 30,				Change
	Three Months EndedMarch 31,				Change
	2022		2021		Dollar Change		% Change
	2023		2022		Dollar Change		% Change
Payment of preferred stock issuance costs	$	—	$	(314)	$	314	NM
Proceeds from issuance of common stock	$	1	$	1,761	$	(1,760)	(99.9)	%
Proceeds from issuance of common stock	2,840		168,770		(165,930)		(98.3)	%
Payments for taxes related to shares withheld for employee taxes	(90)		(4,961)		4,871		98.2	%
Notes payable	(2,385)		—		(2,385)		NM
Repayments of other debt	(39)		(62)		23		37.1	%
Payments for taxes related to shares withheld for employee taxes	(5,224)		(1,503)		(3,721)		(247.6)	%
Net cash used in financing activities	$	(128)	$	(3,262)	$	3,134	N/M
Repayments of other debt	(158)		(821)		663		80.8	%
Net cash (used in) provided by financing activities	$	(4,927)	$	166,132	$	(171,059)	N/M

We believe that our cash, cash equivalents and marketable securities balances, as well as the cash flows generated by our operations, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures, including ~~selling~~investment in product development initiatives, and ~~marketing~~the ~~team~~build ~~expansion~~out of our new leased office space in Loveland, ~~investment~~Colorado (see Part I. Item 2. Properties in ~~key~~our ~~corporate~~Annual ~~functions,~~Report ~~and~~on ~~product~~Form ~~development~~10-K ~~initiatives~~for the year ended December 31, 2022), for at least the next 12 months. Our belief may prove to be incorrect, however, and we could utilize our available financial resources sooner than we currently expect. For example, we actively seek opportunities that are consistent with our strategic direction, which may require additional capital. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in Part I,. Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022. We may seek additional equity or debt financing in order to meet these future capital requirements, even in the absence of any acquisitions. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be adversely affected.

-46-

Effect of currency translation on cash

Net effect of foreign currency translations on cash was a $30.74 million ~~negative~~positive impact for the ~~nine~~three months ended ~~September~~March 3031, ~~2022~~2023 and a $0.21 million negative impact for the ~~nine~~three months ended ~~September~~March 3031, ~~2021~~2022. These effects are related to changes in exchange rates between the U.S. Dollar and the Swiss Franc, Euro, Australian Dollar, Canadian Dollar, and Malaysian Ringgit, which are the functional currencies of our subsidiaries.

Off-Balance Sheet Arrangements and Contractual Obligations

We have no off-balance sheet arrangements. Refer to Note 4 for discussion of our variable interest entity.

-44-

Purchase Obligations

Purchase obligations represent contractual agreements to purchase goods or services that are legally binding; specify a fixed, minimum or range of quantities; specify a fixed, minimum, variable, or indexed price provision; and specify approximate timing of the transaction. As of ~~September~~March 3031, ~~2022~~2023, the Company had contractual purchase obligations for inventory purchases through ~~2030~~2026 in the aggregate amount of $~~105~~45.04 million. Refer to Note 6, Leases in our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for a summary of lease obligations.

Critical Accounting Policies and Estimates

Our accounting policies are described in our audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, ~~2021, other than the recently adopted accounting pronouncements described in Note 1~~2022. Operations and Summary of Significant Accounting Policies in our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, have not changed significantly since such filing.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about other market risk affecting us, see the section under the heading “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022, which is incorporated by reference herein. As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the market risks described in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined by Rule 13a-15(e) 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 principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of the end of such period 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 principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

-47-

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures.

-45-

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

As of ~~September~~March 3031, ~~2022~~2023, 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

~~There~~The ~~have~~risk ~~been~~factors noset ~~material~~forth ~~changes~~below tosupplement the risk factors disclosed in Item 1A. Risk Factors in Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2021~~ 2022.

Risks Related to the Merger

The Merger Agreement and the pendency of the Merger could have a material adverse effect on our business, results of operations, financial condition and stock price.

On March 31, 2023, we entered into the Merger Agreement with Acquiror, Merger Sub, and, solely for purposes of Section 9.15 of the Merger Agreement, Mars.

The Merger Agreement provides that, subject to the terms and conditions set forth therein, at the effective time of the Merger, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation and wholly owned subsidiary of Acquiror, and each share of public common stock, par value $0.01 per share, of the Company (other than shares held in the treasury of the Company, shares held, directly or indirectly, by Mars, Acquiror or Merger Sub (or any of their subsidiaries) or any wholly-owned subsidiary of the Company immediately prior to the Effective Time, restricted stock of Heska (the treatment of which is described elsewhere in the Merger Agreement) or shares held by a holder who properly demands appraisal of such shares pursuant to, and who complies in all respects with, Section 262 of the Delaware General Corporation Law) will be automatically cancelled and converted into the right to receive $120.00 per share in cash, without interest. Completion of the Merger is subject to customary closing conditions, including approval of the Company's shareholders and the receipt of required regulatory approvals. The parties expect the transaction to close in the second half of 2023 (the “Closing”).

During the period between the date of the signing of the Merger Agreement and the Closing, our business is exposed to certain inherent risks due to the effect of the announcement or the pendency of the Merger and the transactions contemplated by the Merger, which may impact our business relationships, financial condition and operating results. Some of these risk factors include:

•difficulties maintaining relationships with customers, distributors, vendors, suppliers, service providers and other business partners, who may defer decision about working with us, move to our competitors, seek to delay or change existing business relationships with us;

-46-

•uncertainties caused by negative sentiment in the marketplace with respect to the Merger, which could adversely impact investor confidence in the Company;

•distraction of our current employees as a result of the announced Merger Agreement, which could result in a decline in their productivity or cause distractions in the workplace;

•our inability to attract new employees or retain current employees may be exacerbated due to uncertainties related to the Merger;

•diversion of significant management time and resources towards the completion of the Merger and transactions related to the Merger;

•impact of costs related to completion of the Merger and transactions related to the Merger, including any costs related to obtaining regulatory approvals;

•our inability to solicit other acquisition proposals, pursue alternative business opportunities, make strategic changes to our business and other restrictions on our ability to conduct our business pursuant to the Merger Agreement; and

•other developments beyond our control, including, but not limited to, changes in domestic or global economic conditions that may affect the timing or success of the Merger.

The Merger may not be completed within the expected timeframe, or at all, and significant delay or the failure to complete the Merger could adversely affect our business.

We cannot assure that our business, our relationships or our financial condition will not be adversely affected if the Merger is not consummated within the expected timeframe, or at all. Failure to complete the Merger within the expected timeframe, or at all, could adversely affect our business and the market price of our common stock in several ways, including the following:

•to the extent that the current market price of our common stock reflects an assumption that the Merger will be completed, it may be negatively impacted because of a failure to complete the Merger within the expected timeframe or at all;

•investor and consumer confidence in our business could decline, litigation could be brought against us, relationships with vendors, service providers, investors and other business partners may be adversely impacted, and we may be unable to retain key personnel;

•we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other costs in connection with the Merger and the transactions contemplated by the Merger, for which we may receive little or no benefit if the Merger and the transactions contemplated by the Merger are not completed. Many of these fees and costs will be payable by us even if the Merger and the transactions contemplated by the Merger are not completed and may relate to activities that we would not have undertaken other than to complete the Merger; and

•failure to complete the Merger may result in negative publicity and a negative impression of us in the investment community.

The occurrence of any of these events individually or in combination could materially and adversely affect our business, results of operations, financial condition, and our stock price. If the Merger is not completed, there can be no assurance that these risks will not materialize and will not materially adversely affect our stock price, business, financial conditions, results of operations or cash flows.

-47-

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

The following table sets forth information about our purchases of our outstanding Public Common Stock during the quarter ended ~~September~~March 3031, ~~2022~~2023:

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs
July 2022	—	$	—	—	$	—
January 2023	—	$	—	—	$	—
August 2022	1,983	$	92.95	—	$	—
February 2023	1,098	$	81.43	—	$	—
September 2022	417	$	77.50	—	$	—
March 2023	—	$	—	—	$	—
	2,400	$	90.27	—	$	—
	1,098	$	81.43	—	$	—
(1) Shares of Public Common Stock we purchased between July 1, 2022 and September 30, 2022 were solely for the cancellation of shares of stock withheld for related tax obligations.
(1) Shares of Public Common Stock we purchased between January 1, 2023 and March 31, 2023 were solely for the cancellation of shares of stock withheld for related tax obligations.

-48-

Item 6. Exhibits

Exhibit Number	Notes	Description of Document
2.1#++	(1)	Agreement regarding the sale and purchase of the sole share in scil animal care company GmbH among Registrant, Heska GmbH, Covetrus Animal Health Holdings Limited and Covetrus, Inc. dated January 14, 2020.
2.2#	(2)	Amendment Agreement dated April 1, 2020 regarding the agreement on the sale and purchase of the sole share in scil animal care company GmbH.
2.3#++	(11)	Sale and Purchase Agreement dated November 1, 2021 regarding Veterinärmedizinisches Dienstleistungszentrum (VetZ) GmbH Online-Dienstleistungen Für Tierärzte among Registrant, Heska GmbH, F2 Beteiligungs GmbH & Co. KG, F3P GmbH, Mr. Ingo Fraedrich, and Mr. Thomas Fraedrich.
2.4#++	(13)	~~Agreement~~Earn-Out Amendment and ~~Plan~~Settlement ofAgreement, ~~Merger~~ dated ~~September~~as 9of March 31, ~~2022~~2023, by and among Heska Corporation, ~~Mbio~~Heska ~~Merger Sub~~GmbH, ~~Inc~~F2 Beteiliguns GmbH & Co. KG, ~~Mbio~~F3P ~~Diagnostics~~GmbH, ~~Inc~~Mr. ~~and~~Ingo ~~Shareholder~~Fraedrich ~~Representative~~and ~~Services~~Mr. ~~LLC~~Thomas Fraedrich
2.5#		Amendment No. 1 to Agreement and Plan of Merger dated October 24, 2022 by and among Heska Corporation, Mbio Merger Sub, Inc., Mbio Diagnostics, Inc. and Shareholder Representative Services LLC
2.5#++	(12)	Agreement and Plan of Merger dated September 9, 2022 by and among Heska Corporation, Mbio Merger Sub, Inc., Mbio Diagnostics, Inc. and Shareholder Representative Services LLC
3.1	(3)	Restated Certificate of Incorporation of the Registrant.
2.6#	(12)	Amendment No. 1 to Agreement and Plan of Merger dated October 24, 2022 by and among Heska Corporation, Mbio Merger Sub, Inc., Mbio Diagnostics, Inc. and Shareholder Representative Services LLC
3.2	(3)	Certificate of Amendment to Restated Certificate of Incorporation of Registrant.
2.7	(13)	Agreement and Plan of Merger, dated as of March 31, 2023, by and among Heska Corporation, Antech Diagnostics, Inc., Helsinki Merger Sub LLC and, solely for purpose of Section 9.15 of the Merger Agreement, Mars, Incorporated
3.3	(3)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.4	(4)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.5	(5)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.6	(6)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.7	(7)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.8	(8)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.9	(11)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.10	(9)	Certificate of Designation of Preferences, Rights and Limitations of Series X Convertible Preferred Stock.
3.11	(10)	Amended and Restated Bylaws of the Registrant, as amended.
31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, 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 of 1934, 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.

-48-


3.1	(3)	Restated Certificate of Incorporation of the Registrant.
3.2	(3)	Certificate of Amendment to Restated Certificate of Incorporation of Registrant.
3.3	(3)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.4	(4)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.5	(5)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.6	(6)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.7	(7)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.8	(8)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.9	(11)	Certificate of Amendment to the Restated Certificate of Incorporation, as amended, of Registrant.
3.10	(9)	Certificate of Designation of Preferences, Rights and Limitations of Series X Convertible Preferred Stock.
3.11	(10)	Amended and Restated Bylaws of the Registrant, as amended.
31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, 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 of 1934, 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.
104.0		Cover Page Interactive Data File (embedded within the Inline XBRL document contained in Exhibit 101)

-49-

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

Notes

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

Furnished and not filed herewith.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

Indicates management contract or compensatory plan or arrangement.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

Certain confidential information contained in this exhibit has been omitted because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed.

104.0

Cover Page Interactive Data File (embedded within the Inline XBRL document contained in Exhibit 101)

Certain personally identifiable information has been omitted from this exhibit pursuant to Item 601(a)(6) under Regulation S-K.

(1)

Filed with the Registrant's Form 10-K for the year ended December 31, 2019.

(2)

Filed with the Registrant's Form 8-K on April 1, 2020.

(3)

Filed with the Registrant's Form 10-K for the year ended December 31, 2012.

(4)

Filed with the Registrant's Form 10-K for the year ended December 31, 2016.

(5)

Filed with the Registrant's Form 10-Q for the quarter ended March 31, 2017.

(6)

Filed with the Registrant's Form 8-K on May 9, 2018.

(7)

Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2019.

(8)

Filed with the Registrant’s Form 10-Q for the quarter ended March 31, 2020.

(9)

Filed with the Registrant’s Form 8-K on April 1, 2020.

(10)

Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2019.

(11)

Filed with the Registrant’s S-3 on February 16, 2022, File Number 333-262795.

(12)

Filed with the Registrant’s Form 10-Q for the quarter ended September 30, 2022.

(13)

Filed with the Registrant’s Form 8-K on April 3, 2023.

Notes
*			Furnished and not filed herewith.
**			Indicates management contract or compensatory plan or arrangement.
++			Certain confidential information contained in this exhibit has been omitted because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed.
#			Certain personally identifiable information has been omitted from this exhibit pursuant to Item 601(a)(6) under Regulation S-K.
(1)			Filed with the Registrant's Form 10-K for the year ended December 31, 2019.
(2)			Filed with the Registrant's Form 8-K on April 1, 2020.
(3)			Filed with the Registrant's Form 10-K for the year ended December 31, 2012.
(4)			Filed with the Registrant's Form 10-K for the year ended December 31, 2016.
(5)			Filed with the Registrant's Form 10-Q for the quarter ended March 31, 2017.
(6)			Filed with the Registrant's Form 8-K on May 9, 2018.
(7)			Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2019.
(8)			Filed with the Registrant’s Form 10-Q for the quarter ended March 31, 2020.
(9)			Filed with the Registrant’s Form 8-K on April 1, 2020.
(10)			Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2019.
(11)			Filed with the Registrant’s S-3 on February 16, 2022, File Number 333-262795.

-50-

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on ~~November~~May 85, ~~2022~~2023.


			HESKA CORPORATION

			By: /s/ KEVIN S. WILSON Kevin S. Wilson Chief Executive Officer and President (Principal Executive Officer)
			By: /s/ CATHERINE GRASSMAN Catherine Grassman Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)

-51-

Filing Compare · HESKA CORP