Filed by Bowne Pure Compliance
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2008
or
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 |
Commission File Number 000-19720
ABAXIS, INC.
(Exact name of registrant as specified in its charter)
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California
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77-0213001 |
(State of Incorporation)
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(I.R.S. Employer Identification No.) |
3240 Whipple Road
Union City, California 94587
(Address of principal executive offices)
(510) 675-6500
(Registrants telephone number including area code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of November 6, 2008, there were 21,886,000 shares of the Registrants common stock outstanding.
ABAXIS, INC.
Form 10-Q
For the Quarter Ended September 30, 2008
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
ABAXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
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Three Months Ended |
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Six Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenues |
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$ |
27,688 |
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$ |
25,192 |
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$ |
52,260 |
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$ |
48,123 |
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Cost of revenues |
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12,346 |
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11,335 |
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23,415 |
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21,250 |
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Gross profit |
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15,342 |
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13,857 |
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28,845 |
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26,873 |
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Operating expenses: |
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Research and development |
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2,082 |
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1,822 |
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4,079 |
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3,475 |
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Sales and marketing |
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6,494 |
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6,381 |
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12,321 |
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11,610 |
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General and administrative |
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1,952 |
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1,538 |
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3,614 |
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3,189 |
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Total operating expenses |
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10,528 |
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9,741 |
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20,014 |
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18,274 |
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Income from operations |
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4,814 |
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4,116 |
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8,831 |
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8,599 |
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Interest and other income (expense), net |
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326 |
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529 |
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788 |
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1,028 |
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Income before income taxes |
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5,140 |
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4,645 |
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9,619 |
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9,627 |
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Income tax provision |
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1,843 |
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1,757 |
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3,546 |
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3,641 |
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Net income |
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$ |
3,297 |
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$ |
2,888 |
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$ |
6,073 |
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$ |
5,986 |
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Net income per share: |
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Basic net income per share |
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$ |
0.15 |
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$ |
0.13 |
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$ |
0.28 |
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$ |
0.28 |
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Diluted net income per share |
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$ |
0.15 |
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$ |
0.13 |
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$ |
0.27 |
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$ |
0.27 |
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Shares used in the calculation of net income per share: |
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Weighted average common shares outstanding basic |
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21,779,000 |
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21,448,000 |
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21,757,000 |
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21,380,000 |
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Weighted average common shares outstanding diluted |
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22,304,000 |
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22,110,000 |
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22,363,000 |
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22,103,000 |
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Share-based compensation expense by function: |
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Cost of revenues |
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$ |
40 |
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$ |
35 |
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$ |
75 |
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$ |
55 |
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Research and development |
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53 |
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36 |
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114 |
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71 |
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Sales and marketing |
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121 |
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88 |
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258 |
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168 |
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General and administrative |
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220 |
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130 |
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388 |
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252 |
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Total share-based compensation expense |
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$ |
434 |
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$ |
289 |
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$ |
835 |
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$ |
546 |
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See accompanying Notes to the Condensed Consolidated Financial Statements.
3
ABAXIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
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September 30, |
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March 31, |
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2008 |
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2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
34,572 |
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$ |
17,219 |
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Short-term investments |
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34,998 |
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6,991 |
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Trade receivables (net of allowances
of $313 at September 30, 2008 and $272
at March 31, 2008) |
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21,613 |
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20,873 |
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Inventories, net |
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17,580 |
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18,657 |
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Prepaid expenses |
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1,093 |
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427 |
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Net deferred tax asset current |
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3,204 |
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2,426 |
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Total current assets |
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113,060 |
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66,593 |
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Long-term investments |
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35,463 |
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Property and equipment, net |
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14,865 |
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14,599 |
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Intangible assets, net |
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338 |
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375 |
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Other assets |
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23 |
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5 |
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Net deferred tax asset non-current |
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3,771 |
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3,868 |
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Total assets |
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$ |
132,057 |
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$ |
120,903 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
4,956 |
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$ |
6,421 |
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Accrued payroll and related expenses |
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4,231 |
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4,277 |
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Other accrued liabilities |
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2,312 |
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1,369 |
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Deferred revenue |
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934 |
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807 |
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Warranty reserve |
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1,617 |
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1,219 |
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Total current liabilities |
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14,050 |
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14,093 |
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Non-current liabilities: |
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Deferred rent |
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217 |
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286 |
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Deferred revenue |
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1,439 |
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1,146 |
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Warranty reserve |
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625 |
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729 |
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Total non-current liabilities |
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2,281 |
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2,161 |
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Commitments and contingencies (Note 8) |
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Shareholders equity: |
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Preferred stock, no par value; 5,000,000
shares authorized; no shares issued and
outstanding |
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Common stock, no par value; 35,000,000 shares authorized;
21,791,000 and 21,706,000 shares issued and outstanding
at September 30, 2008 and at March
31, 2008, respectively |
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113,013 |
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109,031 |
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Retained earnings (accumulated deficit) |
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3,106 |
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(2,967 |
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Accumulated other comprehensive loss |
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(393 |
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(1,415 |
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Total shareholders equity |
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115,726 |
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104,649 |
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Total liabilities and shareholders equity |
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$ |
132,057 |
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$ |
120,903 |
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See accompanying Notes to the Condensed Consolidated Financial Statements.
4
ABAXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Six Months Ended |
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September 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net income |
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$ |
6,073 |
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$ |
5,986 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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2,066 |
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1,656 |
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(Gain) loss on disposal of property and equipment |
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(8 |
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2 |
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Share-based compensation expense |
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835 |
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546 |
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Excess tax benefits from share-based awards |
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(3,085 |
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(138 |
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Deferred income taxes |
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2,332 |
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3,266 |
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Changes in assets and liabilities: |
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Trade receivables, net |
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(740 |
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(2,417 |
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Inventories, net |
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(160 |
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(1,971 |
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Prepaid expenses |
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(666 |
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363 |
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Other assets |
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(18 |
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14 |
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Accounts payable |
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(1,465 |
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(1,254 |
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Accrued payroll and related expenses |
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(46 |
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332 |
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Other accrued liabilities |
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943 |
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(73 |
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Deferred rent |
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(69 |
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(47 |
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Deferred revenue |
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420 |
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(166 |
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Warranty reserve |
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294 |
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447 |
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Net cash provided by operating activities |
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6,706 |
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6,546 |
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Cash flows from investing activities: |
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Purchases of available-for-sale investments |
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(19,575 |
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Purchases of held-to-maturity investments |
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(7,090 |
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(14,176 |
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Proceeds from redemptions of available-for-sale investments |
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8,550 |
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Proceeds from maturities of held-to-maturity investments |
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7,090 |
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27,868 |
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Purchases of property and equipment |
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(1,074 |
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(1,680 |
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Proceeds from disposal of property and equipment |
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20 |
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Net cash provided by (used in) investing activities |
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7,496 |
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(7,563 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock under stock plans, net |
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66 |
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1,516 |
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Excess tax benefits from share-based awards |
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3,085 |
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138 |
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Net cash provided by financing activities |
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3,151 |
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1,654 |
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Net increase in cash and cash equivalents |
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17,353 |
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|
637 |
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Cash and cash equivalents at beginning of period |
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17,219 |
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10,183 |
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Cash and cash equivalents at end of period |
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$ |
34,572 |
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$ |
10,820 |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
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$ |
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$ |
4 |
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Cash paid for income taxes, net of refunds |
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$ |
478 |
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$ |
150 |
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Supplemental disclosure of non-cash flow information: |
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Change in unrealized gain (loss) on investments, net of tax |
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$ |
1,022 |
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$ |
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Transfers of equipment between inventory and property and equipment, net |
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$ |
1,233 |
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$ |
881 |
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Capitalized share-based compensation |
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$ |
(4 |
) |
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$ |
9 |
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Common stock withheld for employee taxes in connection with share-based compensation |
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$ |
275 |
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$ |
109 |
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See accompanying Notes to the Condensed Consolidated Financial Statements.
5
ABAXIS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business. Abaxis, Inc. (the Company), incorporated in California in 1989,
develops, manufactures, markets and sells portable blood analysis systems for use in the human or
veterinary patient-care setting to provide clinicians with rapid blood constituent measurements.
On July 1, 2008, the Companys sales office in Darmstadt, Germany was incorporated as Abaxis Europe
GmbH to market, promote and distribute diagnostic systems for medical and veterinary uses. As a
result, Abaxis Europe GmbH became a wholly-owned subsidiary of the Company. The subsidiary was
formed to provide customer support in a timely manner in response to the growing and increasingly
diverse services needs of customers in the European market. The accompanying unaudited condensed
consolidated financial statements include the accounts of Abaxis, Inc. and its wholly-owned
subsidiary, Abaxis Europe GmbH. All intercompany transactions and balances have been eliminated in
consolidation.
Basis of Presentation. The unaudited condensed consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC). The unaudited condensed consolidated financial statements
included herein reflect all normal recurring adjustments, which are, in the opinion of management,
necessary to state fairly the results of operations and financial position for the periods
presented. The results for the three and six month periods ended September 30, 2008 are not
necessarily indicative of the results to be expected for the entire fiscal year ending March 31,
2009 or for any future period.
These unaudited condensed consolidated financial statements should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations and the
audited financial statements and notes thereto included in the Companys Annual Report on Form 10-K
for the fiscal year ended March 31, 2008.
Reclassifications. Certain reclassifications have been made to prior periods financial statements
to conform to the current period presentation. These reclassifications had no material impact on
previously reported results of operations or financial position.
Use of Estimates in Preparation of Financial Statements. The preparation of financial statements
in accordance with accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and 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. Such
management estimates include allowance for doubtful accounts, fair value of investments, sales and
other allowances, inventory reserves, income taxes, valuation allowance for deferred tax assets,
share-based compensation and warranty reserves. Actual results may differ from these estimates.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2008, the Financial Accounting Standards Board (the FASB) issued Statement of Financial
Accounting Standards (SFAS) SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS No. 161), which is intended to enable investors to better understand how
derivative instruments and hedging activities affect an entitys financial position, financial
performance and cash flows through enhanced disclosure requirements. SFAS No. 161 will be
effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. SFAS No. 161 will become effective for the Company on April 1, 2009. The
Company is currently evaluating the impact of adopting SFAS No. 161 on its financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No.
141(R)). SFAS No. 141(R) will change how business acquisitions are accounted for and will impact
financial statements both on the acquisition date and in subsequent periods. SFAS No. 141(R) will
become effective for the Company on April 1, 2009. The Company is currently evaluating the impact
of adopting SFAS No. 141(R) on its financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51 (SFAS No. 160), which establishes new accounting and
reporting standards for minority interests, which will be recharacterized as noncontrolling
interests and classified as a component of equity. SFAS No. 160 will become effective for the
Company on April 1, 2009. The Company is currently evaluating the impact of adopting SFAS No. 160
on its financial statements.
6
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). SFAS No. 159 permits entities to choose, at specified
election dates, to measure eligible items at fair value (the fair value option). Unrealized
gains and losses on instruments for which the fair value option has been elected are reported in
earnings at each subsequent reporting period. SFAS No. 159 is applied prospectively upon adoption.
The Company adopted SFAS No. 159 effective April 1, 2008. The Company did not elect the fair
value option for any of its financial assets or financial liabilities.
NOTE 3. FAIR VALUE MEASUREMENTS
On April 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157) to
measure the fair value of its financial assets and financial liabilities. In February 2008, the
FASB issued FSP FAS 157-2 Effective Date of FASB Statement No. 157 which delayed the effective
date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a recurring basis (at
least annually) to fiscal years beginning after November 15, 2008. The adoption of SFAS No. 157
for financial assets and liabilities did not have a material impact on the Companys financial
position, cash flows or results of operations.
SFAS No. 157 defines fair value as the price 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.
SFAS No. 157 establishes a fair value hierarchy that distinguishes between (1) market participant
assumptions developed based on market data obtained from independent sources (observable inputs)
and (2) an entitys own assumptions about market participant assumptions developed based on the
best information available in the circumstances (unobservable inputs). The fair value hierarchy
consists of three broad levels, which gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS No. 157 are
described below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Directly or indirectly observable market based inputs used in models or other valuation
methodologies.
Level 3: Unobservable inputs that are supported by little or no market data and require the use of
significant management judgment. These values are generally determined using pricing models for
which the assumptions utilize managements estimates of market participant assumptions.
The following table summarizes financial assets, measured at fair value on a recurring basis, by
level within the fair value hierarchy as of September 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008 |
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
in Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(1) |
|
$ |
34,572 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
34,572 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposits |
|
|
6,991 |
|
|
|
|
|
|
|
|
|
|
|
6,991 |
|
Auction rate securities |
|
|
|
|
|
|
|
|
|
|
28,007 |
|
|
|
28,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
41,563 |
|
|
$ |
|
|
|
$ |
28,007 |
|
|
$ |
69,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cash and cash equivalents as of September 30, 2008 consisted of $23.4 million in cash and $11.2
million in cash equivalents, consisting of money market mutual funds. |
The fair value of the Companys Level 1 financial assets are based on quoted market prices of the
underlying security. As of September 30, 2008, the Company did not have any Level 2 financial
assets or liabilities.
Assets measured at fair value on a recurring basis using significant unobservable Level 3 inputs
consist of auction rate securities. As of September 30, 2008, the Company held $28.4 million par
value of investments in auction rate securities that were structured to periodically reset through
auctions ranging from seven to 28 days. As of September 30, 2008, $24.8 million par value of the
Companys auction rate securities were collateralized by municipal bonds and the remaining $3.6
million par value of the Companys auction rate securities were collateralized by a variety of
securities, including real estate income trust, preferred stock, convertible preferred stock, high
yield bonds, high dividend equities or other stock. All of these investments in auction rate
securities were rated AAA and the Company continues to earn interest on its auction rate securities
at the contractual rate.
7
Until February 2008, the market for the Companys auction rate securities was highly liquid.
Starting in February 2008, the auctions on the Companys auction rate securities began to fail
because the amount of securities submitted for sale began to exceed the amount of purchase orders
for such securities. The credit market has not materially improved and auctions on the Companys
auction rate securities continue to fail. As a result, the Company will not be able to access
these funds until future auctions for these securities are successful, until a secondary market is
established, or until these securities are called for redemption or repurchase. When an auction
fails, the estimated fair value of those investments no longer approximates par value. At
September 30, 2008, the fair value of the Companys auction rate securities was $28.0 million.
During the three and six months ended September 30, 2008, $4.6 million and $8.6 million,
respectively, of the Companys auction rate securities were redeemed at 100% of par value by the
issuer of the auction rate securities.
In September 2008, the Companys bank where its auction rate securities are held reached agreements
with the Financial Industry Regulatory Authority, the State of Michigan Attorney General and the
Michigan Office of Financial and Insurance Regulation regarding the repurchase of auction rate
securities. In October 2008, the Company received a commitment from its bank with regard to the
repurchase of all of its auction rate securities. Accordingly, the Company reclassified its
auction rate securities as short-term investments at September 30, 2008 on its balance sheet
because the Company expects the bank to repurchase its auction rate securities during the third
quarter of fiscal 2009.
At September 30, 2008, observable market information related to auction rate securities was not
available to determine the fair value of the Companys investments. Therefore, the Company
estimated fair value using valuation models that relied on Level 3 inputs to value the securities,
including expected future cash flows, market rate of return, term to maturity, assessment of credit
quality and overall capital market liquidity. The valuation of the auction rate securities is
subject to uncertainties that are difficult to predict and require significant judgment. Factors
that may impact the Companys valuation in the future include, changes to credit ratings of the
securities, changes to the underlying assets supporting the auction rate securities, rates of
default of the underlying assets, discount rates, strength and quality of the credit market and
liquidity.
The following table summarizes the changes in the beginning and ending balances in the carrying
value associated with Level 3 financial assets for the six months ended September 30, 2008 (in
thousands):
|
|
|
|
|
|
|
Auction Rate |
|
|
|
Securities |
|
Balance at March 31, 2008 |
|
$ |
35,463 |
|
Redemptions during the period |
|
|
(4,000 |
) |
Transfers |
|
|
|
|
Total gain or loss (realized or unrealized) |
|
|
|
|
Included in earnings (loss) |
|
|
|
|
Included in other comprehensive loss |
|
|
96 |
|
|
|
|
|
Balance at June 30, 2008 |
|
$ |
31,559 |
|
Redemptions during the period |
|
|
(4,550 |
) |
Transfers |
|
|
|
|
Total gain or loss (realized or unrealized) |
|
|
|
|
Included in earnings (loss) |
|
|
|
|
Included in other comprehensive loss |
|
|
998 |
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
28,007 |
|
|
|
|
|
8
NOTE 4. INVESTMENTS
The following table summarizes, by major security type, the cost and fair value of investments (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gain (Loss) |
|
|
Value |
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposits |
|
$ |
6,991 |
|
|
$ |
|
|
|
$ |
6,991 |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
28,425 |
|
|
|
(418 |
) |
|
|
28,007 |
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
35,416 |
|
|
$ |
(418 |
) |
|
$ |
34,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
|
|
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gain (Loss) |
|
|
Value |
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposits |
|
$ |
2,974 |
|
|
$ |
|
|
|
$ |
2,974 |
|
Municipal bonds |
|
|
4,017 |
|
|
|
|
|
|
|
4,017 |
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments in held-to-maturity |
|
$ |
6,991 |
|
|
$ |
|
|
|
$ |
6,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
$ |
36,975 |
|
|
$ |
(1,512 |
) |
|
$ |
35,463 |
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments in available-for-sale |
|
$ |
36,975 |
|
|
$ |
(1,512 |
) |
|
$ |
35,463 |
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008 and March 31, 2008, unrealized loss on investments, net of related income
taxes, was $393,000 and $1.4 million, respectively.
At September 30, 2008, the contractual maturities for certificate of deposits were less than one
year. The Company determined that its auction rate securities were not liquid at March 31, 2008
since several auctions related to its auction rate securities failed beginning in February 2008 and
accordingly, the Companys auction rate securities were classified as long-term investments at
March 31, 2008. In September 2008, the Companys bank where its auction rate securities are held
reached agreements with the Financial Industry Regulatory Authority, the State of Michigan Attorney
General and the Michigan Office of Financial and Insurance Regulation regarding the repurchase of
auction rate securities. In October 2008, the Company received a commitment from its bank with
regard to the repurchase of all of its auction rate securities. Accordingly, the Company
reclassified its auction rate securities as short-term investments at September 30, 2008 on its
balance sheet because the Company expects the bank to repurchase its auction rate securities during
the third quarter of fiscal 2009.
NOTE 5. INVENTORIES, NET
Inventories, net, include material, labor and overhead, and are stated at the lower of cost
(first-in, first-out method) or market. Components of inventories, net, were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2008 |
|
|
2008 |
|
Raw materials |
|
$ |
7,873 |
|
|
$ |
9,067 |
|
Work-in-process |
|
|
2,677 |
|
|
|
4,315 |
|
Finished goods |
|
|
7,030 |
|
|
|
5,275 |
|
|
|
|
|
|
|
|
Inventories, net |
|
$ |
17,580 |
|
|
$ |
18,657 |
|
|
|
|
|
|
|
|
NOTE 6. WARRANTY RESERVES
The Company provides for the estimated future costs to be incurred under the Companys standard
warranty obligation on its instruments. Starting on July 1, 2007, the Company provides for the
estimated future costs to be incurred under the Companys warranty obligation on its reagent discs
as part of warranty reserves. Prior to July 1, 2007, the Company maintained a provision for
defective reagent discs as part of sales allowances.
Instruments. Since the beginning of fiscal 2006, the Companys standard warranty obligation on
instruments is two years. The estimated contractual warranty obligation is recorded when the
related revenue is recognized and any additional amount is recorded when such cost is probable and
can be reasonably estimated. The estimated accrual for warranty exposure is based on historical
experience, estimated product failure rates, material usage, freight incurred in repairing the
instrument after failure and known design changes.
9
Reagent Discs. Beginning on July 1, 2007, the Company records a provision for defective reagent
discs when the related sale is recognized and any additional amount is recorded when such cost is
probable and can be reasonably estimated. The warranty cost includes the replacement costs and
freight of a defective reagent disc. Prior to July 1, 2007, the Company recorded a provision for
defective reagent discs as part of sales allowances since the Company primarily issued a credit to
customers for defective reagent discs. Starting on July 1, 2007, the provision for defective
reagent discs is recorded as part of warranty reserves, since the Company replaces defective
reagent discs rather than issue a credit to customers. The change did not have a material impact
on the Companys financial statements. During the three and six months ended September 30, 2008,
the provision for warranty expense related to replacement of defective reagent discs was $133,000
and $210,000, respectively. The balance of accrued warranty reserve related to replacement of
defective reagent discs at September 30, 2008 and 2007 was $392,000 and $244,000, respectively,
which was classified as current liability on the balance sheet.
The Company evaluates its estimates for warranty reserves on an ongoing basis and believes it has
the ability to reasonably estimate warranty costs. However, unforeseeable changes in factors may
impact the estimate for warranty and such changes could cause a material change in the Companys
warranty reserve accrual in the period in which the change was identified.
The change in the Companys accrued warranty reserve during the three and six months ended
September 30, 2008 and 2007 is
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Balance at beginning of period |
|
$ |
2,115 |
|
|
$ |
910 |
|
|
$ |
1,948 |
|
|
$ |
847 |
|
Provision for warranty expense |
|
|
512 |
|
|
|
612 |
|
|
|
1,019 |
|
|
|
874 |
|
Warranty costs incurred |
|
|
(385 |
) |
|
|
(228 |
) |
|
|
(725 |
) |
|
|
(427 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
2,242 |
|
|
|
1,294 |
|
|
|
2,242 |
|
|
|
1,294 |
|
Non-current portion of warranty reserve |
|
|
625 |
|
|
|
346 |
|
|
|
625 |
|
|
|
346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of warranty reserve |
|
$ |
1,617 |
|
|
$ |
948 |
|
|
$ |
1,617 |
|
|
$ |
948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7. LINE OF CREDIT
The Company has a line of credit with Comerica Bank-California which provides for borrowings of up
to $2.0 million. The line of credit may be terminated upon notification by either party and the
outstanding balance is payable upon demand. The line of credit bears interest at the banks prime
rate minus 0.25%, which totaled 4.75% at September 30, 2008, and is payable monthly. At September
30, 2008, of the $2.0 million available, $97,000 was committed to secure a letter of credit for the
Companys facilities lease. At September 30, 2008, there was no amount outstanding under the
Companys line of credit. The weighted average interest rates on the line of credit during the
three months ended September 30, 2008 and 2007 were 4.75% and 7.93%, respectively.
The line of credit agreement contains certain financial covenants, which are evaluated on a
quarterly basis. At September 30, 2008, the Company was in compliance with each of these
covenants. Included in these financial covenants, among other stipulations, are the following
requirements:
|
|
The Company must have a minimum net income of $25,000 before preferred stock dividends and
accretion on preferred stock in any three quarters of a fiscal year, provided that any loss
before preferred stock dividends and accretion on preferred stock incurred in the remaining
quarter is not to exceed $250,000. |
|
|
|
The Company is required to be profitable, as defined, on a fiscal year to date basis
beginning, with respect to the current fiscal year, with the six month period ended September
30, 2008 and to have net income before preferred stock dividends and accretion on preferred
stock of at least $1.2 million for the fiscal year ending March 31, 2009. |
|
|
|
The Company is required to comply with certain financial covenants as follows: |
|
|
|
Financial Covenants |
|
Requirements |
Quick ratio, as defined
|
|
Not less than 2.00 to 1.00 |
Cash flow coverage, as defined
|
|
Not less than 1.25 to 1.00 |
Debt to net worth ratio, as defined
|
|
Not greater than 1.00 to 1.00 |
Tangible effective net worth, as defined
|
|
Not less than $25.7 million |
Borrowings under the line of credit are collateralized by the Companys net book value of assets of
$115.7 million at September 30, 2008, including its intellectual property.
10
NOTE 8. COMMITMENTS AND CONTINGENCIES
Purchase Commitments. In November 2003, the Company entered into an original equipment
manufacturing (OEM) agreement with Diatron Messtechnik GmbH (Diatron) of Austria to purchase
Diatron hematology instruments. The Diatron hematology instruments are currently supplied by
Diatron Medical Instruments PLC. Under the terms of the OEM agreement, the Company became
committed to purchase a minimum number of hematology instruments through fiscal 2009 from Diatron
once the product was qualified for sale, which occurred in May 2004. In September 2006, the terms
of the OEM agreement, with respect to the purchase commitments, were revised and the Company
completed its purchase commitments in the quarter ended December 31, 2007. In February 2008, the
terms of the OEM agreement, with respect to the purchase commitments, were again revised. Under
the amended OEM agreement currently in effect, the Company is committed to purchase a minimum
number of hematology instruments through fiscal 2009. In August 2008, the Company entered into a
purchase order with scheduled shipping terms through January 2009 for the remaining number of
hematology instruments under the amended OEM agreement.
Litigation. The Company is involved from time to time in various litigation matters in the normal
course of business. The Company believes that the ultimate resolution of these matters will not
have a material effect on its financial position or results of operations.
NOTE 9. SHARE-BASED COMPENSATION
Effective April 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123(R)) using the modified prospective method. SFAS No. 123(R) requires the
measurement and recognition of compensation expense for all share-based payment awards made to
employees and directors, including stock options and restricted stock units based on their fair
values, in the Companys results of operations. The share-based compensation expense includes
expense for unvested awards at March 31, 2006 and all awards granted subsequent to March 31, 2006.
Share-based compensation expense for the unvested awards outstanding at March 31, 2006 is based on
the grant-date fair value as used in calculating the pro forma disclosures in prior period
financial statements in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation.
Share-based compensation has been classified in the income statement or capitalized on the balance
sheet in the same manner as cash compensation paid to employees. Non-cash compensation expense
recognized for share-based awards during the three months ended September 30, 2008 and 2007 was
$434,000 and $289,000, respectively, and during the six months ended September 30, 2008 and 2007
was $835,000 and $546,000, respectively.
Capitalized share-based compensation cost at September 30, 2008 and 2007 was $23,000 and $22,000,
respectively, which was included in inventory on the balance sheet.
Cash Flow Impact
SFAS No. 123(R) requires cash flows resulting from excess tax benefits to be classified as a part
of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax
deductions for exercised stock options and vested restricted stock units in excess of the deferred
tax asset attributable to share-based compensation expense for such share-based awards. Excess tax
benefits classified as a financing cash inflow for the three months ended September 30, 2008 and
2007 were $1.3 million and $19,000, respectively, and for the six months ended September 30, 2008
and 2007 were $3.1 million and $138,000, respectively.
Equity Compensation Plans
The Companys share-based compensation plans are described below.
2005 Equity Incentive Plan. The Companys 2005 Equity Incentive Plan (the Equity Incentive Plan)
restated and amended the Companys 1998 Stock Option Plan. The Equity Incentive Plan allows for
the awards of stock options, stock appreciation rights, restricted stock awards, restricted stock
units, performance shares, performance units, deferred compensation awards or other share-based
awards to employees, directors and consultants. As of September 30, 2008, the Equity Incentive
Plan provides for the issuance of a maximum of 4,886,000 shares, of which 208,000 shares of common
stock were then available for future issuance. On October 28, 2008, the Companys shareholders
approved an amendment to the Equity Incentive Plan to increase the shares reserved for issuance
under the Equity Incentive Plan by 500,000 shares.
Options granted to employees and directors generally expire ten years from the grant date. Options
granted to employees generally become exercisable over a period of four years based on
cliff-vesting terms and continuous employment. Options granted to non-employee directors generally
become exercisable over a period of one year based on monthly vesting terms and continuous service.
See the Stock Options section in this Note 9 for additional information.
11
Restricted stock units awarded to employees generally vest over a period of four years and the
awards may also be subject to accelerated vesting upon achieving certain performance-based
milestones and continuous employment during the vesting period. Restricted stock units awarded to
non-employee directors generally vest in full one year after the grant date based on continuous
service. See the Restricted Stock Units section in this Note 9 for additional information.
1992 Outside Directors Stock Option Plan. Under the Companys 1992 Outside Directors Stock
Option Plan (the Directors Plan), options to purchase shares of common stock were automatically
granted, annually, to non-employee directors. Options under the Directors Plan were nonqualified
stock options and were granted at the fair market value on the date of grant and expired ten years
from the date of grant. Options granted to non-employee directors generally become exercisable
over a period of one year based on monthly vesting terms and continuous service. The Directors
Plan provided for the issuance of a maximum of 250,000 shares. As of September 30, 2008, all
outstanding options under the Directors Plan were fully vested and fully exercisable and no shares
of common stock were available for future issuance because the time period for granting options
expired in accordance with the terms of the Directors Plan in June 2002.
The Companys current practice is to issue new shares of common stock from its authorized shares
for share-based awards upon the exercise of stock options or vesting of restricted stock units.
Stock Options
Prior to April 1, 2006, the Company granted stock options to employees, with an exercise price
equal to the closing market price of the Companys common stock on the date of grant and with
cliff-vesting terms over four years, conditional on continuous employment with the Company. In
addition, prior to April 1, 2006, the Company granted stock options to non-employee directors with
an exercise price equal to the closing market price of the Companys common stock on the date of
grant and became exercisable over a period of one year based on monthly vesting terms, conditional
on continuous service to the Company. There were no stock options granted during fiscal 2007 or
2008 or during the six months ended September 30, 2008.
The Company used the Black-Scholes option pricing model to determine the fair value of stock
options granted prior to March 31, 2006. The fair value of each stock option granted was estimated
on the date of the grant using the Black-Scholes option pricing model, based on a multiple option
valuation approach, and forfeitures were recognized as they occurred. As of September 30, 2008,
the total unrecognized compensation expense related to stock options granted amounted to $16,000,
which is expected to be recognized over a weighted average period of 0.23 years.
Stock Option Activity
The following table summarizes information regarding options outstanding and options exercisable at
September 30, 2008 and the changes during the six-month period then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Number of |
|
|
Price |
|
|
Contractual |
|
|
Value |
|
|
|
Shares |
|
|
Per Share |
|
|
Life (Years) |
|
|
(In thousands) |
|
Outstanding at March 31, 2008 |
|
|
1,044,000 |
|
|
$ |
7.82 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(53,000 |
) |
|
|
6.45 |
|
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(1,000 |
) |
|
|
12.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008 |
|
|
990,000 |
|
|
$ |
7.89 |
|
|
|
3.30 |
|
|
$ |
12,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2008 |
|
|
990,000 |
|
|
$ |
7.89 |
|
|
|
3.30 |
|
|
$ |
11,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2008 |
|
|
984,000 |
|
|
$ |
7.87 |
|
|
|
3.28 |
|
|
$ |
11,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on
the Companys closing stock price as of September 30, 2008, that would have been received by the
option holders had all option holders exercised their stock options as of that date. Total
intrinsic value of stock options exercised during the three months ended September 30, 2008 and
2007 was $230,000 and $578,000, respectively, and during the six months ended September 30, 2008
and 2007 was $1.0 million and $4.0 million, respectively. Cash proceeds from stock options
exercised during the three months ended September 30, 2008 and 2007 were $123,000 and $218,000,
respectively, and during the six months ended September 30, 2008 and 2007 were $341,000 and $1.6
million, respectively.
12
Restricted Stock Units
The Company grants restricted stock unit awards to employees and directors as part of its
share-based compensation program which began in fiscal 2007. The restricted stock unit awards
entitle holders to receive shares of common stock at the end of a specified period of time.
Vesting for restricted stock unit awards is based on continuous employment or service of the
holder. Upon vesting, the equivalent number of common shares are typically issued net of tax
withholdings. If the vesting conditions are not met, unvested restricted stock unit awards will be
forfeited. Generally, the restricted stock unit awards vest according to one of the
following time-based vesting schedules:
|
|
Restricted stock unit awards to employees: Four year time-based vesting as follows: five
percent vesting after the first year; additional 10 percent after the second year; additional
15 percent after the third year; and the remaining 70 percent after the fourth year of
continuous employment with the Company. |
|
|
|
Restricted stock unit awards to non-employee directors: 100 percent vesting after one year
of continuous service to the Company. |
Certain restricted stock unit awards to employees in fiscal 2007 may also be subject to accelerated
vesting upon achieving certain performance-based milestones. Additionally, the Compensation
Committee of the Companys Board of Directors (the Compensation Committee), in its discretion,
may provide in the event of a change in control for the acceleration of vesting and/or settlement
of the restricted stock unit held by a participant upon such conditions and to such extent as
determined by the Compensation Committee. The Companys Board of Directors has adopted an
executive change in control severance plan, which it may terminate or amend at any time, that
provides that awards granted to executive officers will accelerate fully on a change of control.
The vesting of non-employee director awards granted under the Equity Incentive Plan automatically
will also accelerate in full upon a change in control.
The fair value of restricted stock unit awards used in the Companys expense recognition method is
measured based on the number of shares granted and the closing market price of the Companys common
stock on the date of grant. Such value is recognized as an expense over the corresponding
requisite service period. The Companys policy is to recognize the expense based on the vested
portions of the awards. The share-based compensation expense is reduced for an estimate of the
restricted stock unit awards that are expected to be forfeited. The forfeiture estimate is based
on historical data and other factors, and compensation expense is adjusted for actual results. As
of September 30, 2008, the total unrecognized compensation expense related to restricted stock unit
awards granted amounted to $13.5 million, which is expected to be recognized over a weighted
average period of 2.64 years.
Restricted Stock Unit Activity
The following table summarizes restricted stock unit activity for the six months ended September
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value(1) |
|
Unvested at March 31, 2008 |
|
|
494,000 |
|
|
$ |
23.21 |
|
Granted |
|
|
244,000 |
|
|
|
23.92 |
|
Vested |
|
|
(43,000 |
) |
|
|
23.18 |
|
Canceled or forfeited |
|
|
(9,000 |
) |
|
|
20.63 |
|
|
|
|
|
|
|
|
Unvested at September 30, 2008 |
|
|
686,000 |
|
|
$ |
23.50 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The weighted average grant date fair value of restricted stock units is based on the number of
shares and the closing market price of the Companys common stock on the date of grant. |
Total intrinsic value of restricted stock units vested during the three months ended September 30,
2008 and 2007 was $141,000 and $66,000, respectively, and during the six months ended September 30,
2008 and 2007 was $1.1 million and $477,000, respectively. The total grant date fair value of
restricted stock units vested during the three months ended September 30, 2008 and 2007 was
$155,000 and $77,000, respectively, and during the six months ended September 30, 2008 and 2007 was
$1.0 million and $541,000, respectively.
NOTE 10. NET INCOME PER SHARE
Basic net income per share is computed by dividing the net income attributable to common
shareholders by the weighted average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing the net income attributable to common
shareholders by the weighted average number of common shares that would have been outstanding
during the period assuming the issuance of common shares for all potential dilutive common shares
outstanding using the treasury stock method. Dilutive potential common shares outstanding include
outstanding stock options, restricted stock units and warrants.
13
The following is a reconciliation of the weighted average number of common shares outstanding used
in calculating basic and diluted net income per share (in thousands, except share and per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,297 |
|
|
$ |
2,888 |
|
|
$ |
6,073 |
|
|
$ |
5,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic |
|
|
21,779,000 |
|
|
|
21,448,000 |
|
|
|
21,757,000 |
|
|
|
21,380,000 |
|
Weighted average effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
509,000 |
|
|
|
658,000 |
|
|
|
549,000 |
|
|
|
707,000 |
|
Restricted stock units |
|
|
16,000 |
|
|
|
4,000 |
|
|
|
57,000 |
|
|
|
10,000 |
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted |
|
|
22,304,000 |
|
|
|
22,110,000 |
|
|
|
22,363,000 |
|
|
|
22,103,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.15 |
|
|
$ |
0.13 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.15 |
|
|
$ |
0.13 |
|
|
$ |
0.27 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company excluded the following stock options and warrants from the computation of diluted
weighted average shares outstanding because the exercise price of the stock options and warrants is
greater than the average market price of the Companys common stock during the period and,
therefore, the inclusion of these stock options and warrants would be antidilutive to net income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Weighted average number of shares underlying antidilutive stock options and warrants |
|
|
159,000 |
|
|
|
218,000 |
|
|
$ |
|
|
|
|
218,000 |
|
Weighted average exercise price per share underlying antidilutive stock options and warrants |
|
$ |
21.65 |
|
|
$ |
21.65 |
|
|
$ |
|
|
|
$ |
21.66 |
|
The Company excluded the following restricted stock units from the computation of diluted weighted
average shares outstanding because the inclusion of these awards would be antidilutive to net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Weighted average number of shares underlying antidilutive restricted stock units |
|
|
375,000 |
|
|
|
387,000 |
|
|
|
178,000 |
|
|
|
192,000 |
|
NOTE 11. INCOME TAXES
The Companys effective tax rate for the three months ended September 30, 2008 and 2007 was 36% and
38%, respectively, and for the six months ended September 30, 2008 and 2007 was 37% and 38%,
respectively. During the three and six months ended September 30, 2008, the effective tax rate
included a tax benefit for federal qualified production activities, included a tax benefit for
tax-exempt investments and excluded a tax benefit for the federal research and development tax
credit as a result of the expiration of the credit effective for qualifying research and
development expenses incurred after December 31, 2007. During the three and six months ended
September 30, 2007, the effective tax rate included a tax benefit for tax-exempt investments and a
tax benefit for federal research and development tax credits attributable to qualifying research
and development expenses incurred before December 31, 2007.
The Company did not have any unrecognized tax benefits as of September 30, 2008 or September 30,
2007. During the three and six months ended September 30, 2008 and 2007, the Company did not
recognize any interest and penalties related to unrecognized tax benefits.
NOTE 12. COMPREHENSIVE INCOME
The following is a summary of comprehensive income for the three and six months ended September 30,
2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
3,297 |
|
|
$ |
2,888 |
|
|
$ |
6,073 |
|
|
$ |
5,986 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on investments, net of tax |
|
|
939 |
|
|
|
|
|
|
|
1,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
4,236 |
|
|
$ |
2,888 |
|
|
$ |
7,095 |
|
|
$ |
5,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
NOTE 13. SEGMENT REPORTING INFORMATION
Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the Companys chief operating decision
maker, or decision making group, in deciding how to allocate resources and in assessing
performance.
The Company develops, manufactures, markets and sells portable blood analysis systems for use in
the human or veterinary patient-care setting to provide clinicians with rapid blood constituent
measurements. The Company identifies its reportable segments as those customer groups that
represent more than 10% of the combined revenue or gross profit or loss of all reported operating
segments. The Company manages its business on the basis of the following two reportable segments:
(i) the medical market and (ii) the veterinary market, which are based on the products sold by
market and customer group. Each reportable segment has similar manufacturing processes, technology
and shared infrastructures. The accounting policies for segment reporting are the same as for the
Company as a whole. Assets are not segregated by segments since the Companys chief operating
decision maker does not use assets as a basis to evaluate a particular segments performance.
Medical Market
In the medical market reportable segment, the Company serves a worldwide customer group consisting
of military installations (ships, field hospitals and mobile care units), physicians office
practices across all specialties, urgent care and walk-in clinics (free-standing or
hospital-connected), home care providers (national, regional or local), nursing homes, ambulance
companies, oncology treatment clinics, hospital labs and draw stations. The products manufactured
and sold in this segment primarily consist of Piccolo chemistry analyzers and medical reagent
discs.
Veterinary Market
In the veterinary market reportable segment, the Company serves a worldwide customer group
consisting of companion animal hospitals, animal clinics with mixed practices of small animals,
birds and reptiles, equine and bovine practitioners, veterinary emergency clinics, veterinary
referral hospitals, universities, government, pharmaceutical companies, biotechnology companies and
private research laboratories. The products manufactured and sold in this segment primarily
consist of VetScan chemistry analyzers and veterinary reagent discs. The Company also sells
OEM-supplied products in this segment, consisting primarily of hematology analyzers and hematology
reagent kits.
The table below summarizes revenues, cost of revenues and gross profit from the Companys two
operating segments and from certain unallocated items for the three and six months ended September
30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market |
|
$ |
6,015 |
|
|
$ |
5,643 |
|
|
$ |
12,544 |
|
|
$ |
10,450 |
|
Veterinary Market |
|
|
19,945 |
|
|
|
17,989 |
|
|
|
36,558 |
|
|
|
34,425 |
|
Other(1) |
|
|
1,728 |
|
|
|
1,560 |
|
|
|
3,158 |
|
|
|
3,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
27,688 |
|
|
|
25,192 |
|
|
|
52,260 |
|
|
|
48,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market |
|
|
2,775 |
|
|
|
2,805 |
|
|
|
5,808 |
|
|
|
5,248 |
|
Veterinary Market |
|
|
8,020 |
|
|
|
7,889 |
|
|
|
14,847 |
|
|
|
14,848 |
|
Other(1) |
|
|
1,551 |
|
|
|
641 |
|
|
|
2,760 |
|
|
|
1,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
12,346 |
|
|
|
11,335 |
|
|
|
23,415 |
|
|
|
21,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market |
|
|
3,240 |
|
|
|
2,838 |
|
|
|
6,736 |
|
|
|
5,202 |
|
Veterinary Market |
|
|
11,925 |
|
|
|
10,100 |
|
|
|
21,711 |
|
|
|
19,577 |
|
Other(1) |
|
|
177 |
|
|
|
919 |
|
|
|
398 |
|
|
|
2,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
15,342 |
|
|
$ |
13,857 |
|
|
$ |
28,845 |
|
|
$ |
26,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents unallocated items, not specifically identified to any particular business segment. |
15
NOTE 14. REVENUES BY PRODUCT CATEGORY AND GEOGRAPHIC REGION AND SIGNIFICANT CONCENTRATIONS
Revenue Information
The following is a summary of revenues for each group of products provided by the Company (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Revenues by Product Category |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Instruments |
|
$ |
6,892 |
|
|
$ |
7,462 |
|
|
$ |
14,694 |
|
|
$ |
13,926 |
|
Reagent discs and kits |
|
|
18,734 |
|
|
|
15,680 |
|
|
|
33,627 |
|
|
|
29,939 |
|
Other products |
|
|
1,317 |
|
|
|
1,598 |
|
|
|
2,427 |
|
|
|
3,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales, net |
|
|
26,943 |
|
|
|
24,740 |
|
|
|
50,748 |
|
|
|
47,200 |
|
Development and licensing revenue |
|
|
745 |
|
|
|
452 |
|
|
|
1,512 |
|
|
|
923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
27,688 |
|
|
$ |
25,192 |
|
|
$ |
52,260 |
|
|
$ |
48,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of revenues by geographic region based on customer location (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Revenues by Geographic Region |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
North America |
|
$ |
22,482 |
|
|
$ |
21,071 |
|
|
$ |
42,777 |
|
|
$ |
40,240 |
|
Europe |
|
|
4,341 |
|
|
|
3,175 |
|
|
|
7,726 |
|
|
|
6,232 |
|
Asia Pacific and rest of the world |
|
|
865 |
|
|
|
946 |
|
|
|
1,757 |
|
|
|
1,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
27,688 |
|
|
$ |
25,192 |
|
|
$ |
52,260 |
|
|
$ |
48,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Concentrations
Revenues from significant customers as a percentage of total revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
Geographical |
|
|
September 30, |
|
|
September 30, |
|
Distributor |
|
Location |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Walco International, Inc., d/b/a DVM Resources |
|
United States |
|
|
11 |
% |
|
|
13 |
% |
|
|
<10 |
% |
|
|
14 |
% |
At September 30, 2008, one distributor in the United States accounted for 13% of the Companys
trade receivables. At September 30, 2007, one distributor in the United States accounted for 17%
of the Companys trade receivables.
NOTE 15. SUBSEQUENT EVENTS
In October 2008, the Company and a manufacturer of medical diagnostic products executed a term sheet to enter into a
definitive license agreement with respect to the licensing of certain patents related to lateral flow immunoassay
technology. This term sheet will become binding if the parties do not enter into a definitive agreement on or prior to
January 5, 2009. Under the terms of this agreement, the Company is committed to the payment of an up-front licensing
fee during fiscal 2009, as well as the payment of annual minimum royalties starting in fiscal 2011 through the date of
the expiration of the last patent licensed under the agreement.
16
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Managements Discussion and Analysis of Financial Condition and Results of Operations includes
a number of forward-looking statements, which reflect Abaxis current views with respect to future
events and financial performance. In this report, the words will, anticipates, believes,
expects, intends, plans, future, project, estimate, would, may, could, should,
might, and similar expressions identify forward-looking statements. These forward-looking
statements are subject to certain risks and uncertainties, including but not limited to those
discussed below, in Part II, Item 1A of this report and in Part I, Item 1A of our most recent
Annual Report on Form 10-K filed with the Securities and Exchange Commission (the SEC), that
could cause actual results to differ materially from historical results or those anticipated. Such
risks and uncertainties include, but are not limited to, the market acceptance of our products and
the continuing development of our products, required United States Food and Drug Administration
(FDA) clearance and other government approvals, risks associated with manufacturing and
distributing our products on a commercial scale, free of defects, risks related to the introduction
of new instruments manufactured by third parties, risks associated with entering the human
diagnostic market on a larger scale, risks associated with liquidity concerns related to our
auction rate securities, risks related to the protection of Abaxis intellectual property or claims
of infringement of intellectual property asserted by third parties, risks involved in carrying of
inventory, risks associated with the ability to attract, train and retain competent sales
personnel, general market conditions and competition. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date hereof. Abaxis
assumes no obligation to update any forward-looking statements as circumstances change.
BUSINESS OVERVIEW
Abaxis, Inc. (Abaxis, us or we) was incorporated in California in 1989. Our principal
offices are located at 3240 Whipple Road, Union City, California 94587. Our telephone number is
(510) 675-6500 and our Internet address is www.abaxis.com. We make available free of charge on or
through our Internet website our annual reports on Form 10-K,
quarterly reports on Form
10-Q,
current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable
after such material is electronically filed with or furnished to the SEC. Our common stock trades
on the NASDAQ Global Market under the symbol ABAX.
We develop, manufacture, market and sell portable blood analysis systems for use in the human or
veterinary patient-care setting to provide clinicians with rapid blood constituent measurements.
Our primary product is a blood analysis system, consisting of a compact portable analyzer and a
series of single-use plastic discs, called reagent discs, containing all the chemicals required to
perform a panel of up to 14 tests on human patients and 13 tests on veterinary patients. We
manufacture the system in our manufacturing facilities in Union City, California and we market our
blood chemistry analyzers in both the medical market and in the veterinary market, as described
below.
|
|
Medical Market: We currently market the blood analysis system in the medical market under
the name Piccolo xpress. Through October 2006, we marketed the blood analysis
system in the medical market as the Piccolo®, now referred to as the Piccolo
Classic. We continue to support and service our current population of Piccolo xpress and
Piccolo Classic chemistry analyzers. |
|
|
|
Veterinary Market: We currently market the blood analysis system in the veterinary market
under the name VetScan VS2®. Through March 2006, we marketed the blood analysis
system in the veterinary market as the VetScan®, now referred to as the VetScan
Classic. We continue to support and service our current population of VetScan VS2 and VetScan
Classic chemistry analyzers. |
In September 2007, we introduced a veterinary hematology instrument under the name VetScan HM5.
The VetScan HM5 offers a 22-parameter complete blood count (CBC) analysis, including a five-part
differential cell counter specifically designed for veterinary applications. In May 2004, we
introduced a veterinary hematology instrument that offers an 18-parameter CBC analysis, including a
three-part white blood cell differential, marketed originally as the VetScan HMII, and is now
referred to as the VetScan HM2. We currently purchase the hematology instruments from Diatron
Medical Instruments PLC. of Budapest, Hungary. Through April 2004, we marketed a veterinary
hematology instrument under the name VetScan HMT. We continue to support and service our current
population of VetScan HM5, VetScan HM2, VetScan HMII and VetScan HMT hematology instruments. We
also market reagent kits to be used with our hematology instruments which we currently purchase
from three suppliers: Clinical Diagnostic Solutions, Inc., Diatron and Mallinckrodt Baker BV.
On July 1, 2008, our sales office in Darmstadt, Germany was incorporated as Abaxis Europe GmbH to
market, promote and distribute diagnostic systems for medical and veterinary uses. As a result,
Abaxis Europe GmbH became a wholly-owned subsidiary of Abaxis. The subsidiary was formed to
provide customer support in a timely manner in response to the growing and increasingly diverse
services needs of customers in the European market.
17
Our sales for any future periods are not predictable with a significant degree of certainty, and
may depend on a number of factors outside of our control, including but not limited to inventory or
timing considerations by our distributors. We generally operate with a limited order backlog
because our products are typically shipped shortly after orders are received. As a result, product
sales in any quarter are generally dependent on orders booked and shipped in that quarter. Our
expense levels, which are to a large extent fixed, are based in part on our expectations of future
revenues. Accordingly, we may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. As a result, any such shortfall would negatively affect our
operating results and financial condition. In addition, our sales may be adversely impacted by
pricing pressure from competitors. Our ability to be consistently profitable will depend, in part,
on our ability to increase the sales volumes of our Piccolo and VetScan products and to
successfully compete with other competitors. We believe that period to period comparisons of our
results of operations are not necessarily meaningful indicators of future results.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
Our financial statements are prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting period. On an on-going
basis, we evaluate our estimates and the sensitivity of these estimates to deviations in the
assumptions used in making them. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances. However, there can
be no assurance that our actual results will not differ from these estimates.
We have identified the policies below as critical because they are not only important to
understanding our financial condition and results of operations, but also because application and
interpretation of these policies requires both judgment and estimates of matters that are
inherently uncertain and unknown. Accordingly, actual results may differ materially from our
estimates. The impact and any associated risks related to these policies on our business
operations are discussed below. A more detailed discussion on the application of these and other
accounting policies are included in our Annual Report on Form 10-K for the fiscal year ended March
31, 2008.
Revenue Recognition and Deferred Revenue. Our primary customers are distributors and direct
customers in both the medical and veterinary markets. Revenues from product sales, net of
estimated sales allowances and rebates, are recognized when (i) evidence of an arrangement exists,
(ii) upon shipment of the products to the customer, (iii) the sales price is fixed or determinable
and (iv) collection of the resulting receivable is reasonably assured. Rights of return are not
provided.
We recognize revenue associated with extended maintenance agreements ratably over the life of the
contract. Amounts collected in advance of revenue recognition are recorded as a current or
non-current liability based on the time from the balance sheet date to the future date of revenue
recognition. We provide incentives in the form of free goods or extended maintenance agreements to
customers in connection with the sale of our instruments. Revenues from such sales is allocated
separately to the instruments and incentives based on the relative fair value of each element.
Revenues allocated to incentives is deferred until the goods are shipped to the customer or is
recognized ratably over the life of the maintenance contract.
We periodically offer trade-in programs to customers for trading in an existing instrument to
purchase a new instrument and we will either provide incentives in the form of free goods or reduce
the sales price of the instrument. These incentives in the form of free goods are recorded
according to the policies described above.
Distributor and Customer Rebates. We offer distributor pricing rebates and customer incentives
from time to time. The distributor pricing rebates are offered to distributors upon meeting the
sales volume requirements during a qualifying period. The distributor pricing rebates are recorded
as a reduction to gross revenues during the qualifying period. Cash rebates are offered to
customers who purchase specific instruments during a promotional period. Cash rebates are recorded
as a reduction to gross revenues.
Sales and Other Allowances. We estimate a provision for defective reagent discs as part of sales
allowances when we issue credits to customers for defective reagent discs. We also establish, upon
shipment of our products to distributors, a provision for potentially defective reagent discs,
based on estimates derived from historical experience. The provision for potentially defective
reagent discs was recorded in sales allowances, using internal data available to estimate the level
of inventory in the distribution channel, the lag time for customers to report defective reagent
discs and the historical rates of defective reagent discs. Starting on July 1, 2007, the provision
for potentially defective reagent discs is recorded as part of warranty reserves, instead of sales
allowances, since we replace defective reagent discs rather than issue a credit to customers.
Changes in our estimates for accruals related to provisions for defective reagent discs have not
been material to our financial position or results of operations. In the future, the actual
defective reagent discs may exceed our estimates, which could adversely affect our financial
results.
18
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts based on our
assessment of the collectibility of the amounts owed to us by our customers. In determining the
amount of the allowance, we make judgments about the creditworthiness of customers which is mostly
determined by the customers payment history and the outstanding period of accounts. We
specifically identify amounts that we believe to be uncollectible and the allowance for doubtful
accounts is adjusted accordingly. An additional allowance is recorded based on certain percentages
of our aged receivables, using historical experience to estimate the potential uncollectible and
our assessment of the general financial condition of our customer base. If our actual collections
experience changes, revisions to our allowances may be required, which could adversely affect our
operating income.
Warranty Reserves. We provide for the estimated future costs to be incurred under our standard
warranty obligation on our instruments. Our standard warranty obligation on instruments is two
years. The estimated contractual warranty obligation is recorded when the related revenue is
recognized and any additional amount is recorded when such cost is probable and can be reasonably
estimated. While we engage in product quality programs and processes, including monitoring and
evaluating the quality of our suppliers, our estimated accrual for warranty exposure is based on
historical experience, estimated product failure rates, material usage and freight incurred in
repairing the instrument after failure and known design changes.
A provision for defective reagent discs is recorded when related sales are recognized and any
additional amounts are recorded when such costs are probable and can be reasonably estimated, at
which time they are included in cost of revenues. Prior to July 1, 2007, we primarily issued a
credit to customers for defective reagent discs and, therefore, the provision for estimated costs
for defective reagent discs, which includes the replacement costs and freight of a defective
reagent disc, was recorded as part of sales and other allowances. Starting on July 1, 2007, the
provision for defective reagent discs is recorded as part of warranty reserves, since we replace
defective reagent discs rather than issue a credit to customers.
We analyze the adequacy of the ending accrual balance of warranty reserves each quarter. The
determination of warranty reserves requires us to make estimates of the expected costs to repair or
replace the instruments and to replace defective reagent discs under warranty. If actual repair or
replacement costs of instruments or replacement costs of reagent discs differ significantly from
our estimates, adjustments to cost of revenues may be required.
Inventories. We state inventories at the lower of cost or market, cost being determined using
standard costs which approximates the first-in, first-out (FIFO) method. Inventories include
material, labor and overhead. We establish provisions for excess, obsolete and unusable
inventories after evaluation of future demand and market conditions. If future demand or actual
market conditions are less favorable than those estimated by management or if a significant amount
of the material were to become unusable, additional inventory write-downs may be required, which
would have a negative effect on our operating income.
Long-Lived Assets. The carrying value of our long-lived assets is reviewed for impairment, in
accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. We look to current and future
profitability, as well as current and future undiscounted cash flows, excluding financing costs, as
primary indicators of recoverability. An impairment loss would be recognized when the sum of the
undiscounted future net cash flows expected to result from the use of the asset and its eventual
disposal is less than the carrying amount. If impairment is determined to exist, any related
impairment loss is calculated based on fair value.
Income Taxes. We account for income taxes under the provisions of SFAS No. 109, Accounting for
Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amounts to be recovered.
Share-Based Compensation Expense. Effective April 1, 2006, we adopted SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123(R)) using the modified prospective method. Under the fair
value provisions of SFAS No. 123(R), we recognize share-based compensation expense, net of an
estimated forfeiture rate, for those shares expected to vest over the requisite service period of
the award to employees and directors.
We use the Black-Scholes option pricing model to determine the fair value of stock options granted
prior to March 31, 2006. Determining the appropriate fair value model and calculating the fair
value of share-based awards requires highly subjective assumptions, as described below.
|
|
Risk-free interest rate: The risk-free interest rate is based on U.S. Treasury yields in
effect at the time of grant for the expected term of the option. |
|
|
|
Expected stock price volatility: We estimate the volatility of our common stock at the
date of grant based on the historical volatility of our common stock. |
19
|
|
Expected term: We estimate the expected term of stock options granted based on historical
exercise and post-vesting termination patterns, which we believe are representative of future
behavior. |
|
|
|
Expected dividends: We have not paid cash dividends on our common stock and we do not
anticipate paying cash dividends in the foreseeable future; consequently, we use an expected
dividend yield of zero. |
For restricted stock units, the assumptions to calculate compensation expense is based on the fair
value of our stock at the grant date. As a result, if factors change and we use different
assumptions, our share-based compensation expense could be materially different in the future.
As required by SFAS No. 123(R), employee share-based compensation expense recognized is calculated
based on the awards expected to vest and reduced for estimated forfeitures. The forfeiture rate is
estimated based on historical data of our share-based awards that are granted and cancelled prior
to vesting and upon historical experience of employee turnover. Changes in estimated forfeiture
rates and differences between estimated forfeiture rates and actual experience may result in
significant, unanticipated increases or decreases in share-based compensation expense from period
to period. To the extent we revise our estimate of the forfeiture rate in the future, our
share-based compensation expense could be materially impacted in the quarter of revision, as well
as in following quarters.
Fair Value Measurements. Effective April 1, 2008, we adopted SFAS No. 157, Fair Value
Measurements (SFAS No. 157) to measure the fair value of our financial assets and financial
liabilities. SFAS No. 157 defines fair value as the price 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. SFAS No. 157 establishes a fair value hierarchy that distinguishes between (1) market participant
assumptions developed based on market data obtained from independent sources (observable inputs)
and (2) an entitys own assumptions about market participant assumptions developed based on the
best information available in the circumstances (unobservable inputs). The fair value hierarchy
consists of three broad levels, which gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS No. 157 are
described below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. We
used Level 1 assumptions for our cash and cash equivalents and certificate of deposits, which are
traded in an active market. The valuations are based on quoted prices that are readily and
regularly available in an active market, and accordingly, a significant degree of judgment is not
required.
Level 2: Directly or indirectly observable market based inputs used in models or other valuation
methodologies. As of September 30, 2008, we did not have any Level 2 financial assets or
liabilities.
Level 3: Unobservable inputs that are supported by little or no market data and require the use of
significant management judgment. Assets utilizing Level 3 inputs consist of our auction rate
securities. Since the credit market is currently illiquid for auction rate securities, our
estimates are subject to significant judgment by management.
The valuation of our auction rate securities is subject to uncertainties that are difficult to
predict and the interpretations of relevant market data are subject to uncertainties and require
significant judgment. Factors that may impact our valuation in the future include, changes to
credit ratings of the securities, changes to the underlying assets supporting the auction rate
securities, rates of default of the underlying assets, discount rates, strength and quality of the
credit market and liquidity. Due to the uncertainty inherent in the valuation process, estimates
of fair value may differ significantly from the values that would have been obtained had an active
market for the auction rate securities existed, and the differences could be material.
RESULTS OF OPERATIONS
We develop, manufacture, market and sell portable blood analysis systems for use in the human or
veterinary patient-care setting to provide clinicians with rapid blood constituent measurements.
We operate in two segments: (i) the medical market and (ii) the veterinary market. See Segment
Results in this section for a detailed discussion.
20
Total Revenues
Revenues by Geographic Region and by Product Category. Revenues by geographic region based on
customer location and revenues by product category during the three and six months ended September
30, 2008 and 2007 were as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
Percent |
|
Revenues by Geographic Region |
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
Change |
|
North America |
|
$ |
22,482 |
|
|
$ |
21,071 |
|
|
$ |
1,411 |
|
|
|
7 |
% |
|
$ |
42,777 |
|
|
$ |
40,240 |
|
|
$ |
2,537 |
|
|
|
6 |
% |
Percentage of total revenues |
|
|
81 |
% |
|
|
84 |
% |
|
|
|
|
|
|
|
|
|
|
82 |
% |
|
|
84 |
% |
|
|
|
|
|
|
|
|
Europe |
|
|
4,341 |
|
|
|
3,175 |
|
|
|
1,166 |
|
|
|
37 |
% |
|
|
7,726 |
|
|
|
6,232 |
|
|
|
1,494 |
|
|
|
24 |
% |
Percentage of total revenues |
|
|
16 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
15 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
Asia Pacific and rest of the world |
|
|
865 |
|
|
|
946 |
|
|
|
(81 |
) |
|
|
(9 |
%) |
|
|
1,757 |
|
|
|
1,651 |
|
|
|
106 |
|
|
|
6 |
% |
Percentage of total revenues |
|
|
3 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
3 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
27,688 |
|
|
$ |
25,192 |
|
|
$ |
2,496 |
|
|
|
10 |
% |
|
$ |
52,260 |
|
|
$ |
48,123 |
|
|
$ |
4,137 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
Percent |
|
Revenues by Product Category |
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
Change |
|
Instruments |
|
$ |
6,892 |
|
|
$ |
7,462 |
|
|
$ |
(570 |
) |
|
|
(8 |
%) |
|
$ |
14,694 |
|
|
$ |
13,926 |
|
|
$ |
768 |
|
|
|
6 |
% |
Percentage of total revenues |
|
|
25 |
% |
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
28 |
% |
|
|
29 |
% |
|
|
|
|
|
|
|
|
Reagent discs and kits |
|
|
18,734 |
|
|
|
15,680 |
|
|
|
3,054 |
|
|
|
19 |
% |
|
|
33,627 |
|
|
|
29,939 |
|
|
|
3,688 |
|
|
|
12 |
% |
Percentage of total revenues |
|
|
68 |
% |
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
|
64 |
% |
|
|
62 |
% |
|
|
|
|
|
|
|
|
Other products |
|
|
1,317 |
|
|
|
1,598 |
|
|
|
(281 |
) |
|
|
(18 |
%) |
|
|
2,427 |
|
|
|
3,335 |
|
|
|
(908 |
) |
|
|
(27 |
%) |
Percentage of total revenues |
|
|
4 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
5 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales, net |
|
|
26,943 |
|
|
|
24,740 |
|
|
|
2,203 |
|
|
|
9 |
% |
|
|
50,748 |
|
|
|
47,200 |
|
|
|
3,548 |
|
|
|
8 |
% |
Percentage of total revenues |
|
|
97 |
% |
|
|
98 |
% |
|
|
|
|
|
|
|
|
|
|
97 |
% |
|
|
98 |
% |
|
|
|
|
|
|
|
|
Development and licensing revenue |
|
|
745 |
|
|
|
452 |
|
|
|
293 |
|
|
|
65 |
% |
|
|
1,512 |
|
|
|
923 |
|
|
|
589 |
|
|
|
64 |
% |
Percentage of total revenues |
|
|
3 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
3 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
27,688 |
|
|
$ |
25,192 |
|
|
$ |
2,496 |
|
|
|
10 |
% |
|
$ |
52,260 |
|
|
$ |
48,123 |
|
|
$ |
4,137 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
North America. During the three months ended September 30, 2008, total revenues in North
America increased 7%, or $1.4 million, as compared to the three months ended September 30, 2007.
Components of the change in North America were as follows:
Instruments. During the three months ended September 30, 2008, total revenues from instruments
sold in North America decreased 10%, or $653,000, as compared to the three months ended September
30, 2007. The primary factors of the change were as follows:
(i) Sales of our Piccolo chemistry analyzers in North America (excluding the U.S. government)
decreased 11%, or $176,000. The decrease was partially offset by an increase in sales of our
Piccolo chemistry analyzers to the U.S. government of 30%, or $93,000, primarily due to an increase
in the U.S. Militarys needs for these products, which were not predictable.
(ii) Sales of our VetScan chemistry analyzers in North America increased 34%, or $552,000,
primarily due to quality improvements on our analyzers.
(iii) Sales of our hematology instruments in North America decreased 40%, or $1.1 million,
primarily due to a shift in our sales and marketing focus to our VetScan chemistry analyzers and
reagent discs during the second quarter of fiscal 2009.
Reagent discs and kits. During the three months ended September 30, 2008, total revenues from
reagent discs and kits sold in North America increased 16%, or $2.0 million, as compared to the
three months ended September 30, 2007. The primary factors of the change were as follows:
(i) Medical reagent discs sales in North America (excluding the U.S. government) increased 36%, or
$800,000, primarily due to the expanded installed base of our Piccolo chemistry analyzers. The
increase was partially offset by a decrease in medical reagent discs sold to the U.S. government of
20%, or $119,000, which is based on the U.S. Militarys decreased needs for these products, which
were not predictable.
21
(ii) Veterinary reagent discs sales in North America increased 11%, or $1.0 million, primarily due
to the expanded installed base of
our VetScan chemistry analyzers and higher average selling prices.
(iii) Sales of our hematology reagent kits in North America increased 44%, or $361,000, primarily
due to an expanded installed base of our hematology instruments.
Other products. During the three months ended September 30, 2008, total revenues from other
products sold in North America decreased 17%, or $273,000, as compared to the three months ended
September 30, 2007. The net decrease in other products was primarily due to a decrease in demand
from Becton, Dickinson and Company for products using the Orbos Discrete Lyophilization Process,
which is based on seasonal demands.
Development and licensing. During the three months ended September 30, 2008, total revenues from
development and licensing in North America increased 65%, or $293,000, as compared to the three
months ended September 30, 2007. The increase from development and licensing revenue is primarily
due to a licensing agreement with Cepheid, related to our proprietary technology, the
Orbos® Discrete Lyophilization Process.
Significant concentration. One distributor in the United States, DVM Resources, accounted for 11%
and 13% of our total worldwide revenues for the three months ended September 30, 2008 and 2007,
respectively.
Europe. During the three months ended September 30, 2008, total revenues in Europe
increased 37%, or $1.2 million, as compared to the three months ended September 30, 2007.
Components of the change in Europe were as follows:
Instruments. During the three months ended September 30, 2008, total revenues from instruments
sold in Europe increased 13%, or $109,000, as compared to the three months ended September 30,
2007. The primary factors of the change were as follows:
(i) Sales of our Piccolo chemistry analyzers in Europe decreased 13%, or $38,000.
(ii) Sales of our VetScan chemistry analyzers in Europe increased 21%, or $91,000.
(iii) Sales of our hematology instruments in Europe increased 63%, or $56,000.
Reagent discs and kits. During the three months ended September 30, 2008, total revenues from
reagent discs and kits sold in Europe increased 45%, or $1.1 million, as compared to the three
months ended September 30, 2007. The primary factors of the change were as follows:
(i) Medical reagent discs sales in Europe decreased 15%, or $45,000.
(ii) Veterinary reagent discs sales in Europe increased 56%, or $1.1 million, primarily due to the
expanded installed base of our VetScan chemistry analyzers and higher
average selling prices.
(iii) Sales of our hematology reagent kits in Europe were substantially the same as in the three
months ended September 30, 2007.
Other products. During the three months ended September 30, 2008, total revenues from other
products sold in Europe were substantially the same as in the three months ended September 30,
2007.
Asia Pacific and rest of the world. During the three months ended September 30, 2008,
total revenues in Asia Pacific and rest of the world decreased 9%, or $81,000, as compared to the
three months ended September 30, 2007. Components of the change in Asia Pacific and rest of the
world were as follows:
Instruments. During the three months ended September 30, 2008, total revenues from instruments
sold in Asia Pacific and rest of the world decreased 7%, or $26,000, as compared to the three
months ended September 30, 2007. The primary factors of the change were as follows:
(i) Sales of our Piccolo chemistry analyzers in Asia Pacific and rest of the world increased 39%,
or $12,000.
(ii) Sales of our VetScan chemistry analyzers in Asia Pacific and rest of the world decreased 24%,
or $47,000.
(iii) Sales of our hematology instruments in Asia Pacific and rest of the world were substantially
the same as in the three months ended September 30, 2007.
22
Reagent discs and kits. During the three months ended September 30, 2008, total revenues from
reagent discs and kits sold in Asia Pacific and rest of the world decreased 10%, or $59,000, as
compared to the three months ended September 30, 2007. The primary factors of the change were as
follows:
(i) Medical reagent discs sales in Asia Pacific and rest of the world decreased 36%, or $15,000.
(ii) Veterinary reagent discs sales in Asia Pacific and rest of the world decreased 10%, or
$51,000.
(iii) Sales of our hematology reagent kits in Asia Pacific and rest of the world were substantially
the same as in the three months ended September 30, 2007.
Other products. During the three months ended September 30, 2008, total revenues from other
products sold in Asia Pacific and rest of the world were substantially the same as in the three
months ended September 30, 2007.
Six Months Ended September 30, 2008 Compared to Six Months Ended September 30, 2007
North America. During the six months ended September 30, 2008, total revenues in North
America increased 6%, or $2.5 million, as compared to the six months ended September 30, 2007.
Components of the change in North America were as follows:
Instruments. During the six months ended September 30, 2008, total revenues from instruments sold
in North America increased 6%, or $668,000, as compared to the six months ended September 30, 2007.
The primary factors of the change were as follows:
(i) Sales of our Piccolo chemistry analyzers to the U.S. government increased 212%, or $787,000,
primarily due to an increase in the U.S. Militarys needs for these products during the first
quarter of fiscal 2009, which were not predictable. Sales of our Piccolo chemistry analyzers in
North America (excluding the U.S. government) decreased 10%, or $326,000.
(ii) Sales of our VetScan chemistry analyzers in North America increased 38%, or $1.3 million,
primarily due to quality improvements on our analyzers.
(iii) Sales of our hematology instruments in North America decreased 25%, or $1.1 million,
primarily due to a shift in our sales and marketing focus to our VetScan chemistry analyzers and
reagent discs during the second quarter of fiscal 2009.
Reagent discs and kits. During the six months ended September 30, 2008, total revenues from
reagent discs and kits sold in North America increased 9%, or $2.1 million, as compared to the six
months ended September 30, 2007. The primary factors of the change were as follows:
(i) Medical reagent discs sales in North America (excluding the U.S. government) increased 43%, or
$1.7 million, primarily due to the expanded installed base of our Piccolo chemistry analyzers.
Medical reagent discs sold to the U.S. government were substantially the same as in the six months
ended September 30, 2007.
(ii) Veterinary
reagent discs sales in North America increased 1%, or $33,000,
primarily due to higher average selling prices, partially offset by a
decrease in units sold.
(iii) Sales
of our hematology reagent kits in North America increased 26%, or $404,000, primarily due to an expanded installed base of our hematology instruments.
Other products. During the six months ended September 30, 2008, total revenues from other products
sold in North America decreased 26%, or $864,000, as compared to the six months ended September 30,
2007. The net decrease in other products was primarily due to (i) an increase in maintenance
contracts offered to customers from time to time as incentives in the form of free goods in
connection with the sale of our products and (ii) a decrease in demand from Becton, Dickinson and
Company for products using the Orbos Discrete Lyophilization Process, which is based on seasonal
demands.
Development and licensing. During the six months ended September 30, 2008, total revenues from
development and licensing in North America increased 64%, or $589,000, as compared to the six
months ended September 30, 2007. The increase from development and licensing revenue is primarily
due to a licensing agreement with Cepheid, related to our proprietary technology, the
Orbos® Discrete Lyophilization Process.
Significant concentration. There were no distributors or direct customers that accounted for more
than 10% of our total worldwide revenues for the six months ended September 30, 2008. One
distributor in the United States, DVM Resources, accounted for 14% of our total worldwide revenues
for the six months ended September 30, 2007.
23
Europe. During the six months ended September 30, 2008, total revenues in Europe increased
24%, or $1.5 million, as compared to the six months ended September 30, 2007. Components of the
change in Europe were as follows:
Instruments. During the six months ended September 30, 2008, total revenues from instruments sold
in Europe decreased 1%, or $26,000, as compared to the six months ended September 30, 2007. The
primary factors of the change were as follows:
(i) Sales of our Piccolo chemistry analyzers in Europe decreased 4%, or $23,000.
(ii) Sales of our VetScan chemistry analyzers in Europe decreased 5%, or $73,000.
(iii) Sales of our hematology instruments in Europe increased 37%, or $70,000.
Reagent discs and kits. During the six months ended September 30, 2008, total revenues from
reagent discs and kits sold in Europe increased 39%, or $1.6 million, as compared to the six months
ended September 30, 2007. The primary factors of the change were as follows:
(i) Medical reagent discs sales in Europe increased 24%, or $128,000.
(ii) Veterinary reagent discs sales in Europe increased 42%, or $1.4 million, primarily due to the
expanded installed base of our VetScan chemistry analyzers and higher
average selling prices.
(iii) Sales of our hematology reagent kits in Europe were substantially the same as in the six
months ended September 30, 2007.
Other products. During the six months ended September 30, 2008, total revenues from other products
sold in Europe decreased 76%, or $45,000, as compared to the six months ended September 30, 2007.
Asia Pacific and rest of the world. During the six months ended September 30, 2008, total
revenues in Asia Pacific and rest of the world increased 6%, or $106,000, as compared to the six
months ended September 30, 2007. Components of the change in Asia Pacific and rest of the world
were as follows:
Instruments. During the six months ended September 30, 2008, total revenues from instruments sold
in Asia Pacific and rest of the world increased 23%, or $126,000, as compared to the six months
ended September 30, 2007. The primary factors of the change were as follows:
(i) Sales of our Piccolo chemistry analyzers in Asia Pacific and rest of the world increased 35%,
or $26,000.
(ii) Sales of our VetScan chemistry analyzers in Asia Pacific and rest of the world increased 19%,
or $50,000.
(iii) Sales of our hematology instruments in Asia Pacific and rest of the world increased 25%, or
$50,000.
Reagent discs and kits. During the six months ended September 30, 2008, total revenues from
reagent discs and kits sold in Asia Pacific and rest of the world decreased 2%, or $21,000, as
compared to the six months ended September 30, 2007. The primary factors of the change were as
follows:
(i) Medical reagent discs sales in Asia Pacific and rest of the world decreased 33%, or $31,000.
(ii) Veterinary reagent discs sales in Asia Pacific and rest of the world were substantially the
same as in the six months ended September 30, 2007.
(iii) Sales of our hematology reagent kits in Asia Pacific and rest of the world increased 37%, or
$23,000.
Other products. During the six months ended September 30, 2008, total revenues from other products
sold in Asia Pacific and rest of the world were substantially the same as in the six months ended
September 30, 2007.
24
Segment Results
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
The following table presents revenues, cost of revenues, gross profit and percent of revenues by
operating segments for the three months ended September 30, 2008 and 2007 (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
Increase/ |
|
|
Percent |
|
|
|
2008 |
|
|
Revenues(1) |
|
|
2007 |
|
|
Revenues(1) |
|
|
(Decrease) |
|
|
Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market |
|
$ |
6,015 |
|
|
|
100 |
% |
|
$ |
5,643 |
|
|
|
100 |
% |
|
$ |
372 |
|
|
|
7 |
% |
Percentage of total revenues |
|
|
22 |
% |
|
|
|
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Veterinary Market |
|
|
19,945 |
|
|
|
100 |
% |
|
|
17,989 |
|
|
|
100 |
% |
|
|
1,956 |
|
|
|
11 |
% |
Percentage of total revenues |
|
|
72 |
% |
|
|
|
|
|
|
72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Other(2) |
|
|
1,728 |
|
|
|
|
|
|
|
1,560 |
|
|
|
|
|
|
|
168 |
|
|
|
11 |
% |
Percentage of total revenues |
|
|
6 |
% |
|
|
|
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
27,688 |
|
|
|
|
|
|
|
25,192 |
|
|
|
|
|
|
|
2,496 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market |
|
|
2,775 |
|
|
|
46 |
% |
|
|
2,805 |
|
|
|
50 |
% |
|
|
(30 |
) |
|
|
(1 |
%) |
Veterinary Market |
|
|
8,020 |
|
|
|
40 |
% |
|
|
7,889 |
|
|
|
44 |
% |
|
|
131 |
|
|
|
2 |
% |
Other(2) |
|
|
1,551 |
|
|
|
|
|
|
|
641 |
|
|
|
|
|
|
|
910 |
|
|
|
142 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
12,346 |
|
|
|
|
|
|
|
11,335 |
|
|
|
|
|
|
|
1,011 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market |
|
|
3,240 |
|
|
|
54 |
% |
|
|
2,838 |
|
|
|
50 |
% |
|
|
402 |
|
|
|
14 |
% |
Veterinary Market |
|
|
11,925 |
|
|
|
60 |
% |
|
|
10,100 |
|
|
|
56 |
% |
|
|
1,825 |
|
|
|
18 |
% |
Other(2) |
|
|
177 |
|
|
|
|
|
|
|
919 |
|
|
|
|
|
|
|
(742 |
) |
|
|
(81 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
15,342 |
|
|
|
|
|
|
$ |
13,857 |
|
|
|
|
|
|
$ |
1,485 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The percentages reported are based on revenues by operating segment.
|
|
(2) |
|
Represents unallocated items, not specifically identified to any particular business segment. |
Medical Market
Revenues for Medical Market Segment
During the three months ended September 30, 2008, total revenues in the medical market increased
7%, or $372,000, as compared to the three months ended September 30, 2007. Components of the
change were as follows:
Instruments. Total revenues from sales of our Piccolo chemistry analyzers decreased 5%, or
$109,000, during the three months ended September 30, 2008, as compared to the three months ended
September 30, 2007. We sold a total of 167 Piccolo chemistry analyzers during the three months
ended September 30, 2008, as compared to 178 Piccolo chemistry analyzers sold during the three
months ended September 30, 2007. The changes in revenues were attributed to (a) a decrease in
revenues in North America (excluding the U.S. government) of 11%, or $176,000, and (b) a decrease
in revenues in Europe of 13%, or $38,000. The decrease was partially offset by (c) an increase in
Piccolo chemistry analyzers sold to the U.S. government of 30%, or $93,000, primarily due to an
increase in the U.S. Militarys needs for these products, which were not predictable, and (d) an
increase in revenues in Asia Pacific and rest of the world of 39%, or $12,000.
Reagent discs. Total revenues from reagent discs sold in the medical market increased 20%, or
$621,000, during the three months ended September 30, 2008, as compared to the three months ended
September 30, 2007. We sold 434,000 medical reagent discs during the three months ended September
30, 2008, as compared to 338,000 medical reagent discs sold during the three months ended September
30, 2007. The increase in revenues from medical reagent discs was primarily attributed to the
expanded installed base of our Piccolo chemistry analyzers and
included an increase in revenues in North America (excluding the U.S. government) of 36%, or
$800,000. This increase was partially offset by (a) a decrease in medical reagent discs sold to
the U.S. government of 20%, or $119,000, (b) a decrease in revenues in Europe of 15%, or $45,000,
and (c) a decrease in revenues in Asia Pacific and rest of the world of 36%, or $15,000.
Gross Profit for Medical Market Segment
Gross profit for the medical market segment increased 14%, or $402,000, during the three months
ended September 30, 2008, as compared to the three months ended September 30, 2007. Gross profit
percentages for the medical market segment during the three months ended September 30, 2008 and
2007 were 54% and 50%, respectively. In absolute dollars, the increase in gross profit for the
medical market segment was due to an increase in medical reagent discs sold during the three months
ended September 30, 2008.
25
Veterinary Market
Revenues for Veterinary Market Segment
During the three months ended September 30, 2008, total revenues in the veterinary market increased
11%, or $2.0 million, as compared to the three months ended September 30, 2007. Components of the
change were as follows:
Instruments. Total revenues from our veterinary instruments sold decreased 9%, or $461,000, during
the three months ended September 30, 2008, as compared to the three months ended September 30,
2007. We sold a total of 567 VetScan chemistry analyzers and hematology instruments during the
three months ended September 30, 2008, as compared to an aggregate of 593 veterinary instruments
sold during the three months ended September 30, 2007. The primary factors of the change were as
follows:
(i) Sales of our VetScan chemistry analyzers increased 26%, or $596,000, comprised of (a) an
increase in revenues in North America of 34%, or $552,000, primarily due to quality improvements on
our analyzers and (b) an increase in revenues in Europe of 21%, or $91,000. The increase was
partially offset by a decrease in revenues in Asia Pacific and rest of the world of 24%, or
$47,000.
(ii) Sales of our hematology instruments decreased 35%, or $1.1 million, comprised of a decrease in
revenues in North America of 40%, or $1.1 million, primarily due to a shift in our sales and
marketing focus to our VetScan chemistry analyzers and reagent discs during the second quarter of
fiscal 2009. The decrease was partially offset by an increase in revenues in Europe of 63%, or
$56,000. Hematology instruments sold in Asia Pacific and rest of the world were substantially the
same as in the three months ended September 30, 2007.
Reagent discs and kits. Total revenues from reagent discs and hematology reagent kits sold in the
veterinary market increased 19%, or $2.4 million, during the three months ended September 30, 2008,
as compared to the three months ended September 30, 2007. The primary factors of the change were
as follows:
(i) Total revenues from reagent discs sold in the veterinary market increased 18%, or $2.1 million,
during the three months ended September 30, 2008, as compared to the three months ended September
30, 2007. We sold 1.0 million veterinary reagent discs during the three months ended September 30,
2008, as compared to 906,000 veterinary reagent discs sold during the three months ended September
30, 2007. The increase in revenues from veterinary reagent discs was
primarily attributed to the expanded installed base of our VetScan
chemistry analyzers and higher average selling prices. The increase
was comprised of (a) an increase in revenues in North America of 11%, or $1.0 million
and (b) an increase in revenues in Europe of 56%, or $1.1 million. The increase was partially
offset by a decrease in revenues in Asia Pacific and rest of the world of 10%, or $51,000.
(ii) Total revenues from hematology reagent kits sold increased 40%, or $371,000, during the three
months ended September 30, 2008, as compared to the three months ended September 30, 2007. The
increase in revenues from hematology reagent kits was attributed to an increase in revenues in
North America of 44%, or $361,000, primarily due to an expanded installed base of our hematology
instruments. Hematology reagent kits sold in Europe and Asia Pacific and rest of the world were
substantially the same as in the three months ended September 30, 2007.
Gross Profit for Veterinary Market Segment
Gross profit for the veterinary market segment increased 18%, or $1.8 million, during the three
months ended September 30, 2008, as compared to the three months ended September 30, 2007. Gross
profit percentages for the veterinary market segment during the three months ended September 30,
2008 and 2007 were 60% and 56%, respectively. In absolute dollars, the increase in gross profit
for the veterinary market segment was due to (a) an increase in veterinary reagent discs and
hematology reagent kits sold during the three months ended September 30, 2008 and (b) higher
average selling prices on veterinary reagent discs sold during the three months ended September 30,
2008. The increase was partially offset by a decrease in hematology instruments sold during the
three months ended September 30, 2008.
26
Six Months Ended September 30, 2008 Compared to Six Months Ended September 30, 2007
The following table presents revenues, cost of revenues, gross profit and percent of revenues by
operating segments for the six months ended September 30, 2008 and 2007 (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
Increase/ |
|
|
Percent |
|
|
|
2008 |
|
|
Revenues(1) |
|
|
2007 |
|
|
Revenues(1) |
|
|
(Decrease) |
|
|
Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market |
|
$ |
12,544 |
|
|
|
100 |
% |
|
$ |
10,450 |
|
|
|
100 |
% |
|
$ |
2,094 |
|
|
|
20 |
% |
Percentage of total revenues |
|
|
24 |
% |
|
|
|
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Veterinary Market |
|
|
36,558 |
|
|
|
100 |
% |
|
|
34,425 |
|
|
|
100 |
% |
|
|
2,133 |
|
|
|
6 |
% |
Percentage of total revenues |
|
|
70 |
% |
|
|
|
|
|
|
72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Other(2) |
|
|
3,158 |
|
|
|
|
|
|
|
3,248 |
|
|
|
|
|
|
|
(90 |
) |
|
|
(3 |
%) |
Percentage of total revenues |
|
|
6 |
% |
|
|
|
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
52,260 |
|
|
|
|
|
|
|
48,123 |
|
|
|
|
|
|
|
4,137 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market |
|
|
5,808 |
|
|
|
46 |
% |
|
|
5,248 |
|
|
|
50 |
% |
|
|
560 |
|
|
|
11 |
% |
Veterinary Market |
|
|
14,847 |
|
|
|
41 |
% |
|
|
14,848 |
|
|
|
43 |
% |
|
|
(1 |
) |
|
|
<(1 |
%) |
Other(2) |
|
|
2,760 |
|
|
|
|
|
|
|
1,154 |
|
|
|
|
|
|
|
1,606 |
|
|
|
139 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
23,415 |
|
|
|
|
|
|
|
21,250 |
|
|
|
|
|
|
|
2,165 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market |
|
|
6,736 |
|
|
|
54 |
% |
|
|
5,202 |
|
|
|
50 |
% |
|
|
1,534 |
|
|
|
29 |
% |
Veterinary Market |
|
|
21,711 |
|
|
|
59 |
% |
|
|
19,577 |
|
|
|
57 |
% |
|
|
2,134 |
|
|
|
11 |
% |
Other(2) |
|
|
398 |
|
|
|
|
|
|
|
2,094 |
|
|
|
|
|
|
|
(1,696 |
) |
|
|
(81 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
28,845 |
|
|
|
|
|
|
$ |
26,873 |
|
|
|
|
|
|
$ |
1,972 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The percentages reported are based on revenues by operating segment. |
|
(2) |
|
Represents unallocated items, not specifically identified to any particular business segment. |
Medical Market
Revenues for Medical Market Segment
During the six months ended September 30, 2008, total revenues in the medical market increased 20%,
or $2.1 million, as compared to the six months ended September 30, 2007. Components of the change
were as follows:
Instruments. Total revenues from sales of our Piccolo chemistry analyzers increased 11%, or
$464,000, during the six months ended September 30, 2008, as compared to the six months ended
September 30, 2007. We sold a total of 375 Piccolo chemistry analyzers during the six months ended
September 30, 2008, as compared to 355 Piccolo chemistry analyzers sold during the six months ended
September 30, 2007. The changes in revenues were attributed to (a) an increase in Piccolo
chemistry analyzers sold to the U.S. government of 212%, or $787,000, primarily due to an increase
in the U.S. Militarys needs for these products during the first quarter of fiscal 2009, which were
not predictable and (b) an increase in revenues in Asia Pacific and rest of the world of 35%, or
$26,000. The increase was partially offset by (c) a decrease in revenues in North America
(excluding the U.S. government) of 10%, or $326,000 and (d) a decrease in revenues in Europe of 4%,
or $23,000.
Reagent discs. Total revenues from reagent discs sold in the medical market increased 32%, or $1.8
million, during the six months ended September 30, 2008, as compared to the six months ended
September 30, 2007. We sold 838,000 medical reagent discs during the six months ended September
30, 2008, as compared to 612,000 medical reagent discs sold during the six months ended September
30, 2007. The changes in revenues from medical reagent discs was primarily attributed to the
expanded installed base of our Piccolo chemistry analyzers and consisted of (a) an increase in
revenues in North America (excluding the U.S. government) of 43%, or $1.7 million and (b) an
increase in revenues in Europe of 24%, or $128,000. The increase was partially offset by a
decrease in revenues in Asia Pacific and rest of the world of 33%, or $31,000. Medical reagent
discs sold to the U.S. government were substantially the same as in the six months ended September
30, 2007.
Gross Profit for Medical Market Segment
Gross profit for the medical market segment increased 29%, or $1.5 million, during the six months
ended September 30, 2008, as compared to the six months ended September 30, 2007. Gross profit
percentages for the medical market segment during the six months ended September 30, 2008 and 2007
were 54% and 50%, respectively. In absolute dollars, the increase in gross profit for the medical
market segment was due to an increase in medical reagent discs sold during the six months ended
September 30, 2008.
27
Veterinary Market
Revenues for Veterinary Market Segment
During the six months ended September 30, 2008, total revenues in the veterinary market increased
6%, or $2.1 million, as compared to the six months ended September 30, 2007. Components of the
change were as follows:
Instruments. Total revenues from our veterinary instruments sold increased 3%, or $304,000, during
the six months ended September 30, 2008, as compared to the six months ended September 30, 2007.
We sold a total of 1,163 VetScan chemistry analyzers and hematology instruments during the six
months ended September 30, 2008, as compared to an aggregate of 1,093 veterinary instruments sold
during the six months ended September 30, 2007. The primary factors of the change were as follows:
(i) Sales of our VetScan chemistry analyzers increased 25%, or $1.2 million, comprised of (a) an
increase in revenues in North America of 38%, or $1.3 million, primarily due to quality
improvements on our analyzers and (b) an increase in revenues in Asia Pacific and rest of the world
of 19%, or $50,000. The increase was partially offset by a decrease in revenues in Europe of 5%,
or $73,000.
(ii) Sales of our hematology instruments decreased 20%, or $935,000, comprised of a decrease in
revenues in North America of 25%, or $1.1 million, primarily due to a shift in our sales and
marketing focus to our VetScan chemistry analyzers and reagent discs during the second quarter of
fiscal 2009. The decrease was partially offset by (a) an increase in revenues in Europe of 37%, or
$70,000 and (b) an increase in revenues in Asia Pacific and rest of the world of 25%, or $50,000.
Reagent discs and kits. Total revenues from reagent discs and hematology reagent kits sold in the
veterinary market increased 8%, or $1.9 million, during the six months ended September 30, 2008, as
compared to the six months ended September 30, 2007. The primary factors of the change were as
follows:
(i) Total revenues from reagent discs sold in the veterinary market increased 6%, or $1.5 million,
during the six months ended September 30, 2008, as compared to the six months ended September 30,
2007. We sold 1.8 million veterinary reagent discs during the six months ended September 30, 2008
and 2007, respectively. The increase in revenues from veterinary reagent discs was comprised of the following: (a) an increase in
revenues in North America of 1%, or $33,000, primarily due to higher
average selling prices, partially offset by a decrease in units sold, and (b) an increase in revenues in Europe of 42%, or
$1.4 million, primarily due to the expanded installed base of
our VetScan chemistry analzyers and higher average selling prices. Veterinary reagent discs sales in Asia Pacific and rest of the world were
substantially the same as in the six months ended September 30, 2007.
(ii) Total revenues from hematology reagent kits sold increased 25%, or $431,000, during the six
months ended September 30, 2008, as compared to the six months ended September 30, 2007. The
increase in revenues from hematology reagent kits was attributed to (a) an increase in revenues in
North America of 26%, or $404,000, primarily due to an expanded installed base of our hematology instruments, and (b) an increase in revenues in Asia Pacific and rest of the
world of 37%, or $23,000. Hematology reagent kits sold in Europe were substantially the same as in
the six months ended September 30, 2007.
Gross Profit for Veterinary Market Segment
Gross profit for the veterinary market segment increased 11%, or $2.1 million, during the six
months ended September 30, 2008, as compared to the six months ended September 30, 2007. Gross
profit percentages for the veterinary market segment during the six months ended September 30, 2008
and 2007 were 59% and 57%, respectively. In absolute dollars, the increase in gross profit for the
veterinary market segment was due to (a) an increase in Vetscan chemistry analyzers and hematology
reagent kits sold during the six months ended September 30, 2008 and (b) higher average selling
prices on veterinary reagent discs sold during the six months ended September 30, 2008. The
increase in gross profit was offset by a decrease in hematology instruments sold during the six
months ended September 30, 2008.
Cost of Revenues
The following sets forth our cost of revenues for the periods indicated (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
Percent |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
Change |
|
Cost of revenues |
|
$ |
12,346 |
|
|
$ |
11,335 |
|
|
$ |
1,011 |
|
|
|
9 |
% |
|
$ |
23,415 |
|
|
$ |
21,250 |
|
|
$ |
2,165 |
|
|
10 |
% |
Percentage of total revenues |
|
|
45 |
% |
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
45 |
% |
|
|
44 |
% |
|
|
|
|
|
|
|
|
28
Cost of revenues includes the costs associated with manufacturing, assembly, packaging, warranty
repairs, test and quality assurance for our instruments, reagent discs and hematology reagent kits
and manufacturing overhead, including costs of personnel and equipment associated with
manufacturing support.
Three and Six Months Ended September 30, 2008 Compared to Three and Six Months Ended September 30,
2007
The increase in cost of revenues, in absolute dollars, during the three months ended September 30,
2008, as compared to the three months ended September 30, 2007, was primarily due to an increase in
the sales volume of medical and veterinary reagent discs and hematology reagent kits during the
three months ended September 30, 2008. The increase was partially offset by a decrease in
hematology instruments sold during the three months ended September 30, 2008.
The increase in cost of revenues, in absolute dollars, during the six months ended September 30,
2008, as compared to the six months ended September 30, 2007, was primarily due to an increase in
the sales volume of medical reagent discs, Vetscan chemistry analyzers and hematology reagent kits
during the six months ended September 30, 2008. The increase was partially offset by a decrease in
hematology instruments sold during the six months ended September 30, 2008.
Operating Expenses
Research and Development
The following sets forth our research and development expenses for the periods indicated (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
Percent |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
Change |
|
Research and development
expenses |
|
$ |
2,082 |
|
|
$ |
1,822 |
|
|
$ |
260 |
|
|
|
14 |
% |
|
$ |
4,079 |
|
|
$ |
3,475 |
|
|
$ |
604 |
|
|
|
17 |
% |
Percentage of total revenues |
|
|
8 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
8 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
Research and development expenses consist of personnel costs (including salaries, benefits and
share-based compensation expense), consulting expenses and materials and related expenses
associated with the development of new tests and test methods, clinical trials, product
improvements and enhancement of existing products.
Three and Six Months Ended September 30, 2008 Compared to Three and Six Months Ended September 30,
2007
The increase in research and development expenses, in absolute dollars, during the three and six
months ended September 30, 2008, as compared to the three and six months ended September 30, 2007,
was primarily due to new product development and enhancement of existing products and clinical
trials. Research and development expenses are based on the project activities planned and the
level of spending depends on budgeted expenditures. The projects primarily relate to new product
development in both the medical and veterinary markets and costs related to compliance with FDA
regulations and clinical trials. Share-based compensation expense during the three months ended
September 30, 2008 and 2007 was $53,000 and $36,000, respectively, and during the six months ended
September 30, 2008 and 2007 was $114,000 and $71,000, respectively.
We anticipate the dollar amount of research and development expenses to increase in fiscal 2009
from fiscal 2008 but remain consistent as a percentage of total revenues, as we complete new
products for both the medical and veterinary markets. There can be no assurance, however, that we
will undertake such research and development activities in future periods or, if we do, that such
activities will be successful.
Sales and Marketing
The following sets forth our sales and marketing expenses for the periods indicated (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
Percent |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
Change |
|
Sales and marketing expenses |
|
$ |
6,494 |
|
|
$ |
6,381 |
|
|
$ |
113 |
|
|
|
2 |
% |
|
$ |
12,321 |
|
|
$ |
11,610 |
|
|
$ |
711 |
|
|
|
6 |
% |
Percentage of total revenues |
|
|
23 |
% |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
24 |
% |
|
|
24 |
% |
|
|
|
|
|
|
|
|
29
Sales and marketing expenses consist of personnel costs (including salaries, benefits and
share-based compensation expense), commissions and travel-related expenses for personnel engaged in
selling, costs associated with advertising, lead generation, marketing programs, trade shows and
services related to customer and technical support.
Three and Six Months Ended September 30, 2008 Compared to Three and Six Months Ended September 30,
2007
The increase in sales and marketing expenses, in absolute dollars, during the three and six months
ended September 30, 2008, as compared to the three and six months ended September 30, 2007, was
primarily due to personnel-related costs resulting from an increase in headcount in various
divisions including sales and marketing, customer service and technical service, to support the
growth in both our medical and veterinary markets. Share-based compensation expense during the
three months ended September 30, 2008 and 2007 was $121,000 and $88,000, respectively, and during
the six months ended September 30, 2008 and 2007 was $258,000 and $168,000, respectively.
General and Administrative
The following sets forth our general and administrative expenses for the periods indicated (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
Percent |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
Change |
|
General and administrative expenses |
|
$ |
1,952 |
|
|
$ |
1,538 |
|
|
$ |
414 |
|
|
|
27 |
% |
|
$ |
3,614 |
|
|
$ |
3,189 |
|
|
$ |
425 |
|
|
|
13 |
% |
Percentage of total revenues |
|
|
7 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
7 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
General and administrative expenses consist of personnel costs (including salaries, benefits and
share-based compensation expense), and expenses for outside professional services related to
general corporate functions, including accounting, human resources and legal.
Three and Six Months Ended September 30, 2008 Compared to Three and Six Months Ended September 30,
2007
The increase in general and administrative expenses, in absolute dollars, during the three and six
months ended September 30, 2008, as compared to the three and six months ended September 30, 2007,
was primarily due to an increase in personnel-related costs, which includes share-based
compensation expense. Share-based compensation expense during the three months ended September 30,
2008 and 2007 was $220,000 and $130,000, respectively, and during the six months ended September
30, 2008 and 2007 was $388,000 and $252,000, respectively.
Interest and Other Income (Expense), Net
The following sets forth our interest and other income (expense), net, for the periods indicated
(in thousands, except percentages):
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Three Months Ended |
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Six Months Ended |
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September 30, |
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Change |
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|
September 30, |
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Change |
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Increase/ |
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Percent |
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Increase/ |
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Percent |
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2008 |
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2007 |
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|
(Decrease) |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
Change |
|
Interest and other income (expense), net |
|
$ |
326 |
|
|
$ |
529 |
|
|
$ |
(203 |
) |
|
|
(38 |
)% |
|
$ |
788 |
|
|
$ |
1,028 |
|
|
$ |
(240 |
) |
|
|
(23 |
)% |
Interest and other income (expense), net, consists primarily of interest income earned on cash,
cash equivalents and short-term and long-term investments.
Three and Six Months Ended September 30, 2008 Compared to Three and Six Months Ended September 30,
2007
The decrease in interest and other income (expense), net, during the three and six months ended
September 30, 2008, as compared to the three and six months ended September 30, 2007, was primarily
attributed to lower interest yields in our investment portfolio compared to the same period in
fiscal 2008.
Income Tax Provision
The following sets forth our income tax provision for the periods indicated (in thousands, except
percentages):
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|
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|
|
Three Months Ended |
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|
Six Months Ended |
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|
|
September 30, |
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|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Income tax provision |
|
$ |
1,843 |
|
|
$ |
1,757 |
|
|
$ |
3,546 |
|
|
$ |
3,641 |
|
Effective tax rate |
|
|
36 |
% |
|
|
38 |
% |
|
|
37 |
% |
|
|
38 |
% |
30
Three and Six Months Ended September 30, 2008 Compared to Three and Six Months Ended September 30,
2007
During the three and six months ended September 30, 2008, our effective tax rate included a tax
benefit for federal qualified production activities, included a tax benefit for tax-exempt
investments and excluded a tax benefit for the federal research and development tax credit as a
result of the expiration of the credit effective for qualifying research and development expenses
incurred after December 31, 2007. During the three and six months ended September 30, 2007, our
effective tax rate included a tax benefit for tax-exempt investments and a tax benefit for federal
research and development tax credits attributable to qualifying research and development expenses
incurred before December 31, 2007.
We did not have any unrecognized tax benefits as of September 30, 2008 or September 30, 2007.
During the three and six months ended September 30, 2008 and 2007, we did not recognize any
interest and penalties related to unrecognized tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
Total cash, cash equivalents and short-term and long-term investments at September 30, 2008 and
March 31, 2008 were as follows (in thousands, except percentages):
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|
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|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2008 |
|
|
2008 |
|
Cash and cash equivalents |
|
$ |
34,572 |
|
|
$ |
17,219 |
|
Short-term investments |
|
|
34,998 |
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|
|
6,991 |
|
Long-term investments |
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|
|
|
|
|
35,463 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and investments |
|
$ |
69,570 |
|
|
$ |
59,673 |
|
|
|
|
|
|
|
|
Percentage of total assets |
|
|
53 |
% |
|
|
49 |
% |
|
|
|
|
|
|
|
Cash Flow Changes
Cash provided by (used in) the six months ended September 30, 2008 and 2007 were as follows (in
thousands):
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|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Net cash provided by operating activities |
|
$ |
6,706 |
|
|
$ |
6,546 |
|
Net cash provided by (used in) investing activities |
|
|
7,496 |
|
|
|
(7,563 |
) |
Net cash provided by financing activities |
|
|
3,151 |
|
|
|
1,654 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
17,353 |
|
|
$ |
637 |
|
|
|
|
|
|
|
|
At September 30, 2008, we had net working capital of $99.0 million compared to $52.5 million at
March 31, 2008. Cash and cash equivalents at September 30, 2008 were $34.6 million, compared to
$17.2 million at March 31, 2008. The increase in cash and cash equivalents during the six months
ended September 30, 2008 was primarily due to net cash provided by operating activities of income
of $6.7 million and proceeds from redemptions of $8.6 million of investments in auction rate
securities, partially offset by purchases of property and equipment of $1.1 million.
Operating Activities
During the six months ended September 30, 2008, we generated $6.7 million in cash from operating
activities. The cash provided by operating activities during the six months ended September 30,
2008 was primarily the result of net income of $6.1 million, adjusted for the effects of non-cash
adjustments including depreciation and amortization of $2.1 million, share-based compensation
expense of $835,000 and deferred income taxes of $2.3 million, partially offset by a decrease of
$3.1 million related to excess tax benefits from share-based awards.
Other changes in operating activities during the six months ended September 30, 2008 were as
follows:
(i) Net trade receivables increased by $740,000, from $20.9 million at March 31, 2008 to $21.6
million as of September 30, 2008, primarily due to higher sales in the last month of the quarter
ended September 30, 2008.
(ii) Net inventories decreased by $1.1 million, from $18.7 million at March 31, 2008 to $17.6
million as of September 30, 2008, primarily due to (a) improvements in the quality of the parts
from suppliers and (b) transfer to property and equipment to support
our sales and marketing activities.
(iii) Prepaid expenses increased by $666,000, from $427,000 at March 31, 2008 to $1.1 million as of
September 30, 2008, primarily due to the timing of payments.
31
(iv) Current net deferred tax asset increased by $778,000, from $2.4 million at March 31, 2008 to
$3.2 million as of September 30, 2008, primarily as a result of certain operating expenses
recognized in the six months ended September 30, 2008 which are currently non-deductible for tax
purposes and an increase in California research and development tax credits carryovers.
(v) Accounts payable decreased by $1.5 million, from $6.4 million at March 31, 2008 to $5.0 million
as of September 30, 2008, primarily due to the timing and payment of services and inventory
purchases.
(vi) Accrued payroll and related expenses decreased by $46,000, from $4.3 million at March 31, 2008
to $4.2 million as of September 30, 2008.
(vii) Other accrued liabilities increased by $943,000, from $1.4 million at March 31, 2008 to $2.3
million as of September 30, 2008, primarily due to an increase in income taxes payable at September
30, 2008.
(viii) Total deferred revenue increased by $420,000, resulting from an increase in the current
portion of deferred revenue of $127,000, from $807,000 at March 31, 2008 to $934,000 as of
September 30, 2008, and an increase in the non-current portion of deferred revenue of $293,000,
from $1.1 million at March 31, 2008 to $1.4 million as of September 30, 2008, primarily due to an
increase in maintenance contracts offered to customers from time to time as incentives in the form
of free goods in connection with the sale of our products.
(ix) Total warranty reserves increased by $294,000, resulting from an increase in the current
portion of warranty reserves of $398,000, from $1.2 million at March 31, 2008 to $1.6 million as of
September 30, 2008, partially offset by a decrease in the non-current portion of warranty reserves
of $104,000, from $729,000 at March 31, 2008 to $625,000 as of September 30, 2008. The net change
in warranty reserves is based on (a) the number of instruments in standard warranty and estimated
repair costs and (b) an estimate of defective reagent discs and replacement costs.
We anticipate that we will incur incremental additional costs to support our future operations,
including further additional pre-clinical testing and clinical trials for our current and future
products; research and design costs related to the continuing development of our current and future
products; and acquisition of capital equipment for our manufacturing facility, which includes the
ongoing costs related to the continuing development of our current and future products.
Investing Activities
Net cash provided by investing activities during the six months ended September 30, 2008 totaled
$7.5 million, compared to net cash used in investing activities of $7.6 million during the six
months ended September 30, 2007. Changes in investing activities were as follows:
Investments. Cash used to purchase certificate of deposits totaled $7.1 million during the six
months ended September 30, 2008. Cash provided by proceeds from (a) maturities of certificate of
deposits and municipal bonds totaled $7.1 million and (b) redemptions of auction rate securities
totaled $8.6 million during the six months ended September 30, 2008. For a discussion regarding
the liquidity of our auction rate securities, see Notes 3 and 4 of the Notes to the Condensed
Consolidated Financial Statements (Unaudited).
Property and Equipment. Cash used to purchase property and equipment totaled $1.1 million during
the six months ended September 30, 2008, primarily to support (a) sales and marketing activities
and (b) more efficient production lines. We anticipate that we will continue to purchase property
and equipment necessary in the normal course of our business.
Financing Activities
Net cash provided by financing activities during the six months ended September 30, 2008 totaled
$3.2 million, primarily consisting of $3.1 million related to excess tax benefits from share-based
awards and $341,000 related to proceeds from stock options exercised, partially offset by the
payment of income withholding taxes of $275,000 due upon vesting of restricted stock units.
Line of Credit
We have a line of credit with Comerica Bank-California which provides for borrowings of up to $2.0
million. The line of credit may be terminated upon notification by either party and any
outstanding balance is payable upon demand. The line of credit bears interest at the banks prime
rate minus 0.25%, which totaled 4.75% at September 30, 2008, and is payable monthly. At September
30, 2008, of the $2.0 million available, $97,000 was committed to secure a letter of credit for our
facilities lease. At September 30, 2008, there was no amount outstanding under our line of credit.
The weighted average interest rates on the line of credit during the three months ended September
30, 2008 and 2007 were 4.75% and 7.93%, respectively.
32
The line of credit agreement contains certain financial covenants, which are evaluated on a
quarterly basis. At September 30, 2008, we were in compliance with each of these covenants.
Included in these financial covenants, among other stipulations, are the following requirements:
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|
We must have a minimum net income of $25,000 before preferred stock dividends and accretion
on preferred stock in any three quarters of a fiscal year, provided that any loss before
preferred stock dividends and accretion on preferred stock incurred in the remaining quarter
is not to exceed $250,000. |
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|
We are required to be profitable, as defined, on a fiscal year to date basis beginning,
with respect to the current fiscal year, with the six month period ended September 30, 2008
and to have net income before preferred stock dividends and accretion on preferred stock of at
least $1.2 million for the fiscal year ending March 31, 2009. |
|
|
|
We are required to comply with certain financial covenants as follows: |
|
|
|
Financial Covenants |
|
Requirements |
Quick ratio, as defined
|
|
Not less than 2.00 to 1.00 |
Cash flow coverage, as defined
|
|
Not less than 1.25 to 1.00 |
Debt to net worth ratio, as defined
|
|
Not greater than 1.00 to 1.00 |
Tangible effective net worth, as defined
|
|
Not less than $25.7 million |
Borrowings under the line of credit are collateralized by our net book value of assets of $115.7
million at September 30, 2008, including our intellectual property.
Purchase Commitments
A discussion of our amended original equipment manufacturing agreement with Diatron Messtechnik
GmbH is included in the Notes to the Condensed Consolidated Financial Statements (Unaudited).
Contingencies
We are involved from time to time in various litigation matters in the normal course of business.
While the outcome of these proceedings and claims cannot be predicted with certainty, we do not
believe that the ultimate resolution of these matters will have a material effect on our financial
position or results of operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Financial Condition
We anticipate that our existing capital resources, available line of credit and anticipated revenue
from the sales of our products will be adequate to satisfy our currently planned operating and
financial requirements through at least the next 12 months. Our future capital requirements will
largely depend upon the increased market acceptance of our point-of-care blood analyzer products.
However, our sales for any future periods are not predictable with a significant degree of
certainty. Regardless, we may seek to raise additional funds to pursue strategic opportunities.
RECENT ACCOUNTING PRONOUNCEMENTS
A discussion of recent accounting pronouncements is included in Note 2 of the Notes to the
Condensed Consolidated Financial Statements (Unaudited).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to the impact of interest rate changes with respect to our short-term and long-term
investments and line of credit.
Our investment portfolio is typically comprised of investments in auction rate securities,
certificate of deposits, corporate debt securities or municipal bonds.
Our investment objective is to invest excess cash in cash equivalents and in various types of
investments to maximize yields without significantly increased risk. At September 30, 2008, our
short-term investments totaled $35.0 million, consisting of certificate of deposits and auction
rate securities. At September 30, 2008, we had unrealized loss, net of related income taxes of
$393,000, which were temporary and reported as a component of accumulated other comprehensive loss.
During the first six months of fiscal 2009, we redeemed $8.6 million of our auction rate
securities at 100% of par value.
33
In September 2008, the bank where our auction rate securities are held reached agreements with the
Financial Industry Regulatory Authority, the State of Michigan Attorney General and the Michigan
Office of Financial and Insurance Regulation regarding the repurchase of auction rate securities.
In October 2008, we received a commitment from our bank with regard to the repurchase of all of our
auction rate securities. We expect the bank to repurchase all of the remaining balance of our
auction rate securities during the third quarter of fiscal 2009, however, there is no assurance
that any of the auction rate securities in our portfolio will be redeemed at par value in the
future, or at all. Additionally, there is no assurance as to when the market for auction rate
securities will stabilize. The fair value of the Companys auction rate securities could change
significantly based on market conditions and continued uncertainties in the credit markets.
However, based on our ability to access our cash and other short-term investments and our expected
operating cash flows, we currently do not anticipate these investments in auction rate securities
will affect our ability to execute our current business, operating results or financial condition.
We have the ability to hold the certificate of deposits in our investment portfolio at September
30, 2008 until maturity and therefore, we believe we have no material exposure to interest rate
risk. A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to our
total investment balances at September 30, 2008 indicated that such market movement would not have
a material effect on our business, operating results or financial condition. We have not
experienced any significant loss on our investment portfolio.
For our line of credit, which provides for borrowings of up to $2.0 million, the interest rate is
equal to the banks prime rate minus 0.25%, which totaled 4.75% at September 30, 2008.
Consequently, an increase in the prime rate would expose us to higher interest expenses. A
sensitivity analysis assuming a hypothetical 10% movement in the prime rate applied to our line of
credit balance at September 30, 2008 indicated that such market movement would not have a material
effect on our business, operating results or financial condition, as there was no amount
outstanding on our line of credit at September 30, 2008.
As a matter of management policy, we do not currently enter into transactions involving derivative
financial instruments. In the event we do enter into such transactions in the future, such items
will be accounted for in accordance with Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities.
Foreign Currency Rate Fluctuations
We operate primarily in the United States and a majority of our revenues, cost of revenues,
operating expenses and capital purchasing activities for the six months ended September 30, 2008
were transacted in U.S. dollars. However, we are exposed to foreign currency exchange rate
fluctuations on the hematology instruments and hematology reagent kits purchased from Diatron
Messtechnik GmbH, which are primarily denominated in Euros.
In the first quarter of fiscal 2009, operations from our Germany sales office, which have not been
significant to date, were stated in Euros and translated into U.S. dollars at the period-end
exchange rates. On July 1, 2008, the Germany sales office was incorporated as Abaxis Europe GmbH
to market, promote and distribute diagnostic systems for medical and veterinary uses. Abaxis
Europe GmbH is our wholly-owned subsidiary and its functional currency is in U.S. dollars. The
period-end translation of the non-functional currency assets and liabilities (primarily assets and
liabilities on our subsidiarys condensed balance sheet that are not denominated in U.S. dollars)
at the period-end exchange rates resulted in foreign currency gains and losses, which were included
in our Condensed Consolidated Statements of Operations in Interest and other income (expense),
net.
To the extent the U.S. dollar strengthens against the Euro currency, the translation of the foreign
currency denominated transactions may result in reduced cost of revenues and operating expenses.
Similarly, our cost of revenues and operating expenses will increase if the U.S. dollar weakens
against the Euro currency.
Other than the foregoing, there have been no material changes in our market risk during the three
months ended September 30, 2008 compared to the disclosures in Part II, Item 7A of our Annual
Report on Form 10-K for the fiscal year ended March 31, 2008.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on our managements evaluation, with the participation of our principal executive officer and
principal financial officer, as of the end of the period covered by this report, our principal
executive officer and principal financial officer have concluded that our disclosure controls and
procedures (which are defined under Securities and Exchange Commission rules as controls and other
procedures of a company that are designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Securities Exchange Act of 1934, as
amended, (the Exchange Act) is recorded, processed, summarized and reported within required time
periods), were effective as of September 30, 2008.
34
Changes in Internal Control over Financial Reporting
On July 1, 2008, our sales office in Darmstadt, Germany was incorporated as Abaxis Europe GmbH. As
a result, Abaxis Europe GmbH became a wholly-owned subsidiary of Abaxis. In connection with this
incorporation, we transitioned the responsibilities of financial reporting and sales order
processing for all sales of our products in Europe to our subsidiary and incorporate the financial
data from our subsidiary into our consolidated financial statements. These changes were effective
beginning with our financial reporting for the fiscal quarter ended September 30, 2008. These
changes were not made in response to any material weakness or significant deficiency in our
internal controls.
Except as noted above, there was no other change in our internal control over financial reporting
during the quarter ended September 30, 2008 that has materially
affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
Inherent Limitations on Controls and Procedures
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risks
that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Accordingly, even an effective system
of internal control will provide only reasonable assurance that the objectives of the internal
control system are met.
Item 4T. Controls and Procedures
Not applicable.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are involved from time to time in various litigation matters in the normal course of business.
We do not believe that the ultimate resolution of these matters will have a material effect on our
financial position or results of operations.
Item 1A. Risk Factors
RISK FACTORS THAT MAY AFFECT OUR PERFORMANCE
Our future performance is subject to a number of risks. If any of the following risks actually
occur, our business could be harmed and the trading price of our common stock could decline.
When used in these risk factors, the words anticipates, believes, continue, could,
estimates, expects, future, intends, may, might, plans, projects, will and
similar expressions identify forward-looking statements. Our actual results could differ
materially from those that we project in the forward-looking statements as a result of factors that
we have set forth throughout this document as well as factors of which we are currently not aware.
In evaluating our business, you should carefully consider the following risks in addition to the
other information in our Annual Report on Form 10-K for the fiscal year ended March 31, 2008 as
filed with the Securities and Exchange Commission on June 13, 2008. We note these factors for
investors as permitted by the Private Securities Litigation Reform Act of 1995. It is not possible
to predict or identify all such factors and, therefore, you should not consider the following risks
to be a complete statement of all the potential risks or uncertainties that we face.
We are not able to predict sales in future quarters and a number of factors affect our periodic
results, which makes our quarterly operating results less predictable.
We are not able to accurately predict our sales in future quarters. Our revenue in the medical and
veterinary markets is derived primarily by selling to distributors who resell our products to the
ultimate user. While we are better able to predict sales of our reagent discs, as we sell these
discs primarily for use with blood chemistry analyzers that we sold in prior periods, we generally
are unable to predict with much certainty sales of our blood chemistry analyzers, as we typically
sell our blood chemistry analyzers to new users. Accordingly, our sales in any one quarter are not
indicative of our sales in any future period.
35
We generally operate with a limited order backlog, because we ship our products shortly after we
receive the orders from our customers. As a result, our product sales in any quarter are generally
dependent on orders that we receive and ship in that quarter. We base our expense levels, which
are to a large extent fixed, in part on our expectations as to future revenues. We may be unable
to reduce our spending in a timely manner to compensate for any unexpected revenue shortfall. As a
result, any such shortfall would immediately materially and adversely impact our operating results
and financial condition.
The sales cycle for our products can fluctuate, which may cause revenue and operating results to
vary significantly from period to period. We believe this fluctuation is due primarily to (i)
seasonal patterns in the decision making processes by our independent distributors and direct
customers, (ii) inventory or timing considerations by our distributors and (iii) on the purchasing
requirements of the U.S. Military to acquire our products. Accordingly, we believe that period to
period comparisons of our results of operations are not necessarily meaningful.
In the future, our periodic operating results may vary significantly depending on, but not limited
to, a number of factors, including:
|
|
new product announcements made by us or our competitors; |
|
|
|
changes in our pricing structures or the pricing structures of our competitors; |
|
|
|
our ability to develop, introduce and market new products on a timely basis; |
|
|
|
our manufacturing capacities and our ability to increase the scale of these capacities; |
|
|
|
the mix of product sales between our blood chemistry analyzers and our reagent disc
products; |
|
|
|
the amount we spend on research and development; and |
|
|
|
changes in our strategy. |
We would fail to achieve anticipated revenue if the market does not accept our products.
We believe that our core compact blood chemistry analyzer product differs substantially from
current blood chemistry analyzers on the market. Our primary competition is from centralized
laboratories that offer a greater number of tests than our products, but do so at a greater overall
cost and require more time. We also compete with other point-of-care analyzers that cost more,
require more maintenance and offer a narrower range of tests. However, these point-of-care
analyzers are generally marketed by larger companies which have greater resources for sales and
marketing, in addition to a recognized brand name and established distribution relationships.
In the human medical market, we have relatively limited experience in large-scale sales of our
Piccolo blood chemistry analyzers. Although we believe that our blood chemistry analyzers offer
consumers many advantages, including substantial cost savings according to our analyses, in terms
of implementation of the actual product, these advantages involve changes to current standard
practices, such as using large clinical laboratories that will require changes in both the
procedures and mindset of care providers. The human medical market in particular is highly
regulated, structured, difficult to penetrate and often slow to adopt new product offerings. If we
are unable to convince large numbers of medical clinics, hospitals and other point-of-care
environments of the benefits of our Piccolo blood chemistry analyzers and our other products, we
will suffer lost sales and could fail to achieve anticipated revenue.
Historically, in the veterinary market, we have marketed our VetScan systems through both direct
sales and distribution channels to veterinarians. We continue to develop new animal blood tests to
expand and we cannot be assured that these tests will be accepted by the veterinary market.
We could fail to achieve anticipated revenue if problems related to the manufacture of our new
blood chemistry analyzers are not resolved.
We manufacture our blood chemistry analyzers at our manufacturing facility in Union City,
California. During fiscal 2008, we experienced problems related to the manufacture of our new
blood chemistry analyzer, which are primarily related to difficulties and delays in obtaining
certain key components that we purchase from various suppliers. These manufacturing problems were
primarily related to quality control issues for key components that we obtain from our suppliers
and to design issues of the key components required in our blood chemistry analyzer. Our
difficulties in obtaining an adequate amount of quality components for the manufacture of our blood
chemistry analyzer had a materially adverse impact on our sales of Vetscan chemistry analyzers in
fiscal 2008. We have taken, and are continuing to take, steps to resolve these issues, including
securing quality parts from our suppliers, but there can be no assurance that our efforts to
resolve these manufacturing difficulties will be successful or that similar
manufacturing problems will not arise. If we do not continue to resolve these manufacturing
problems on our new blood chemistry analyzer or prevent similar problems in the future, we may not
be able to manufacture sufficient quantities to meet anticipated demand and, therefore, will not be
able to effectively market and sell our new blood chemistry analyzer; accordingly, our revenue and
business would be materially adversely affected.
36
We have invested a significant portion of our cash in auction rate securities, the market for which
is currently illiquid. Funds associated with certain of our auction rate securities may not be
accessible for an undetermined period of time and our auction rate securities may experience an
other than temporary decline in value, which would adversely affect our statement of operations.
Our investment portfolio includes auction rate securities that are structured with short-term
interest rate reset dates of generally less than 30 days, but with contractual maturities that can
be well in excess of ten years or may never mature. At the end of each reset period, which occurs
ranging from every seven to 28 days, depending on the security, investors can sell or continue to
hold the securities at par value. This mechanism has historically provided a liquid market for
these securities. However, the recent negative conditions in the global credit markets have
prevented some investors from liquidating their holdings of auction rate securities because the
amount of securities submitted for sale has exceeded the amount of purchase orders for such
securities. At September 30, 2008, we held $28.4 million par value of our investments in auction
rate securities for which the auctions had been unsuccessful. At September 30, 2008, the fair
value of these auction rate securities was $28.0 million. An auction failure, which is not a
default in the underlying debt instrument, occurs when there are more sellers than buyers at a
scheduled interest rate auction date and parties desiring to sell their securities are unable to do
so. If the credit market does not improve, auctions for our invested amounts may continue to fail.
If an auction fails for securities in which we have invested, we may be unable to liquidate some
or all of our auction rate securities at par value, should we need or desire to access the funds invested
in those securities. In the event we need or desire to access these funds, we will not be able to
do so until a future auction on these investments is successful or a buyer is found outside the
auction process. If a buyer is found but is unwilling to purchase the investments at par value, we
may incur a loss. Furthermore, if the issuers of the auction rate securities are unable to
successfully complete future auctions and their credit ratings deteriorate, we may be required to
adjust the carrying value of these investments by recording an impairment charge.
In September 2008, the bank where our auction rate securities are held reached agreements with the
Financial Industry Regulatory Authority, the State of Michigan Attorney General and the Michigan
Office of Financial and Insurance Regulation regarding the repurchase of auction rate securities.
In October 2008, we received a commitment from our bank with regard to the repurchase of all of our
auction rate securities. Accordingly, we reclassified our auction rate securities as short-term
investments at September 30, 2008 on our balance sheet because we expect the bank to repurchase all
of the remaining balance of our auction rate securities during the third quarter of fiscal 2009.
During the six months ended September 30, 2008, $8.6 million of our auction rate securities were
redeemed at 100% of par value. However, there is no assurance that any of the remaining auction
rate securities in our portfolio will be redeemed at 100% of par value in the future, or at all.
Additionally, there is no assurance as to when the market for auction rate securities will
stabilize. The fair value of our auction rate securities could change significantly based on
market conditions and continued uncertainties in the credit markets. If conditions in the credit
markets deteriorate further causing additional auctions to fail, the funds associated with these
auction rate securities may also not be accessible for an undetermined period of time, and we may
be required to record losses or an impairment charge on our auction rate securities portfolio in
future quarters, which would harm our financial condition.
We rely on patents and other proprietary information, the loss of which would negatively affect our
business.
As of September 30, 2008, 38 patent applications have been filed on our behalf with the United
States Patent and Trademark Office (USPTO), of which 30 patents have been issued and 29 patents
are currently active. Additionally, we have filed several international patent applications
covering the same subject matter as our domestic applications. The patent position of any medical
device manufacturer, including us, is uncertain and may involve complex legal and factual issues.
Consequently, we may not be issued any additional patents, either domestically or internationally.
Furthermore, our patents may not provide significant proprietary protection because there is a
chance that they will be circumvented or invalidated. We cannot be certain that we were the first
creator of the inventions covered by our issued patents or pending patent applications, or that we
were the first to file patent applications for these inventions, because (1) the USPTO maintains
all patent applications that are not filed in any foreign jurisdictions in secrecy until it issues
the patents (unless a patent application owner files a request for publication) and (2)
publications of discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months. We may have to participate in interference proceedings, which are
proceedings in front of the USPTO, to determine who will be issued a patent. These proceedings
could be costly and could be decided against us.
We also rely upon copyrights, trademarks and unpatented trade secrets. Others may independently
develop substantially equivalent proprietary information and techniques that would undermine our
proprietary technologies. Further, others may gain access to our trade secrets or disclose such
technology. Although we require our employees, consultants and advisors to execute agreements that
require that our corporate information be kept confidential and that any inventions by these
individuals are property of Abaxis, there can be no assurance that these agreements will provide
meaningful protection or adequate remedies for our trade secrets in the
event of unauthorized use or disclosure of such information. The unauthorized dissemination of our
confidential information would negatively impact our business.
37
We must increase sales of our Piccolo and VetScan products or we may not be able to maintain
profitability.
As of September 30, 2008, we had retained earnings of $3.1 million. Our ability to continue to be
profitable will depend, in part, on our ability to increase our sales volumes of our Piccolo and
VetScan products. Increasing the sales volume of our products will depend upon, among other
things, our ability to:
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continue to improve our existing products and develop new and innovative products; |
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increase our sales and marketing activities; |
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effectively manage our manufacturing activities; and |
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effectively compete against current and future competitors. |
We cannot assure you that we will be able to successfully increase our sales volumes of our
products to sustain profitability.
We must continue to develop our sales, marketing and distribution experience in the human
diagnostic market or our business will not grow.
Although we have gained experience marketing our VetScan products in the veterinary diagnostic
market, we have limited sales, marketing and distribution experience with our Piccolo chemistry
analyzers in the human diagnostic market. Accordingly, we cannot assure you that:
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we will be able to establish and maintain effective distribution arrangements in the human
diagnostic market; |
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any distribution arrangements that we are able to establish will be successful in marketing
our products; or |
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the costs associated with sales, marketing and distributing our products will not be
excessive. |
Should we fail to effectively develop our sales, marketing and distribution efforts, our growth
will be limited and our results of operations will be adversely affected.
We may inadvertently produce defective products, which may subject us to significant warranty
liabilities or product liability claims and we may have insufficient product liability insurance to
pay material uninsured claims.
Our business exposes us to potential warranty and product liability risks which are inherent in the
testing, manufacturing and marketing of human and veterinary medical products. We strive to apply
sophisticated methods to raw materials and produce defect-free medical test equipment. Although we
have established procedures for quality control on both the raw materials that we receive from
suppliers and our manufactured final products, these procedures may prove inadequate to detect a
defect that occurs in limited quantities, that we have not anticipated or otherwise. Our Piccolo
and VetScan chemistry analyzers may be unable to detect all errors which could result in the
misdiagnosis of human or veterinary patients.
Should we inadvertently manufacture and ship defective products, we may be subject to substantial
claims under our warranty policy or product liability laws. In addition, our policy is to credit
medical providers for any defective product that we produce, including those reagent discs that are
rejected by our Piccolo and VetScan chemistry analyzers. Therefore, even if a mass defect within a
lot or lots of reagent discs were detected by our Piccolo and VetScan chemistry analyzers, the
replacement of such reagent discs free of charge would be costly and could materially harm our
financial condition. Further, in the event that a product defect is not detected in our Piccolo
chemistry analyzer, our relatively recent expansion into the human medical market greatly increases
the risk that the amount of damages involved with just one product defect would be material to our
operations. We currently maintain limited product liability insurance that we believe is adequate
for our current needs, taking into account the risks involved and cost of coverage. However, our
product liability insurance and cash may be insufficient to cover potential liabilities. In
addition, in the future the coverage that we require may be unavailable on commercially reasonable
terms, if at all. Even with our current insurance coverage, a mass product defect, product
liability claim or recall could subject us to claims above the amount of our coverage and would
materially adversely affect our business and our financial condition.
38
We must effectively train and integrate the members of our sales team in order to achieve our
anticipated revenue or expand our business.
As of September 30, 2008, we had 76 full-time sales personnel directly involved in our sales and
marketing activities, many of whom have been employed by us for a limited period of time. In
addition, we experience significant turnover in our sales and marketing personnel. If we are to
increase our direct sales, we will need to train new sales personnel and supervise them closely.
We also will continue hiring additional sales personnel. If we are unable to retain our existing
personnel, or attract and train additional qualified personnel, our growth may be limited due to
our lack of resources to market our products.
We need to successfully manufacture and market additional reagent discs for the human diagnostic
market if we are to compete in that market.
We have developed a blood analysis system that consists of a portable blood analyzer and single-use
reagent discs. Each reagent disc performs a series of standard blood tests. We believe that it is
necessary to develop additional series of reagent discs with various tests for use with the Piccolo
and VetScan chemistry analyzers. Historically, we have developed reagent discs suitable for the
human medical and veterinary diagnostic markets. We have received 510(k) clearances from the U.S.
Food and Drug Administration (FDA) for 25 test methods in the human medical market. These tests
are included in standard tests for which the medical community receives reimbursements from
third-party payors such as HMOs and Medicare. We may not be able to successfully manufacture or
market these reagent discs. Our failure to meet these challenges will materially adversely affect
our operating results and financial condition.
We rely primarily on distributors to sell our products and we rely on sole distributor arrangements
in a number of countries. Our failure to successfully develop and maintain these relationships
could adversely affect our business.
We sell our medical and veterinary products primarily through a limited number of distributors. As
a result, we are dependent upon these distributors to sell our products and to assist us in
promoting and creating a demand for our products. We operate on a purchase order basis with the
distributors and the distributors are under no contractual obligation to continue carrying our
products. Further, many of our distributors may carry our competitors products, and may promote
our competitors products over our own products.
We depend on a number of distributors in the United States who distribute our VetScan products.
Our largest distributor in the United States, DVM Resources, accounted for 11% and 13% of our total
worldwide revenues for the three months ended September 30, 2008 and 2007, respectively. During
the six months ended September 30, 2008, there were no distributors or direct customers that
accounted for more than 10% of total worldwide revenues. One distributor, DVM Resources accounted
for 14% of our total worldwide revenues for the six months ended September 30, 2007. We depend on
our distributors to assist us in promoting our products in the veterinary market, and accordingly,
if one or more of our distributors were to stop selling our products in the future, we may
experience a sharp decline or delay in our sales revenue.
In the United States medical market, we depend on a few distributors for our Piccolo products. We
entered into formal distribution agreements with the following distributors to sell and market
Piccolo chemistry analyzers and medical reagent discs: National Distribution & Contracting, Inc.
in our third quarter of fiscal 2008, McKesson Medical-Surgical Inc. in our first quarter of fiscal
2008, Cardinal Health in our fourth quarter of fiscal 2007, Henry Scheins Medical Group in our
first quarter of fiscal 2007 and PSS World Medical, Inc. in our third quarter of fiscal 2006. We
depend on these distributors to assist us in promoting market acceptance of our Piccolo chemistry
analyzers.
Internationally, we rely on only a few distributors for our products in both the medical and
veterinary diagnostic markets. In the first quarter of fiscal 2008 we terminated our distributor
agreement with T. Chatani & Co., Ltd. (T. Chatani) in Japan. T. Chatani had agreed to continue
to service Abaxis customers, which included selling our reagent discs and hematology reagent kits,
for a limited period, which ended during the fourth quarter of fiscal 2008. In October 2007, we
signed an exclusive distribution agreement with Central Scientific Commerce, Inc. (CSC) to
distribute the complete line of our medical and veterinary products in Japan. In the third quarter
of fiscal 2008, CSC began the process of registering our new instruments, the VetScan VS2, VetScan
HM5 and Piccolo xpress in Japan. The registration process was completed in the first quarter of
fiscal 2009, and consequently, CSC can begin to import and market our instruments along with our
reagent discs and kits. However, we cannot assure you that our new distribution relationship with
CSC will be as successful as our prior distribution arrangement, or at all. Furthermore, an
inability of, or any delays by, our distributor in receiving the necessary approvals for our new or
other products can adversely impact our revenues in Japan.
39
We currently rely on distributors that carry either our medical or veterinary products in the
following countries: Australia, Austria, Bahrain, Belgium, Canada, Czech Republic, Denmark,
France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Korea, Macao, the Netherlands, New
Zealand, the Philippines, Portugal, Romania, Russia, Singapore, South Africa, Spain, Sweden,
Switzerland, Turkey, Ukraine, the United Arab Emirates, the United Kingdom and the United States.
Our distributors in each of these countries are responsible for obtaining the necessary approvals
to sell our new and existing products. These distributors may not be successful in obtaining
proper approvals for our new and existing products in their respective countries, and they may not
be successful in marketing our products. We plan to continue to enter into additional distributor
relationships to expand our international distribution base and solidify our international
presence. However, we may not be successful in entering into additional distributor relationships
on favorable terms, or at all. In addition, our distributors may terminate their relationship with
us at any time. Historically, we have experienced a high degree of turnover among our
international distributors. This turnover makes it difficult for us to establish a steady
distribution network overseas. Consequently, we may not be successful in marketing our Piccolo and
VetScan products internationally.
We depend on limited or sole suppliers for several key components in our products, many of whom we
have not entered into contractual relationships with and failure of our suppliers to provide the
components to us could harm our business.
We use several key components that are currently available from limited or sole sources as
discussed below:
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Reagent Discs: Two injection-molding manufacturers, C. Brewer & Co. and Nypro, Inc.,
currently make the molded plastic discs which, when loaded with reagents and welded together,
form our reagent disc products. We believe that only a few manufacturers are capable of
producing these discs to the narrow tolerances that we require. To date, we have only
qualified these two manufacturers to manufacture the molded plastic discs. |
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Reagent Chemicals: We currently depend on the following single source vendors for some of
the chemicals that we use to produce the dry reagent chemistry beads that are either inserted
in our reagent discs or sold as stand-alone products: Amano Enzyme USA Co., Ltd., Genzyme
Corporation, Kikkoman Corporation Biochemical Division, Microgenics Corporation, Roche
Molecular Biochemicals of Roche Diagnostics Corporation, a division of F. Hoffmann-La Roche,
Ltd., Toyobo Specialties (formerly Shinko American Inc.) and Sigma Aldrich Inc. |
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Blood Chemistry Analyzer Components: Our blood analyzer products use several
technologically-advanced components that we currently purchase from a limited number of
vendors, including components from Hamamatsu Corporation and PerkinElmer, Inc. and components
from a single-source supplier, UDT Sensors (a division of OSI Optoelectronics). Our analyzers
also use a printer that is primarily made by Seiko North America Corporation. The loss of the
supply of any of these components could force us to redesign our blood chemistry analyzers. |
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Hematology Instruments and Reagents: Our hematology instruments are manufactured by
Diatron Messtechnik GmbH in Hungary and are purchased by us as a completed instrument. In
addition, to date, we have qualified only three suppliers to produce the reagents for our
hematology instruments: Clinical Diagnostic Solutions, Inc., Diatron and Mallinckrodt Baker
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We operate on a purchase order basis with all of the suppliers of our molded plastic reagent discs,
reagent chemicals, blood chemistry analyzer components, hematology instruments and hematology
reagents and, therefore, these suppliers are under no contractual obligation to supply us with
their products or to do so at specified prices. Although we believe that there may be potential
alternate suppliers available for these critical components, to date we have not qualified
additional vendors beyond those referenced above and cannot assure you we would be able to enter
into arrangements with additional vendors on favorable terms, or at all.
Because we are dependent on a limited number of suppliers and manufacturers for critical components
to our products, we are particularly susceptible to any interruption in the supply of these
products or the viability of our assembly arrangements. The loss of any one of these suppliers or
a disruption in our manufacturing arrangements could materially adversely affect our business and
financial condition.
We may not be able to compete effectively with larger, more established entities or their products,
or with future organizations or future products, which could cause our sales to decline.
Blood analysis is a well-established field in which there are a number of competitors that have
substantially greater financial resources and larger, more established marketing, sales and service
organizations than we do. We compete with the following organizations:
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commercial clinical laboratories; |
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hospitals clinical laboratories; and |
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manufacturers of bench top multi-test blood analyzers and other testing systems that health
care providers can use on-site (a listing of our competitors is listed below). |
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Historically, hospitals and commercial laboratories performed most human diagnostic testing, and
commercial laboratories performed most veterinary medical testing. We have identified five
principal factors that we believe customers typically use to evaluate our products and those of our
competitors. These factors include:
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range of tests offered; |
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immediacy of results; |
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cost effectiveness; |
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ease of use; and |
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reliability of results. |
We believe that we compete effectively on each of these factors except for the range of tests
offered. Clinical laboratories are effective at processing large panels of tests using skilled
technicians and complex equipment. While our current offering of reagent discs cannot provide the
same broad range of tests, we believe that in certain markets our products provide a sufficient
breadth of test menus to compete successfully with clinical laboratories given the advantages of
our products with respect to the other four factors. In addition, we cannot assure you that we
will continue to be able to compete effectively on cost effectiveness, ease of use, immediacy of
results or reliability of results. We also cannot assure you that we will ever be able to compete
effectively on the basis of range of tests offered.
Competition in the human and veterinary diagnostic markets is intense. Our principal competitors
in the human diagnostic market are Alfa Wassermann S.P.A., i-STAT Corporation (which was purchased
by Abbott Laboratories), Johnson & Johnson (including its subsidiary, Ortho-Clinical Diagnostics,
Inc.), Kodak (DT60 analyzer), Polymedco, Inc. and F. Hoffman-La Roche (Reflotron system). Our
principal competitors in the veterinary diagnostic market are Idexx Laboratories, Inc. and Heska
Corporation. Most of our competitors have significantly larger product line offering and greater
financial and other resources than we do. In particular, many of our competitors have large sales
forces and well-established distribution channels. Consequently, we must develop our distribution
channels and significantly improve our direct sales force in order to compete in these markets.
Changes in third-party payor reimbursement regulations can negatively affect our business.
By regulating the maximum amount of reimbursement they will provide for blood testing services,
third-party payors, such as HMOs, pay-per-service insurance plans, Medicare and Medicaid, can
indirectly affect the pricing or the relative attractiveness of our human testing products. For
example, the Centers for Medicare and Medicaid Services (the CMS) set the level of reimbursement
of fees for blood testing services for Medicare beneficiaries. If third-party payors decrease the
reimbursement amounts for blood testing services, it may decrease the amount that physicians and
hospitals are able to charge patients for such services. Consequently, we would need to charge
less for our products. If the government and third-party payors do not provide for adequate
coverage and reimbursement levels to allow health care providers to use our products, the demand
for our products will decrease.
We are subject to numerous governmental regulations and regulatory changes are difficult to predict
and may be damaging to our business.
Need for FDA Certification for Our Medical Device Products
Our Piccolo products are regulated under the 1976 Medical Device Amendments to the Food, Drug and
Cosmetic Act, which is administered by the FDA. The FDA has classified our Piccolo products as
Class I and Class II devices. These classifications require us to submit to the FDA a
pre-market notification form or 510(k). The FDA uses the 510(k) to substantiate product claims
that are made by medical device manufacturers prior to marketing. In our 510(k) notification, we
must, among other things, establish that the product we plan to market is substantially
equivalent to (1) a product that was on the market prior to the adoption of the 1976 Medical
Device Amendment or (2) a product that the FDA has previously cleared under the 510(k) process.
The FDA review process of a 510(k) notification can last anywhere from three to six months, and the
FDA must issue a written order finding substantial equivalence before a company can market a
medical device. As of September 30, 2008, we have received market clearance from the FDA for our
Piccolo chemistry analyzer and 25 reagent tests that we have on 13 reagent discs. We are currently
developing additional tests that we will have to clear with the FDA through the 510(k) notification
procedures. These new test products are crucial for our success in the human medical market. If
we do not receive 510(k) clearance for a particular product, we will not be able to market that
product in the United States, which could harm our future sales.
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Need to Comply with Manufacturing Regulations
The 1976 Medical Device Amendment also requires us to manufacture our Piccolo products in
accordance with Good Manufacturing Practices guidelines. Current Good Manufacturing Practice
requirements are set forth in the 21 CFR 820 Quality System Regulation. These requirements
regulate the methods used in, and the facilities and controls used for the design, manufacture,
packaging, storage, installation and servicing of our medical devices intended for human use. Our
manufacturing facility is subject to periodic inspections. In addition, various state regulatory
agencies may regulate the manufacture of our products. To date, we have complied with the
following federal, state, local and international regulatory requirements:
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In April 2001, the State of California Food and Drug Branch granted our manufacturing
facility in compliance status, based on the regulations for Good Manufacturing Practices for
medical devices. |
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In May 2001, the State of California Food and Drug Branch granted licensing for our
manufacturing facility in Union City, California. |
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In May 2002, we received our ISO 9001 certification, expanding our compliance with
international quality standards. |
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In December 2003, we received ISO 13485 Quality System certification as required by the
2003 European In Vitro Device Directive. This certified our quality system specifically to
medical devices. |
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In both March 2003 and September 2005, the FDA conducted a facility inspection and verified
our compliance with the 21 CFR 820 Regulation. |
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In November 2006, we received our recertification to the ISO 13485:2003 Quality System
Standard for medical devices. |
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In August 2008, the FDA conducted an additional facility inspection to verify our
compliance with 21 CFR 820 Regulation. |
We cannot assure you that we will successfully pass the latest FDA inspection or any re-inspection
by the FDA or the State of California. In addition, we cannot assure you that we can comply with
all current or future government manufacturing requirements and regulations. If we are unable to
comply with the regulations, or if we do not pass routine inspections, our business and results of
operations will be materially adversely affected.
Effects of the Clinical Laboratory Improvement Amendments on Our Products
Our Piccolo products are also affected by the Clinical Laboratory Improvement Amendments (the
CLIA) of 1988. The CLIA are intended to insure the quality and reliability of all medical
testing in the United States regardless of where the tests are performed. The current CLIA
regulations divide laboratory tests into the following three categories:
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waived; |
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moderately complex; and |
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highly complex. |
Many of the tests performed using the Piccolo chemistry analyzer are in the moderately complex
category. This category requires that any location in which testing is performed be certified as a
laboratory. Hence, we can only sell some Piccolo products to customers who meet the standards of a
laboratory. To receive laboratory certification, a testing facility must be certified by the
CMS. After the testing facility receives a laboratory certification, it must then meet the CLIA
regulations. Because we can only sell some Piccolo products to testing facilities that are
certified laboratories, the market for some products is correspondingly constrained.
We can currently offer the following Piccolo reagent discs as waived tests to the medical market:
Basic Metabolic Panel, Comprehensive Metabolic Panel, Electrolyte Panel, General Chemistry 6,
General Chemistry 13, Kidney Check, Lipid Panel, Lipid Panel Plus and Liver Panel Plus. Waived
status permits untrained personnel to run the Piccolo chemistry analyzer using these tests; thus,
extending the sites (doctors offices and other point-of-care environments) that can use the
Piccolo chemistry analyzer. Although we are engaged in an active program to test and apply for
CLIA waivers for additional analytes, we cannot assure you that we will successfully receive CLIA
waived status from the FDA for other products. Consequently, for the reagent discs that have not
received CLIA waived status, the market for our Piccolo products may be confined to those testing
facilities that are certified as laboratories and our growth can be limited accordingly.
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Need to Comply with Various Federal, State, Local and International Regulations
Federal, state, local and international regulations regarding the manufacture and sale of health
care products and diagnostic devices may change. In addition, as we continue to sell in foreign
markets, we may have to obtain additional governmental clearances in those markets. Foreign
certifications that we have received include the following, among others:
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In December 2003, we received certification from the British Standards Institute to the ISO
13485:1996 quality system standard for medical devices. This quality system certification,
along with successful completion of product testing to 2003 European standards and the
translation of Piccolo product documentation into the required languages, enabled us to meet
the compliance requirements of the CE Mark and the 2003 European In Vitro Device Directive. |
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In September 2005, we received the Canadian Medical Device Conformity Assessment System
stamp on our ISO 13485 certificate to signify compliance with Health Canada regulations. |
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In March 2006, we received our certification to the 2003 version of the ISO 13485 Quality
System Standard for medical devices. |
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In November 2006, we received our recertification to the ISO 13485:2003 Quality System
Standard for medical devices. |
We cannot predict what impact, if any, such current or future regulatory changes would have on our
business. We may not be able to obtain regulatory clearances for our products in the United States
or in foreign markets, and the failure to obtain these regulatory clearances will materially
adversely affect our business and results of operations.
Although we believe that we will be able to comply with all applicable regulations of the FDA and
of the State of California, including the Quality System Regulation, current regulations depend on
administrative interpretations. Future interpretations made by the FDA, CMS or other regulatory
bodies may adversely affect our business.
We have incurred and may continue to incur, in future periods, significant share-based compensation
charges under SFAS No. 123(R), which may adversely affect our reported financial results.
Effective April 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (SFAS No. 123(R)), issued by the Financial Accounting Standards
Board, which requires the measurement of all share-based payments to employees, using a
fair-value-based method and the recording of such expense in our results of operations. The fair
value of restricted stock unit awards used in our expense recognition method is measured based on
the number of shares granted and the closing market price of our common stock on the date of grant.
Such value is recognized as an expense, net of an estimated forfeiture rate, for those shares
expected to vest over the corresponding requisite service period. Our policy is to recognize the
expense of restricted stock unit grants based on the vested portions of the awards. Since fiscal
2007, we granted restricted stock unit awards annually to employees based on the following
time-based vesting schedule over a four-year period: five percent vesting after the first year;
additional ten percent after the second year; additional 15 percent after the third year; and the
remaining 70 percent after the fourth year of continuous employment. During fiscal 2007, 2008 and
the first six months of fiscal 2009, share-based compensation expense related to restricted stock
units had a material impact on our earnings per share and on our financial statements and we expect
that it will continue to adversely impact our reported results of operations, particularly in the
fourth year of vesting for the restricted stock unit awarded to employees. As of September 30,
2008, our unrecognized compensation expense related to restricted stock unit awards granted to
employees and directors to date totaled $13.5 million, which is expected to be recognized over a
weighted average period of 2.64 years.
We depend on key members of our management and scientific staff and, if we fail to retain and
recruit qualified individuals, our ability to execute our business strategy and generate sales
would be harmed.
We are highly dependent on the principal members of our management and scientific staff. The loss
of any of these key personnel, including in particular Clinton H. Severson, our President, Chief
Executive Officer and Chairman of our Board of Directors, might impede the achievement of our
business objectives. We may not be able to continue to attract and retain skilled and experienced
marketing, sales and manufacturing personnel on acceptable terms in the future because numerous
medical products and other high technology companies compete for the services of these qualified
individuals. We currently do not maintain key man life insurance on any of our employees.
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We are subject to increasingly complex requirements from recent legislation requiring companies to
evaluate internal control over financial reporting.
Rules adopted by the Securities and Exchange Commission pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002 require an assessment of internal control over financial reporting by
our management and an attestation of the effectiveness of our internal controls over financial
reporting by an independent registered public accounting firm. We have an ongoing program to
perform the assessment, testing and evaluation to comply with these requirements and we expect to
continue to incur significant expenses to Section 404 compliance on an ongoing basis.
Our management assessed the effectiveness of our internal control over financial reporting as of
our fiscal years ended March 31, 2008 and 2007. Although we received an unqualified opinion on our
financial statements for the fiscal years ended March 31, 2008 and 2007, and on the effectiveness
of our internal control over financial reporting as of March 31, 2008 and 2007, we cannot predict
the outcome of our testing in future periods. In the event that our internal controls over
financial reporting are not effective as defined under Section 404, or any failure to implement
required new or improved controls, or difficulties encountered in implementation could harm
operating results or prevent us from accurately reporting financial results or cause a failure to
meet our reporting obligations in the future. If management cannot assess internal control over
financial reporting is effective, or our independent registered public accounting firm is unable to
provide an unqualified attestation report on such assessment, investor confidence and our share
value may be negatively impacted.
We may need additional funding in the future and these funds may not be available to us.
We believe that our existing capital resources, available line of credit and anticipated revenue
from the sales of our products will be adequate to satisfy our currently planned operating and
financial requirements through the next 12 months, although no assurances can be given. The terms
of our line of credit contain a number of covenants concerning financial tests that we must meet,
and these tests are more fully explained under the subheading Managements Discussion and Analysis
of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q.
Further, we expect to incur incremental additional costs to support our future operations,
including:
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further commercialization of our products and development of new test methods to allow us
to further penetrate the human diagnostic market and the veterinary diagnostic market; |
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our need to acquire capital equipment for our manufacturing facilities, which includes the
ongoing costs related to the continuing development of our current and future products; |
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research and design costs related to the continuing development of our current and future
products; and |
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additional pre-clinical testing and clinical trials for our current and future products. |
To the extent that our existing resources and anticipated revenue from the sale of our products are
insufficient to fund our activities or if we are unable to meet the financial covenants of our line
of credit, we may have to raise additional funds from the issuance of public or private securities.
In the event that we cannot maintain compliance with these financial covenants, we may also be
subject to increased interest rate expenses. We may not be able to raise additional funding, or if
we are able to, we may not be able to raise funding on acceptable terms. We may also dilute
then-existing shareholders if we raise additional funds by issuing new equity securities.
Alternately, we may have to relinquish rights to certain of our technologies, products and/or sales
territories if we are required to obtain funds through arrangements with collaborative partners.
If we are unable to raise needed funds, we may be required to curtail our operations significantly.
This would materially adversely affect our operating results and financial condition.
We must comply with strict and potentially costly environmental regulations or we could pay
significant fines.
We are subject to stringent federal, state and local laws, rules, regulations and policies that
govern the use, generation, manufacture, storage, air emission, effluent discharge, handling and
disposal of certain materials and wastes. In particular, we are subject to laws, rules and
regulations governing the handling and disposal of biohazardous materials used in the development
and testing of our products. We handle and dispose of human and veterinary blood samples for
testing (whole blood, plasma, serum), which cost approximately $90,000 in fiscal 2008, and includes
other environmental health and safety expenses to comply with applicable environmental regulations.
Although we believe that we have complied with applicable laws and regulations in all material
respects and have not been required to take any action to correct any noncompliance, we may have to
incur significant costs to comply with environmental regulations if our manufacturing to commercial
levels continues to increase. In addition, if a government agency determines that we have not
complied with these laws, rules and regulations, we may have to pay significant fines and/or take
remedial action that would be expensive and we do not carry environmental-related insurance
coverage.
44
Our facilities and manufacturing operations are vulnerable to natural disasters and other
unexpected losses; system failures or delays may harm our business.
Our success depends on the efficient and uninterrupted operation of our manufacturing operations,
which are co-located with our corporate headquarters in Union City, California. A failure of
manufacturing operations, be it in the development and manufacturing of our Piccolo or VetScan
blood chemistry analyzers or the reagent discs used in the blood chemistry analyzers, could result
in our inability to supply customer demand.
We do not have a backup facility to provide redundant manufacturing capacity in the event of a
system failure. Accordingly, if our location in Union City, California experienced a system
failure or regulatory problem that temporarily shuts down our manufacturing facility, our
manufacturing ability would become unavailable until we were able to bring an alternative facility
online, a process which could take several weeks or even months. These manufacturing operations
are also vulnerable to damage from earthquakes, fire, floods, power loss, telecommunications
failures, break-ins and similar events. Although we carry property and business interruption
insurance, our coverage may not be adequate to compensate us for all losses that may occur.
Additionally, our computer servers may be vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions.
Fluctuations in foreign exchange rates and the possible lack of financial stability in foreign
countries could prevent overseas sales growth.
Our international sales are currently primarily U.S. dollar-denominated. As a result, an increase
in the value of the U.S. dollar relative to foreign currencies could make our products less
competitive in international markets. For the limited amount of our sales denominated in local
currencies, we are subject to fluctuations in exchange rates between the U.S. dollar and the
particular local currency. Our operating results could also be adversely affected by the
seasonality of international sales and the economic conditions of our overseas markets.
Our operating results could be materially affected by unanticipated changes in our tax provisions
or exposure to additional income tax liabilities.
Our determination of our tax liability (like any companys determination of its tax liability) is
subject to review by applicable tax authorities. Any adverse outcome of such a review could have
an adverse effect on our operating results and financial condition. In addition, the determination
of our provision for income taxes and other tax liabilities requires significant judgment including
our determination of whether a valuation allowance against deferred tax assets is required.
Although we believe our estimates and judgments are reasonable, the ultimate tax outcome may differ
from the amounts recorded in our financial statements and may materially affect our financial
results in the period or periods for which such determination is made.
Our stock price is highly volatile and investing in our stock involves a high degree of risk, which
could result in substantial losses for investors.
The market price of our common stock, like the securities of many other medical products companies,
fluctuates over a wide range, and will continue to be highly volatile in the future. During the
quarter ended September 30, 2008, the closing sale prices of our common stock on the NASDAQ Global
Market ranged from $18.45 to $24.25 per share and the closing sale price for our quarter ended
September 30, 2008 was $19.70 per share. During the last eight fiscal quarters ended September 30,
2008, our stock price closed at a high of $39.74 on December 24, 2007 and a low of $17.00 on
January 25, 2007. Many factors may affect the market price of our common stock, including:
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fluctuation in our operating results; |
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announcements of technological innovations or new commercial products by us or our
competitors; |
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changes in governmental regulation in the United States and internationally; |
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prospects and proposals for health care reform; |
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governmental or third-party payors controls on prices that our customers may pay for our
products; |
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developments or disputes concerning our patents or our other proprietary rights; |
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product liability claims and public concern as to the safety of our devices or similar
devices developed by our competitors; and |
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general market conditions. |
45
Because our stock price is so volatile, investing in our common stock is highly risky. A potential
investor must be able to withstand the loss of his entire investment in our common stock.
Our shareholders rights plan and our ability to issue preferred stock may delay or prevent a change
of control of Abaxis.
Our shareholder rights plan, adopted by our board of directors on April 22, 2003, may make it more
difficult for a third party to acquire, or discourage a third party from attempting to acquire
control of, Abaxis. The shareholder rights plan could limit the price that investors might be
willing to pay in the future for shares of our common stock.
In addition, our board of directors has the authority to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the shareholders, except to
the extent required by NASDAQ rules. The issuance of preferred stock, while providing flexibility
in connection with possible financings or acquisitions or other corporate purposes, could have the
effect of making it more difficult for a third party to acquire a majority of our outstanding
voting stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
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Exhibit No. |
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Description of Document |
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3.1 |
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Restated Articles of Incorporation (Filed with the Securities and Exchange Commission as an
exhibit with our Annual Report on Form 10-K for the fiscal year ended March 31, 1993 and
incorporated herein by reference.) |
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3.2 |
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By-laws (Filed with the Securities and Exchange Commission in our Registration Statement No.
33-44326 on December 11, 1991 and incorporated herein by reference.) |
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3.3 |
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Amendment to the By-laws (Filed with the Securities and Exchange Commission as an exhibit with
our Current Report on Form 8-K on July 30, 2007 and incorporated herein by reference.) |
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4.1 |
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Registration Rights Agreement, dated as of March 29, 2002 (Filed with the Securities and Exchange
Commission as an exhibit with our Current Report on Form 8-K on May 13, 2002 and incorporated
herein by reference.) |
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4.2 |
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Reference is made to Exhibit 3.1, Exhibit 3.2 and Exhibit 3.3. |
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
# |
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
# |
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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# |
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This certification accompanies this Quarterly Report on Form 10-Q. The certification is not deemed filed with the
Securities and Exchange Commission and is not to be incorporated by reference into any filing of Abaxis, Inc. under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the
date of this Quarterly Report on Form 10-Q and irrespective of any general incorporation language contained in any such
filing. |
46
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.
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ABAXIS, INC.
(Registrant)
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Date: November 10, 2008 |
BY: |
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/s/ Clinton H. Severson
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Clinton H. Severson |
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President, Chief Executive Officer and Director
(Principal Executive Officer) |
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Date: November 10, 2008 |
BY: |
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/s/ Alberto R. Santa Ines
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Alberto R. Santa Ines |
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Chief Financial Officer and Vice President of Finance
(Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
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Exhibit No. |
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Description of Document |
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3.1 |
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Restated Articles of Incorporation (Filed with the Securities and Exchange Commission as an
exhibit with our Annual Report on Form 10-K for the fiscal year ended March 31, 1993 and
incorporated herein by reference.) |
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3.2 |
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By-laws (Filed with the Securities and Exchange Commission in our Registration Statement No.
33-44326 on December 11, 1991 and incorporated herein by reference.) |
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3.3 |
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Amendment to the By-laws (Filed with the Securities and Exchange Commission as an exhibit with
our Current Report on Form 8-K on July 30, 2007 and incorporated herein by reference.) |
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4.1 |
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Registration Rights Agreement, dated as of March 29, 2002 (Filed with the Securities and Exchange
Commission as an exhibit with our Current Report on Form 8-K on May 13, 2002 and incorporated
herein by reference.) |
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4.2 |
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Reference is made to Exhibit 3.1, Exhibit 3.2 and Exhibit 3.3. |
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
# |
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
# |
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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# |
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This certification accompanies this Quarterly Report on Form 10-Q. The certification is not deemed filed with the
Securities and Exchange Commission and is not to be incorporated by reference into any filing of Abaxis, Inc. under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the
date of this Quarterly Report on Form 10-Q and irrespective of any general incorporation language contained in any such
filing. |
48