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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 000-19720
ABAXIS, INC.
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(Exact name of registrant as specified in its charter)
California 77-0213001
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(State of Incorporation) (I.R.S Employer Identification No.)
1320 Chesapeake Terrace
Sunnyvale, CA 94089
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(Address of principal executive offices)
Registrant's telephone number, including area code, is (408) 734-0200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of June 25, 1999 was approximately $42,443,791 based upon the
closing sale price reported for such date on the NASDAQ National Market. For
purposes of this disclosure, shares of Common Stock held by persons who hold
more than 5% of the outstanding shares of Common Stock and shares held by
officers and directors of the registrant have been excluded because such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive for other purpose.
The number of shares of the registrant's Common Stock outstanding as of June 25,
1999, was 13,957,980.
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TABLE OF CONTENTS
PART I ......................................................................
ITEM 1. BUSINESS
General ....................................................
In-vitro Diagnostic Testing ................................
Abaxis Products ............................................
Customer Segments and Distribution .........................
Competition ................................................
Manufacturing ..............................................
Government Regulation ......................................
Intellectual Property ......................................
Employees ..................................................
ITEM 2. PROPERTIES .................................................
ITEM 3. LEGAL PROCEEDINGS ..........................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........
PART II .....................................................................
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS ................................
ITEM 6. SELECTED FINANCIAL DATA ....................................
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..............
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................
Report of Deloitte & Touche LLP, Independent Auditors ......
Balance Sheets at March 31, 1999 and 1998 ..................
Statements of Operations for the Years Ended March 31, 1999,
1998 and 1997...............................................
Statements of Shareholders' Equity for the Years Ended
March 31, 1999, 1998 and 1997...............................
Statements of Cash Flows for the Years Ended March 31, 1999,
1998 and 1997..............................................
Notes to Financial Statements ..............................
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS...............
PART III ....................................................................
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT ................................................
TABLE OF CONTENTS
(continued)
ITEM 11. EXECUTIVE COMPENSATION ....................................
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ................................................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS ..............................................
PART IV .....................................................................
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K .......................................
(a) 1. Financial Statements ..............................
2. Financial Statements Schedules ....................
3. Exhibits ..........................................
(b) Reports on Form 8-K ..................................
SIGNATURES ..................................................................
EXHIBITS INDEX ..............................................................
PART I
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 that reflect the
Company's current view with respect to future events and financial
performance. When used in this report, the words "anticipates",
"believes", "expects", "intends", "plans", "future", and similar
expressions identify forward-looking statements. The future events
described in these statements involve risks and uncertainties, among them
risks and uncertainties related to the market acceptance of the Company's
products and continuing development of its products, including required
United States Food and Drug Administration ("FDA") clearance and other
government approvals, risks associated with manufacturing and distributing
its products on a commercial scale, including complying with federal and
state food and drug regulations, general market conditions and
competition. Actual results could differ materially from those projected
in the forward-looking statements as a result of factors set forth
throughout this document. The Company undertakes no obligation to revise
or publicly release the results of any revision to these forward-looking
statements, whether as a result of new information, future events or
otherwise. Readers should be advised to read this Form 10-K in its
entirety paying careful attention to the risk factors set forth in this
and other reports or documents the Company files from time to time with
the Securities and Exchange Commission, particularly the Quarterly Reports
on Form 10-Q and any Current Reports on Form 8-K, copies of which may be
obtained from the Company or from the Securities and Exchange Commission
at its website at www.sec.gov.
ITEM 1. BUSINESS
General
Abaxis, Inc. (the "Company"), incorporated in California in 1989,
develops, manufactures and markets portable blood analysis systems for use
in any patient-care setting to provide clinicians with rapid blood
constituent measurements. The Company's primary product is a system
consisting of a compact 6.9 kilogram analyzer and a series of single-use
plastic discs called reagent discs containing all the chemicals required
to perform a panel of up to 12 tests. The system can be operated with
minimal training and performs multiple routine tests on whole blood, serum
or plasma using either venous or fingerstick samples. The system provides
test results in less than 15 minutes with the precision and accuracy
equivalent to a clinical laboratory analyzer. The Company currently
markets this system for veterinary use under the name VetScanr and in the
human medical market under the name Piccolor. The Company has its primary
operations and all of its employees in the United States. Approximately
84%, 71% and 69% of the Company's revenues are from the United States, 9%,
7% and 9% are from Europe and 7%, 22% and 22% are from Japan during fiscal
years 1999, 1998 and 1997 respectively.
The Company offers its point-of-care blood chemistry analyzer system with
a total of 19 test methods. The Company's repertoire of test methods
includes albumin, amylase, alkaline phosphates (ALP), alanine
aminotransferase (ALT), aspartate aminotransferase (AST), calcium,
creatinine, creatine kinase (CK), glucose, glutamyl transferase (GGT),
potassium, total bilirubin, total cholesterol, urea nitrogen (BUN), total
protein, uric acid, thyroxine (T4), CO2 and sodium. Fourteen of these
tests are marketed for both human and veterinary markets. Tests for uric
acid and direct bilirubin are marketed only in the human market, and tests
for CK, T4 and potassium, are marketed exclusively in the veterinary
market. The Company markets its reagent products by configuring these 19
test methods in panels that are designed to meet a variety of clinical
diagnostic needs. The Company currently offers 4 multi-test reagent disc
products in the human medical market and 6 reagent discs in the veterinary
market.
Abaxis' focus in fiscal 2000 will continue to be in markets where the
Company believes it can receive immediate economic rewards while at the
same time developing new products that will allow the Company to expand
into other market segments in the following year. Domestically, the
Company expects to continue to focus on growing its presence in the
veterinary markets and expanding its marketing effort to the armed forces.
Internationally, the Company will continue to focus its sales effort in
Europe. Revenues from Japan as well as markets in Asia and Latin America
have been difficult to exploit due to unfavorable foreign exchange rates
and poor economic conditions. The Company has re-allocated marketing and
sales expenses from Asia and Latin America to the domestic market.
Sales for any future periods are not predictable with a significant degree
of certainty. The Company generally operates with limited order backlog
because its products typically are 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. The Company
currently operates in one segment.
In fiscal year 1999, one customer accounted for 39% of total revenue.
Three customers accounted for 29%, 19% and 13%, respectively, of total
revenues for the fiscal year ended March 31, 1998. Three customers
accounted for 34%, 20% and 10%, respectively, of total revenues for the
fiscal year ended March 31, 1997.
The Company's research and development expenses were $2,627,000,
$1,635,000 and $1,315,000 in fiscal 1999, 1998 and 1997, respectively.
The increase in research and development expenditures is primarily due to
investment in increasing the number of tests available for the VetScan and
Piccolo.
In-vitro Diagnostic Testing
More than 20 billion blood tests are performed annually worldwide. These
blood tests are performed mostly in commercial laboratories, hospitals,
urgent care centers or physicians' offices. Sales of in-vitro diagnostic
products for use by these facilities to conduct blood testing total
approximately $15 billion per year. Although over 1,000 different tests
are performed on blood, fewer than 50 different tests account for 70% of
all blood testing. These tests are considered the "gatekeepers" of
medical care as physicians routinely use them to diagnose and monitor the
treatment of disease. A significant portion of the top 50 tests prescribed
by physician's fall in the clinical chemistry category. In-vitro
diagnostic products sold for the purpose of conducting clinical chemistry
tests represent approximately 32% of the total $15 billion market, while
diagnostic testing products for immunoassay represent another 33% of the
market. With such a large volume of testing, centralized laboratories
using automated batch testing equipment have become the norm in providing
physicians the diagnostic test results they need to make medical treatment
decisions.
The current worldwide focus on reducing medical care costs while
maintaining quality of care has encouraged the movement of blood testing
out of the central laboratories into the patient care setting. This trend
began in the early 1980s with the introduction of handheld devices that
could perform one or two tests. In the mid-1980s, small desktop
instruments such as the Abbott VISION and the Kodak DT60 (now marketed by
Johnson and Johnson) were introduced for use in doctors' offices and
hospital satellite laboratories. While these systems allowed testing
closer to the patient, they still required skilled technicians and were
limited to performing one test at a time. As a result, multiple tests
could not be performed economically and turnaround time was not
significantly enhanced.
In the United States, there are approximately 40,000 veterinarians who
generate annual billings of approximately $600 million in diagnostic
testing. In the veterinary market blood testing has become more important
to veterinarians by providing them valuable diagnostic information.
Veterinarians have historically relied on the services of the centralized
laboratories. The same factors affecting the human diagnostic market,
however, also impact veterinary practices. Small desk top instruments
such as the Dade Behring Analyst, Kodak DT60, and Idexx VetTest have been
marketed to veterinarians to perform in-house blood testing. While these
products have made in-house testing possible for veterinarians, they still
require skilled technicians to properly use and maintain these products.
As a result, based on the Company's market research, 55% of the
veterinarians in the United States do not perform in-house testing despite
its advantages.
Abaxis believes that a key element of the patient-centered, cost-
constrained health care model in the year 2000 and beyond will be the
availability of blood analysis systems in the patient care setting that
are easily and reliably operated by caregivers and provide accurate, real
time results for making immediate clinical decisions. The optimal system
uses whole blood, has built-in calibration and quality control, provides
quick turnaround time and is portable and low cost. In addition, the
optimal near-patient system should be easy to use by people with no
special training and capable of transmitting test results instantly to
patient information management systems.
Abaxis has developed a blood analysis system incorporating all of these
criteria into a 6.9 kilogram analyzer and a series of menu-specific,
single-use reagent discs. The system is essentially a compact portable
laboratory that can be easily carried to the patient. Each reagent disc
is pre-configured with multiple analytes and contains all the reagents
necessary to perform a fixed menu of tests. Taking the system to the
patient care site instead of shipping the sample to a central laboratory
makes blood testing and analysis as easy as measuring the patient's blood
pressure, temperature, and heart rate. Additional advantages of near-
patient testing include eliminating errors from sample handling,
transcription, and transportation, which, studies have shown, may cause up
to 85% of reporting errors.
Abaxis Products
Point-of-Care Blood Analyzer
The Company's point-of-care blood chemistry analyzer is a portable
spectrophotometer, which is a device that measures the absorption of light
at various wavelengths. A variable speed motor is used to spin the
reagent disc for sample processing. The chemical reactions in the disc's
cuvettes are measured optically by detecting the light absorbance of the
solutions in the cuvettes at pre-determined wavelengths. The absorbances
are converted to clinically relevant units by a measurement
microprocessor. Results are stored by the analyzer's interface
microprocessor, sent to an RS232 port and printed on result cards by an
internal thermal printer. The features of the analyzer include a small
required sample size (100 uL) of whole blood, serum or plasma, an
intelligent quality control system that includes many self-test functions
to ensure quality results, a built-in instrument self calibration, a
built-in printer, a quick turn-around time of less than 15 minutes,
minimal operational training and ease of information transmission using a
computer port on the analyzer.
Reagent Discs
The reagent discs are designed to handle almost all technical steps of
blood chemistry testing automatically. The discs first separate a whole
blood sample into plasma and blood cells, meter the required quantity of
plasma and diluent, mix the plasma and diluent, and deliver the mixture to
the reagent chambers, called cuvettes, along the disc perimeter. The
diluted plasma dissolves and mixes with the reagent beads initiating the
chemical reactions, which are monitored by the analyzer. The discs are 8-
cm diameter, single-use devices constructed from three ultrasonically
welded injection-molded plastic parts. The base and the middle piece
create the chambers, cuvettes and passageways for processing the whole
blood and mixing plasma with diluent and reagents. The top piece,
referred to as the bar code ring, is imprinted with bar codes that contain
disc-specific calibration information. In the center of the disc is a
plastic diluent container sealed with polyethylene-laminated foil.
Spherical lyophilized reagent beads are placed in the cuvettes during disc
manufacturing. Upon completion of the analysis, used discs may be placed
back into their foil pouches to minimize human contact with blood prior to
proper disposal.
To perform a panel of tests, the operator collects a blood sample via
finger puncture or venipuncture (the latter requiring a trained
phlebotomist). The operator then transfers the sample into the reagent
disc. The operator places the disc into the analyzer drawer, and enters
patient, physician, and operator identification numbers. The analyzer
spins the disc to separate cells from plasma, meters and mixes plasma with
diluent, distributes diluted plasma to the cuvettes, and monitors chemical
reactions. In less than 15 minutes, results are printed out on a result
card with an adhesive backing for inclusion in the patient's medical
record. A computer port enables transmission of patient results to
external computers for data management.
The Company introduced its Piccolo system to the human marketplace in
November 1995 with two reagent discs, General Health Panel 8 and General
Health Panel 11. In November 1996, the Company introduced the Liver Panel
Plus 9 disc, which was enabled by the 510(k) clearance of the GGT test
received from the FDA in September 1996. Subsequently, the Company has
released four other differently configured reagent disc products to meet
different physicians' needs, mostly in the international markets. As of
June 1999, a total of seven reagent disc products were marketed worldwide
for use with the Piccolo system.
The VetScan system was introduced in the US veterinary market in July
1994. The Company initially launched the system with the Diagnostic
Profile, a nine-test reagent product. Since then, the Company has added
new test methods and new reagent disc products targeted to fulfill
different veterinary diagnostic needs. The newest addition to the VetScan
family of reagent products was the Critical Care Profile introduced to the
market in March 1999. The Critical Care Profile adds electrolyte testing
capability, which includes sodium, potassium, CO2, as well as ALT,
creatinine, BUN and glucose. As of June 1999, the Company offers a total
of seven reagent disc products to its veterinary customers.
Orbos Process
The dry reagents used in the Company's reagent discs are produced using a
proprietary technology called the Orbos "RTM" Discrete Lyophilization Process.
This process allows the production of an accurate, precise amount of
active chemical ingredient in the form of a soluble bead. The Orbos
process involves flash-freezing a drop of liquid reagent to form a solid
bead and then freeze-drying the bead to remove water. The Orbos beads are
stable in dry form and dissolve rapidly in aqueous solutions. The Company
believes that the Orbos process has broad applications in products where
delivery of active ingredients in a stable, pre-metered format is desired.
The Company currently has a licensing agreement with Pharmacia Biotech and
a supply contract with Becton Dickinson Immunocytometry Systems for
products produced using the Orbos process. Abaxis is continuing to
explore potential applications with other companies. There can be no
assurance that the Company will be able to discover and/or develop any new
applications for the Orbos process.
Hematology
In March, 1999 the Company signed an OEM and distribution agreement with
MELET Schloesing Laboratoires (MELET) through which the Company will
market and sell the MELET Hematology instrument and reagents and MELET
will market and sell the VetScan and Piccolo. The Company will market the
hematology instrument as the VetScan HMT in the veterinary market and the
Piccolo HMT in the human medical market (collectively HMT). Under the
agreement, the Company has the right to market the HMT in the United
States, Canada, Mexico, the United Kingdom, Australia and Israel. The
Company launched the VetScan HMT in the United States, Australia and
Israel in the 1st quarter of fiscal year 2000. The Company will be
required to complete clinical studies in order obtain the necessary
regulatory approvals to sell the Piccolo HMT. These studies are expected
to be done during fiscal year 2000. There can be no assurance that these
clinical studies for the Piccolo HMT will be successful.
MELET will market and sell the VetScan and Piccolo in France, Austria,
Belgium, the Netherlands and the Middle East excluding Israel. Melet
launched the VetScan in the 1st quarter of fiscal year 2000.
The VetScan HMT is a hematology analyzer, which provides a complete CBC
including three-part WBC differential in less than 2 minutes and requires
only 12 ?l of whole blood. It provides results for 8 selectable species,
plus 2 user configurable programs.
Future Products
The Company continues to develop new products that the Company believes
will provide further opportunities for growth in the human and veterinary
markets. The Company is working on the development of tests for chloride,
triglycerides, phosphorous, magnesium and HDL tests. Clinical trials of
these test methods are expected during fiscal 2000 and 2001. Additional
test methods development for other disc products will be targeted at
specific applications based on fulfilling clinical needs. The Company's
current focus of test methods development is in clinical chemistry. In
addition to clinical chemistry, the Company has demonstrated its ability
to perform immunoassay tests in its blood analysis system by successfully
developing its Thyroxine (T4) test in the veterinary market. The Company
believes other homogeneous immunoassay methods can be performed in its
discs to measure a wide assortment of low concentration blood analytes,
such as therapeutic drugs and drugs of abuse.
There can be no assurance that Abaxis will be able to develop any of these
potential products. While the Company believes that its technology will
allow it to develop reagent disc products in the future to provide a
variety of additional blood tests, there can be no assurance that such
future products will be developed, that such products will receive
required regulatory clearance, or that the Company will be able to
manufacture or market such products successfully.
Customer Segments and Distribution
Customer Segments
Abaxis sells its point-of-care blood chemistry analyzer products and
reagent discs either directly or through distributors depending on the
needs of the customer segment. In the delivery of human or veterinary
care there are many kinds of providers and a multitude of sites where
Abaxis products could be used as an alternative to relying on a central
laboratory for blood test information. The Company believes that its
current Piccolo system menu of 14 reagent test methods are suitable for
certain niche market segments of the human medical market. These niche
market segments include military installations (ships, field hospitals and
mobile care units), urgent care and walk-in clinics (free-standing or
hospital-connected), home care providers (national, regional or local),
nursing homes, acute care hospitals, ambulance companies, dialysis
centers, hospital labs and draw stations. The Company believes that its
veterinary reagent product offerings meet a substantial part of the
clinical diagnostic needs of veterinarians. Potential customers for the
VetScan System are primarily companion animal hospitals, animal clinics
with mixed practices of small animals, birds and reptiles, equine
practitioners, veterinary referral hospitals, and private toxicology
laboratories and university and government toxicology research
laboratories.
Distribution Within North America
Abaxis sells its products directly to those customers who serve large
human patient populations with employed caregivers such as the military,
hospitals, and managed care organizations. As a result of health care
reform, the Company expects a consolidation of providers with more
centralized purchasing of medical products based on the standardization of
care and the use of patient outcome studies to influence purchase
decisions. The Company plans to achieve its direct sales objectives by
employing highly skilled sales specialists and eventually sales teams
which will work closely with providers in performing studies to show that
the use of the Piccolo point-of-care blood chemistry analyzer rather than
laboratory alternatives can provide better outcomes at a lower cost.
Abaxis is using distributors for those customers who desire to purchase
reagent discs frequently and in small quantities. These distributors also
contribute to identifying potential customers and introducing the product,
but often need the support of Abaxis personnel in closing the sale.
Product distributors are generally of two types: large companies that
primarily serve hospitals, clinics and large health maintenance
organizations (HMOs) nationwide using multiple warehouses and extensive
transportation systems and smaller companies that provide the daily
supplies needed by office-based physicians. In the human market, national
firms sell thousands of products, including furniture, capital equipment,
surgical instruments and a myriad of consumables. The smaller companies
generally direct their product offerings to those items a physician uses
daily in caring for primarily ambulatory patients. These firms also may
sell lower priced equipment such as diagnostic instruments, which are used
in conjunction with consumable reagents. The Company currently has non-
exclusive distribution agreements with Allegiance Healthcare Corporation
(formerly Baxter Healthcare) and Sage London of Canada.
Veterinarians are served similarly to office-based physicians by small,
local firms, some with national affiliations. The Company currently has a
non-exclusive agreement with VedCo, Inc., a national network of 14
independent distributors with 23 sales offices in the US. The Company
also has five additional distribution agreements with regional
distributors. In addition to selling through distributors, the Company
directly supplies its VetScan products to three national institutional
customers: VCA, the nation's largest veterinary hospital chain; VetSmart,
the nation's largest chain of veterinary service clinics; and PetSmart.
The Company intends to enter into arrangements with additional
distributors as well as pursue direct sales where appropriate. There can
be no assurance that the Company will be successful in securing
arrangements with additional distributors or that any of the Company's
distributors will devote the necessary resources to be successful in their
efforts to commercialize the Company's products.
Distribution Outside of North America
The Company's international sales and marketing objectives include
identifying and defining the market segments in each country by product
and then focusing on specific objectives for each segment in each country.
These specific objectives include modification and expansion of
distribution and distributor training and monitoring to ensure the
attainment of sales goals.
The Company currently has distribution agreements in the following
countries: Argentina, Austria, Brazil, Chile, France, Germany, Greece,
Israel, Hong Kong, Italy, Japan, Korea, Mexico, New Zealand, Norway,
Portugal, Spain, Switzerland, Turkey and the United Kingdom. Each
distributor agreement contains a number of requirements that must be met
to retain exclusivity, including minimum order quantity commitments, trade
show and promotion requirements and a specified number of demonstration
analyzer requirements. In most cases, the foreign distributors need to
either go through an FDA-equivalent approval process with national
regulators or clinical trials/market evaluations with their local opinion
leaders in the medical field. Each distributor is responsible for
obtaining the required approvals. There can be no assurance that any of
the Company's distributors will be successful in obtaining proper
approvals for Abaxis products in their respective countries or that these
distributors will be successful in marketing Abaxis products. The Company
plans to enter into additional distribution agreements to enhance its
international distribution base and solidify its international presence.
There can be no assurance that the Company will be successful in entering
into any additional distributor agreements.
Abaxis is party to a series of agreements with Teramecs, the Company's
Japanese distributor, involving funded research, distribution and
manufacturing rights and an equity investment by Teramecs in the Company.
Under these agreements Abaxis has granted Teramecs, subject to certain
restrictions, the exclusive right to distribute Abaxis products in Japan,
an option to obtain a license to manufacture the Piccolo system for resale
only to Abaxis or in Japan and access to future Abaxis technology.
Teramecs has provided $1,000,000 of research funding (which was recognized
as revenue by Abaxis in fiscal 1994) and is obligated to purchase minimum
quantities of products annually in order to maintain exclusive
distribution rights in Japan. In the event Teramecs exercises its option
to manufacture Abaxis products, it must pay the Company an additional
license fee, purchase from Abaxis the reagent beads for the products it
manufactures, and pay royalties on the sale of such products. In August
1996, with the regulatory approval from the Japanese Ministry of Health
and Welfare (Koseisho), Teramecs contracted with Daiichi Pure Chemical to
provide more extensive market coverage to sell and distribute the Piccolo
system in the Japanese human medical markets under the name Lunaspin.
During fiscal 1998, Teramecs received regulatory approval to market the
VetScan system from the Japanese Ministry of Agriculture, Forestry and
Fishery (Nosuisho). There can be no assurance that Teramecs and Daiichi
will be successful in marketing any Abaxis products.
Competition
Abaxis' competition includes clinical laboratories, hospitals and
independent laboratories and manufacturers of bench top multi-test
analyzers and other near-patient test systems. Blood analysis is a well
established field in which there are a number of competitors, which have
substantially greater financial resources and larger, more established
marketing, sales and service organizations than the Company. No assurance
can be given that the Company's products will be competitive with existing
or future products or services of such competitors.
Historically, most human medical testing has been performed in the
hospital or commercial laboratory setting. Clinical laboratories have
traditionally been effective at processing large panels of tests using
skilled technicians and complex equipment. The Company's products compete
with the clinical laboratories with respect to range of tests offered, the
immediacy of results and cost effectiveness. While Abaxis cannot provide
the same range of tests, the Company believes that its products will
provide a sufficient breadth of test menus to compete successfully with
clinical laboratories on the basis of immediacy of results and cost
effectiveness. The Company's products compete with other products in the
marketplace with respect to ease-of-use, the ability to conduct tests
without a skilled technician, the ability to conduct multiple test panels,
breadth of tests, built-in calibration and quality control, cost
effectiveness and quality of results.
Most of the Company's current and potential competitors have significantly
greater financial and other resources than Abaxis, and the Company expects
that competition will continue to be intense. In particular, most of
these competitors have large sales forces and well-developed channels of
distribution. To compete, the Company must develop effective channels of
distribution and a focused direct sales force. There is no assurance that
the Company will be able to compete successfully.
Manufacturing
Abaxis began manufacturing its VetScan products for the commercial market
during fiscal 1995. The Company began manufacturing Piccolo products for
commercial sale in fiscal 1996. To produce and commercially ship Piccolo
products, the Company must have a license to manufacture medical products
in the State of California, where the Company conducts its principal
manufacturing activities, and have approval from the FDA as a medical
device manufacturer. In May 1996, the Company received its license to
manufacture from the State of California. In September 1996, the FDA
granted the Company's manufacturing facility "in compliance" status,
according to the regulations for current Good Manufacturing Practices
("cGMP") for medical devices. The Company is inspected by the FDA and
the State of California on a routine basis, typically once every 24
months. Although the Company is not required when manufacturing the
VetScan products to comply with all of the government regulations
applicable to the human market, the Company has established all of its
manufacturing operations to be cGMP and Quality System Regulations
("QSR") compliant as this ensures product quality and integrity
regardless of end use or patient. There can be no assurance that the
Company can successfully pass a re-inspection by the FDA or the State of
California or any other future inspections. There can be no assurance
that the Company can comply with all current or future government
manufacturing requirements and regulations.
In addition to the development of standardized manufacturing processes and
quality control programs for the entire manufacturing process, the
Company's manufacturing activities are concentrated in the following three
primary areas:
Point-of-Care Blood Chemistry Analyzer
The analyzer used in the Piccolo and VetScan system employs a variety of
components designed or specified by Abaxis, including a variable speed
motor, microprocessors, a liquid crystal display, a result card printer, a
spectrophotometer and other electronic components. These components are
manufactured by several third party vendors that have been qualified and
approved by Abaxis and then assembled by contract manufacturers for
Abaxis. The components are assembled at the Abaxis facility into the
finished product and completely tested to ensure that the finished product
meets product specifications. The analyzer uses technologically advanced
components, many of which are available only from single source vendors.
During fiscal 1998, the Company was successful in identifying potential
alternate suppliers of some critical components and will continue to work
on qualifying additional vendors to protect its source of supply on these
crucial items. There can be no assurance that the Company will not
experience a material interruption of supply of components from single
source vendors.
Reagent Disc
The molded plastic disks used in the manufacture of the reagent disc are
manufactured to the Company's specification by an established injection-
molding manufacturer. To achieve the precision required for accurate test
results, the disks must be molded to very narrow tolerances. The Company
believes only a few manufacturers are capable of manufacturing to such
tolerances. To date, the Company has qualified one manufacturer to mold
the disks and has four molds. The Company has ordered four more
production molds, which it expects to qualify by the end of fiscal 2000 to
better expand its supply source. The Company is also working with its
supplier to improve yields and increase capacity on the existing
production molds. While the Company has increased the number of disk
molding tools to strengthen and better protect its line of supply, the
inability of its injection-molding manufacturer to supply sufficient disks
would have a material adverse impact on the Company's results of
operations.
The Company assembles the reagent discs by using the molded plastic disks,
loading the disk with reagents and then ultrasonically welding together
the top and bottom pieces. The Company has begun development of an
automated disc assembly line ("autoline") to provide anticipated
capacity for future demand and to improve production efficiency. The
Company expects to have this autoline fully operational during the first
half of fiscal year 2000. The autoline is expected to double the
Company's capacity while improving quality and yield. The qualification
of the autoline could involve significant time and cost and could entail
some initial unforeseen production problems. There can be no assurance
that the autoline will be fully operational within fiscal 2000, that
capacity will be doubled, quality and yield will improve or that the
Company will not experience significant time requirements and additional
cost associated with qualification of the autoline.
Reagent Beads
The reagent discs contain diluent and all the dry reagent chemistry beads
necessary to perform blood analyses. Abaxis purchases chemicals from
third party suppliers and formulates the raw materials, using proprietary
processes, into beads at the proper concentration and consistency to
facilitate placement in the reagent disc and provide homogeneous
dissolution and mixing when contacted by the diluted plasma. The Company
is dependent on single source vendors for some of the chemicals and the
loss of any one supplier of chemicals would materially adversely affect
the results of operations. The Company is currently evaluating additional
vendor sources to better protect its lines of supplies in the future.
There can be no assurances that the Company can qualify additional vendor
sources.
Government Regulation
Piccolo System
Abaxis' Piccolo products are regulated under the 1976 Medical Device
Amendments to the Food, Drug and Cosmetic Act (the "Amendment"). The
Company's current products are Class II devices requiring the submission
of a 510(k) FDA pre-market notification to substantiate label claims prior
to marketing. In its submission, the Company must, among other things,
establish that the product to be marketed is "substantially equivalent"
to a product that was on the market prior to the Amendment or to a product
that has previously been cleared under the 510(k) process. The typical
process for clearance of 510(k)'s can be three months to over a year and
the FDA must issue a written order finding substantial equivalence.
To date, Abaxis has received market clearance for its portable blood
analyzer and 16 test methods from the FDA. Abaxis is currently and plans
to continue developing additional tests that will require clearance
through the FDA. There can be no assurance that Abaxis will receive
marketing clearance for any of its future products. The Amendment also
requires the Company to manufacture its products in accordance with the
cGMP and QSR using facilities registered to manufacture the Company's
products. The Company's facility is subject to periodic inspections by
the FDA. In addition, the use of the Company's facilities may be
regulated by various state agencies. There can be no assurance that the
Company will be able to maintain facility compliance with applicable
requirements or regulations.
The Piccolo system is also affected by the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA"), which are intended to ensure the quality
and reliability of all medical testing in the United States regardless of
where tests are performed. Under CLIA regulations, laboratory tests are
divided into three categories: "waived or simple", "moderately complex"
and "highly complex." The Company's current products, under these
regulations, are classified in the "moderately complex" category, which
would require that any location using these products be certified as a
laboratory. Initial certification would require the laboratory to obtain
a registration certificate from the Health Care Financing Administration
("HCFA") which would be issued if the laboratory (1) agrees to notify
HCFA within 30 days of any change in its ownership, name or location, (2)
agrees to treat proficiency testing samples in the same manner as patient
specimens and (3) remits the registration fee. Within two years of
registration certificate issuance, laboratories would be inspected to
determine compliance with the CLIA requirements. The CLIA regulations
require laboratories to meet specified standards in the areas of personnel
qualification, administration, participation in proficiency testing,
patient test management, quality control/assurance, laboratory information
systems and inspections. There can be no assurance that CLIA regulations
will not have a materially adverse impact on the Company and its ability
to market and sell its products.
In July 1996, the Company filed an application to the Center for Disease
Control ("CDC") for its Piccolo system to be waived from the CLIA
regulations. If granted, users of the product can then avoid many of the
burdens imposed on users of moderately complex tests. To have the Piccolo
placed in the waived category, the Company must conduct field studies at
three non-laboratory sites using at least 20 operators each who have no
medical laboratory training and can operate the Piccolo system with
directions that require no more than seventh grade reading skills. The
Company met with the CDC in February 1997 to review its application. The
CDC has requested more detailed performance data, which the Company is in
the process of collecting. To date, only a few companies have received
waived category status for their tests and approval time from CDC appears
to be in excess of a year or two. Although the review process for a CLIA
waiver could potentially be very lengthy and costly, the Company believes
that its Piccolo products fulfill all requirements for obtaining a waived
status. There can be no assurance that the Company will be able to obtain
a waived status for its Piccolo system, or that if such waived status was
granted, it will enhance the Company's ability to place Piccolo systems.
Federal and state regulations regarding the manufacture and sale of health
care products and diagnostic devices are subject to future change. The
Company cannot predict what material impact, if any, such changes might
have on its business. In addition, some foreign markets require obtaining
foreign regulatory clearances of the Company's products before they can be
distributed in those countries. There can be no assurance that the
Company will be able to obtain regulatory clearances for its products in
the US or in foreign markets.
Although Abaxis believes that it will be able to comply with all
applicable regulations of the FDA and of the State of California, current
regulations depend heavily on administrative interpretations. There can
be no assurance that future interpretations made by the FDA, the HCFA, the
CDC or other regulatory bodies, with possible retroactive effect, will not
adversely affect the Company.
Third party payers can indirectly affect the pricing or the relative
attractiveness of the Company's products by regulating the maximum amount
of reimbursement they will provide for blood testing services. For
example, the reimbursement of fees for blood testing services for Medicare
beneficiaries is set by the HCFA. If the reimbursement amounts for blood
testing services are decreased in the future, it may decrease the amount
which physicians and hospitals are able to recover for such services and
consequently the price the Company can charge for its products. If
adequate coverage and reimbursement levels are not provided by government
and third-party payers for use of the Company's products, the market
acceptance of those products would be adversely affected.
VetScan System
The government regulations discussed above generally do not apply to the
Company's VetScan products in the US. Internationally, among the
countries where the Company currently has established distribution
arrangements, to the Company's knowledge, Japan is the only market where
VetScan products are subject to government approvals. In Japan,
veterinary diagnostic devices are regulated by the Ministry of
Agriculture, Forestry and Fishery, and thus the VetScan system must be
approved by such Ministry prior to being marketed in Japan. Teramecs, the
Company's Japanese distributor, received approval for the VetScan system
at the end of summer 1997.
In order to maintain high quality standards for all its products, the
Company is using the same manufacturing facilities to manufacture all
point-of-care blood chemistry analyzers whether they be for the Piccolo or
VetScan system products and therefore is following the same manufacturing
processes and procedures where practical.
Intellectual Property
The Company has pursued the development of a patent portfolio to protect
its technology. As of June 1999, the Company has filed 25 United States
patent applications. The following 18 patents have been issued:
Patent No. Description Issue Date
- ----------- -------------------------------------------------- -----------------
5,061,381 Apparatus and Method for Separating Cells from October 29, 1991
Biological Fluids
5,122,284 Apparatus and Method for Optically Analyzing June 16, 1992
Biological Fluids
5,173,193 Centrifugal Rotor Having Flow Partition December 22, 1992
5,242,606 Sample Metering Port for Analytical Rotor Having September 7, 1993
Overflow Chamber
5,275,016 Cryogenic Apparatus January 4, 1994
5,304,348 Reagent Container for Analytical Rotor April 19, 1994
5,403,415 Method and Device for Ultrasonic Welding April 4, 1995
5,409,665 Simultaneous Cuvette Filling with Means to April 25, 1995
isolate Cuvettes
5,413,732 Reagent Compositions for Analytical Testing May 9, 1995
5,457,053 Reagent Container for Analytical Rotor October 10, 1995
5,472,603 Analytical Rotor with Dye Mixing Chamber December 5, 1995
5,478,750 Methods for Photometric Analysis December 26, 1995
5,518,930 Simultaneous Cuvette Filling with Means to May 21, 1996
isolate Cuvettes
5,590,052 Error Checking in Blood Analyzer December 31, 1996
5,591,643 Simplified Inlet Channels January 7, 1997
5,599,411 Method and Device for Ultrasonic Welding February 4, 1997
5,624,597 Reagent Compositions for Analytical Testing April 29, 1997
5,693,233 Methods of Transporting Fluids within an December 2, 1997
Analytical Rotor
The Company's policy is to file patent applications to protect technology,
inventions and improvements that are important to the development of its
business. The Company also relies upon trade secrets, know-how,
continuing technological innovations and licensing opportunities to
develop and maintain its competitive position. The Company has filed
under the Patent Cooperation Treaty for international patent protection
and is selectively filing patents in countries where the Company expects
to market its product.
The patent position of any medical device manufacturer, including Abaxis,
is uncertain and may involve complex legal and factual issues.
Consequently, even though Abaxis is currently executing its patent
applications in the US and has filed an international application under
the Patent Cooperation Treaty, in addition to actual foreign patents, the
Company does not know whether any of its applications will result in the
issuance of any further patents, or, for any patents issued, whether they
will provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications are maintained in the US in
secrecy until patents issue, and since publications of discoveries in the
scientific or patent literature tend to lag behind actual discoveries by
several months, Abaxis cannot be certain that it was the first creator of
inventions covered by its issued patent or pending patent applications or
that it was the first to file patent applications for such inventions.
There can be no assurance that the Company's patent applications will
result in further patents being issued or that if issued the patents will
offer protection against competitors with similar technology; nor can
there be any assurance that others will not gain patents that the Company
would need to license or circumvent. Moreover, the Company may have to
participate in interference proceedings declared by the US Patent and
Trademark Office to determine the priority of inventions, which could
result in substantial cost to the Company.
The Company also relies upon copyright, trademarks and unpatented trade
secrets, and no assurance can be given that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets or disclose such
technology.
Abaxis requires its employees, consultants and advisors to execute
confidentiality agreements upon the commencement of an employment or
consulting relationship with the Company. Each agreement provides that
all confidential information developed or made known to the individual
during the course of the relationship will be kept confidential and not
disclosed to third parties except in specified circumstances. In the case
of employees, the agreements provide that all inventions conceived by an
individual shall be the exclusive property of the Company, other than
inventions unrelated to the Company's business and developed entirely on
the employee's own time. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for the
Company's trade secrets in the event of unauthorized use or disclosure of
such information.
Employees
The Company's success depends upon the continued contribution of its
officers and key personnel, many of whom would be difficult to replace.
If certain of these people were to leave the Company, the Company's
ability to achieve its business objective might be impeded. As of March
31, 1999, the Company had a total of 93 full-time employees. Twenty
employees, including five Ph.D's, continued to further the Company's
research and development activities while also driving the manufacturing
process development. Forty employees worked in manufacturing operations
devoting their time to manufacturing the VetScan and Piccolo products as
well as supporting development activities as necessary. Ten employees,
including one Ph.D, were selling and marketing the VetScan and Piccolo
products. The remaining six employees worked in general administration to
support the Company's administrative requirements. The Company also uses
temporary help to assist in carrying out certain operational duties. As
of March 31, 1999, the Company had 13 temporary employees and most of them
were assisting in manufacturing operations. None of the employees are
covered by collective bargaining agreements and management considers its
relations with employees to be good.
ITEM 2. PROPERTIES
The Company occupies approximately 38,300 square feet of office, research
and development and manufacturing space in a building in Sunnyvale,
California. The Company's lease will expire in July 2000. During fiscal
1999 the Company had adequate space to satisfy all its needs. The Company
may need additional space during fiscal year 2000 for warehousing
purposes. Should the need for additional space arise, the Company
believes that suitable additional space will be available on commercially
reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation in the normal course of business.
In the opinion of management, the ultimate resolution of these matters
will not have a material effect on the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's initial public offering was completed in January 1992. From
that date, the Company's common stock has been traded on the NASDAQ
National Market under the symbol ABAX.
The high and low prices for the Company's common stock during each quarter
since April 1, 1997 are exhibited in the table below, as represented by
the high and low daily trade closing sales prices as reported by NASDAQ.
High Low
--------- ---------
Fiscal 1998
-----------
First Quarter........................... $3.375 $2.625
Second Quarter.......................... $5.000 $2.500
Third Quarter........................... $4.000 $2.375
Fourth Quarter.......................... $2.875 $1.875
Fiscal 1999
-----------
First Quarter........................... $3.500 $1.938
Second Quarter.......................... $3.750 $2.625
Third Quarter........................... $2.313 $1.375
Fourth Quarter.......................... $2.500 $1.438
Fiscal 2000
-----------
First Quarter........................... $3.375 $1.750
As of June 25, 1999, there were 259 shareholders of record and
approximately 4,800 beneficial shareholders. Abaxis has never paid
dividends on its common stock and does not anticipate paying cash
dividends in the foreseeable future.
In November 1998 the Company sold 4,000 shares of non-voting Series C
Convertible Preferred Stock to certain non-U.S. purchasers at a price per
share of $1,000, with net proceeds to the Company of approximately
$3,581,000. Each share of Series C Preferred Stock shall be entitled to
receive a dividend of $60 per share per annum, payable in cash or stock at
the option of the Company. The 4,000 shares of Series C Preferred Stock
are convertible into 1,600,000 shares of the Company's common stock. The
number of converted shares is determined by dividing $1,000, the original
price per share of Series C Preferred Stock, by $2.50, the original
conversion price for the Series C Preferred Stock. The Series C Preferred
Stock will automatically convert into common stock on October 31, 2002.
The Series C Preferred Stock can be converted, at the option of the
issuer, prior to October 31, 2002 if the shares of the Company's common
stock trade above $5.00 per share for 60 consecutive days. The shares
were sold in a private offering transaction and were not registered under
the Securities Act in reliance upon the exemptions provided by Section
4(2) of the Securities Act and Regulation D promulgated thereunder as a
transaction by an issuer not involving a public offering.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and with the consolidated financial statements, related notes and other
financial information included elsewhere in this report.
Year Ended March 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Total revenues......................... $13,347,000 $12,187,000 $7,294,000 $2,948,000 $1,044,000
------------ ------------ ------------ ------------ ------------
Operating expenses:
Cost of product sales............... 9,530,000 10,461,000 7,661,000 4,883,000 2,587,000
Research and development............ 2,627,000 1,635,000 1,315,000 1,326,000 4,166,000
Selling, general and administrative. 5,352,000 4,741,000 4,867,000 3,482,000 3,504,000
------------ ------------ ------------ ------------ ------------
Total costs and operating expenses..... 17,509,000 16,837,000 13,843,000 9,691,000 10,257,000
------------ ------------ ------------ ------------ ------------
Loss from operations................... (4,162,000) (4,650,000) (6,549,000) (6,743,000) (9,213,000)
Interest income and other.............. 183,000 370,000 360,000 547,000 376,000
Interest expense....................... (231,000) (73,000) -- -- (149,000)
------------ ------------ ------------ ------------ ------------
Net loss............................... ($4,210,000) ($4,353,000) ($6,189,000) ($6,196,000) ($8,986,000)
============ ============ ============ ============ ============
Basic and diluted loss per share (1)... ($0.31) ($0.44) ($0.72) ($0.65) ($1.24)
============ ============ ============ ============ ============
Common shares used in computing
per share amounts..................... 13,794,450 11,920,202 10,502,646 9,466,084 7,268,315
============ ============ ============ ============ ============
March 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash, cash equivalents, and
short-term investments............... $5,426,000 $5,897,000 $5,321,000 $7,778,000 $7,195,000
Working capital........................ 5,828,000 5,752,000 6,825,000 7,912,000 7,109,000
Long-term investments.................. -- -- -- 500,000 700,000
Total assets........................... 12,914,000 12,032,000 11,977,000 13,046,000 12,147,000
Long-term portion of notes payable
and capital lease obligation......... 889,000 263,000 -- -- --
Total shareholders' equity............. 7,530,000 7,883,000 9,358,000 10,726,000 10,436,000
(1) See Note 1 to the Financial Statements. Loss attributable to
common shareholders used in computation of loss per share for the
years ended March 31, 1999, 1998 and 1997 was $(4,309,000),
$(5,233,000) and $(7,595,000), respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Abaxis, Inc. (the "Company") develops, manufactures and markets portable
blood analysis systems for use in any patient-care setting to provide
clinicians with rapid blood constituent measurements. The Company's
products consist of a compact 6.9 kilogram analyzer and a series of
single-use plastic disks called reagent discs that contain all the
chemicals required to perform a panel of up to 12 tests. The system can
be operated with minimal training and performs multiple routine tests on
whole blood, serum or plasma using either venous or fingerstick samples.
The system provides test results in less than 15 minutes with the
precision and accuracy equivalent to a clinical laboratory. The Company
currently markets this system for veterinary use under the name VetScan
and in the human medical market under the name Piccolo.
In fiscal 1999, the Company's US revenues accounted for 84% of its total
revenues versus 71% in fiscal 1998, international revenues accounted for
16% versus 29% in fiscal 1998. The decline in the share of the
international revenue is due to a decline in the Asian market, in
particular Japan. The Asian market declined to 7% of total revenues in
fiscal 1999 from 23% in fiscal 1998. The Company does not expect the
Asian market to recover to previous levels in the near future or at all.
During the year ended March 31, 1999, the Company placed 771 point-of-care
blood chemistry analyzers worldwide (a 29% decrease from fiscal 1998
shipments of 1,086 point-of-care blood chemistry analyzers). The decline
in instrument sales reflects lower unit shipments to Japan and the US
Military. The Company does not expect instrument unit sales to Japan to
recover in the near future, if at all. Shipments to the military declined
due to the completion of a contract with the US Navy. The Company does
not expect sales to the US Military to increase unless an additional
contract is completed, if at all. Reagent discs shipped during fiscal
1999 were approximately 748,000, an increase of 59% compared to fiscal
1998 shipments of approximately 469,000 reagent discs. Most (96%) of
these reagent disc shipments were for veterinary applications. The
increase in reagent disc shipments during fiscal 1999 is consistent with
the Company's belief that there will be recurring reagent disc revenue as
the Company's product lines mature. This growth is mostly attributable to
the expanded installed base of VetScan systems and higher consumption
rates of institutional users. There can be no assurance growth in
revenues or unit sales will continue or that the Company will be able to
increase production to meet increased product demand.
Sales for any future periods are not predictable with a significant degree
of certainty. The Company generally operates with limited order backlog
because its products typically are 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. The Company's
expense levels, which are to a large extent fixed, are based in part on
its expectations as to future revenues. Accordingly the Company may be
unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. As a result, any such shortfall would have
an immediate materially adverse impact on operating results and financial
condition. Until sales volume of the Company's products, particularly its
reagent discs, increases significantly so as to offset associated fixed
costs and to realize certain manufacturing economies of scale, sales of
the Company's products will result in further losses and adversely affect
the Company's results of operations and financial condition. The Company
believes that it needs to complete the development and obtain approval for
the four electrolyte disc in order to make a significant impact in the
human medical market. The Company is currently preparing a submission to
the FDA for potassium and CO2. Sodium is currently in clinical trials and
chloride is in research and development. There is no assurance that the
products will be successfully developed or that the FDA will approve the
marketing application. The Company believes that period to period
comparisons of its results of operations are not necessarily meaningful.
There has been little or no impact on the Company's business due to
changing prices.
The Company's periodic operating results have in the past varied and in
the future may vary significantly depending on, but not limited to, a
number of factors, including the level of competition; the size and timing
of sales orders; market acceptance of current and new products; new
product announcements by the Company or its competitors; changes in
pricing by the Company or its competitors; the ability of the Company to
develop, introduce and market new products on a timely basis; component
costs and supply constraints; manufacturing capacities and ability to
scale up production; the mix of product sales between the analyzers and
the reagent discs; mix in sales channels; levels of expenditure on
research and development; changes in Company strategy; personnel changes;
regulatory changes; and general economic trends.
The Company continues to explore the application of its proprietary
technology used to produce the dry reagents used in the reagent discs,
called the Orbos Discrete Lyophilization Process, to other companies'
products. This process allows the production of an accurate, precise
amount of active chemical ingredients in the form of a soluble bead. The
Company believes that the Orbos process has broad applications in products
where delivery of active ingredients in a stable, pre-metered format is
desired. The Company has contracts with Becton Dickinson Immunocytometry
Systems and Pharmacia Biotech, Inc. to either supply products or license
Orbos technology. The Company is currently working with other companies
to determine potential suitability of the Orbos technology to these
companies' products. As resources permit, the Company will pursue other
development, licensing or manufacturing agreement opportunities for its
Orbos technology with other companies. There can be no assurances,
however, that other applications will be identified or that additional
agreements with the Company will result.
Results of Operations
Revenue
During fiscal 1999, the Company reported total revenues of approximately
$13,347,000, a $1,160,000 or 10% increase from fiscal 1998 total revenues
of approximately $12,187,000. During fiscal 1998, the Company reported
total revenues of approximately $12,187,000, a $4,893,000 or 67% increase
from fiscal 1997 total revenues of approximately $7,294,000. Revenue
increases in fiscal 1999 compared to fiscal 1998 were due to increased
unit sales of VetScan systems and reagent discs in the US and Europe.
Total revenue in the US for fiscal 1999 was approximately $11,179,000, a
$2,546,000 or 30% increase from fiscal 1998 of approximately $8,633,000.
Total revenue in Europe for fiscal 1999 was approximately $1,210,000, a
$404,000 or 50% increase from fiscal 1998 of approximately $806,000.
Total revenue in Asia and Latin America was approximately $958,000, a
$1,790,000 or 65% decline from fiscal 1998 of approximately $2,748,000.
The decline in Asia and Latin America was due to unfavorable currency and
economic conditions. The Company does not expect revenues from Asia and
Latin America to recover in fiscal year 2000, if ever. The Company
expects to shift sales and marketing resources from the Asian and Latin
American markets to the US and European markets.
Total revenue in the US for fiscal 1998 was approximately $8,633,000, a
$3,616,000 or 72% increase from fiscal 1997 of approximately $5,017,000.
Total revenue in Europe for fiscal 1998 was approximately $806,000, a
$111,000 or 16% increase from fiscal 1998 of approximately $695,000.
Total revenue in Asia and Latin America in fiscal 1998 was approximately
$2,748,000, a $1,166,000 or 74% increase from fiscal 1997 of approximately
$1,582,000.
In fiscal year 1999, one customer accounted for 39% of total revenue.
Three customers accounted for 29%, 19% and 13%, respectively, of total
revenues for the fiscal year ended March 31, 1998. Three customers
accounted for 34%, 20% and 10%, respectively, of total revenues for the
fiscal year ended March 31, 1997.
Cost of Product Sales
Cost of product sales during the year ended March 31, 1999 was
approximately $9,530,000 or 71% of total revenues, as compared to
approximately $10,461,000 or 86% of total revenues in fiscal year 1998.
In fiscal year 1997 cost of product sales was approximately $7,661,000 or
105% of total revenues. The decrease in cost of product sales as a
percent of revenue for the year ending March 31, 1999 as compared to the
same periods ending March 31,1998 and 1997 was primarily a function of the
increase in sales volume of reagent discs and lower unit costs resulting
from improved manufacturing processes. The decrease in cost of product
sales as a percentage of total revenues comparing fiscal 1998 to 1997 is
due to lower unit costs resulting from better standardized manufacturing
processes and economies of scale related to increased manufacturing
volume.
Research and Development Expense
The Company incurred research and development expenses of approximately
$2,627,000 in fiscal 1999 compared with $1,635,000 in fiscal 1998 and
approximately $1,315,000 in fiscal 1997. The $992,000 or 61% increase in
research and development expenses in fiscal 1999 compared to fiscal 1998
is the result of increased spending in the development of new test
methods, in particular the new Critical Care Profile disk the Company
launched in March 1999. The $320,000 or 24% increase in research and
development expenses in fiscal 1998 compared to fiscal 1997 is the result
of increased spending in the development of new test methods offset by
reallocation of a portion of the Company's development resources to
support product manufacturing activities such as manufacturing process
development.
Research and development activities accounted for 20% of product revenue
during fiscal 1999 as compared to 13% of product revenue during fiscal
1998 and 18% during fiscal 1997. The Company expects the dollar amount of
research and development expenses to increase in fiscal 2000 from fiscal
1999 but decline as a percentage of product revenue, as the Company
completes development and clinical trials of new test methods to expand
its test menus as well as other development projects. There can be no
assurance, however, that the Company will undertake such research and
development activities in future periods or, if it does, that such
activities will be successful.
Selling, General and Administrative Expense
Selling, general and administrative expenses were approximately $5,352,000
or 40% of total revenue in fiscal 1999 compared to $4,741,000 or 39% of
total revenues in fiscal 1998, and approximately $4,867,000 or 67% of
total revenues in fiscal 1997. The increase in selling, general and
administrative expenses for fiscal 1999 is primarily the result of
launching new products and an increase in headcount. The decrease in
selling, general and administrative expenses for fiscal 1998 as compared
to fiscal 1997 of $126,000 or 3% is primarily the result of certain non-
recurring costs associated with the launch of the Piccolo product line in
fiscal 1997 and the Company's cost containment efforts in fiscal 1998.
The Company expects the dollar amount of selling, general and
administrative expense to increase in fiscal 2000 from fiscal 1999 but
decline as a percent of product revenue, to meet staffing and support
demands associated with increased sales.
Net Interest and Other Income (Expense)
Net interest and other income (expense) totaled approximately ($48,000) in
fiscal 1999 compared to $297,000 for fiscal 1998, and $360,000 in fiscal
1997. The Company incurred interest expense of approximately $231,000 on
an equipment loan and a working capital loan during fiscal 1999, net of
capitalized interest of approximately $67,000 on the purchase and
installation of the new automated disk production line. The Company
incurred interest expense of approximately $73,000 on an equipment loan
during fiscal 1998. The Company incurred no interest expense during
fiscal 1997. The Company expects interest expense to increase in fiscal
2000 to meet working capital requirements associated with an increase in
sales.
Liquidity and Capital Resources
As of March 31, 1999, the Company had approximately $5,426,000 in cash and
cash equivalents. The Company expects to incur substantial additional
costs to support its future operations, including further
commercialization of its products and development of new test methods that
will allow the Company to further penetrate the human diagnostic market;
acquisition of capital equipment for the Company's manufacturing
facilities, which includes the ongoing costs related to continuing
development of its current and future products; development and
implementation of an automated manufacturing line to provide capacity for
commercial volumes; and additional pre-clinical testing and clinical
trials for its current and future products.
Net cash used in operating activities during fiscal 1999 was $4,891,000
compared to $2,111,000 in fiscal 1998 and $6,818,000 net cash used in
operating activities during fiscal 1997. The increase in net cash used in
operating activities in fiscal 1999 compared to fiscal 1998 was due to an
increase in trade receivables and inventories and a decrease in accounts
payable and accrued payroll and related expenses. The decrease in net
cash used in operating activities in fiscal 1998 compared to fiscal 1997
was due to a lower net loss, a decrease in inventories and increases in
trade and other receivables, accounts payable, and accrued payroll and
other accrued liabilities. Net inventories at March 31, 1997, compared to
March 31, 1998, were higher due to preparation for shipment against orders
from the Navy and VetSmart contracts beginning in April 1997. Increases
in trade and other receivables and accounts payable is due to increases in
receivable and payable levels associated with revenue growth.
Net cash provided by investing activities for fiscal 1999 was $3,278,000
as compared to net cash used of $870,000 for fiscal 1998 compared to
$1,842,000 net cash provided by investing activities for fiscal 1997. The
change from net cash used in fiscal 1998 to net cash provided in 1999 was
due primarily to maturities of available-for-sale securities in fiscal
1999. The change from net cash provided by investing activities in fiscal
1997 to net cash used in investing activities for fiscal 1998 was
primarily the result of an increase in purchases of short-term investments
offset by a decrease in the purchase of property and equipment.
Net cash provided by financing activities for fiscal 1999 was $5,338,000
as compared to $3,246,000 for fiscal 1998 and $4,821,000 for fiscal 1997.
Cash provided by financing activities for fiscal 1999 is primarily the
result of net proceeds from issuance of preferred stock of $3,581,000, net
proceeds of borrowings under a line-of-credit and net proceeds from
equipment financing of $1,741,000. Cash provided by financing activities
for fiscal 1998 is primarily the result of net proceeds from issuance of
common and preferred stock of $2,809,000 and net proceeds from equipment
financing of $600,000. Cash provided by financing activities for fiscal
1997 is primarily the result of net proceeds from issuance of common and
preferred stock of $4,847,000. Cash provided by financing activities
during fiscal 1997 was decreased by a $26,000 payment of a preferred stock
dividend.
The Company currently has $1,817,000 available under the line of credit.
This line of credit expires in August 1999 and there can be no assurance
that the Company will be able to extend the line of credit for another
year.
The Company anticipates that its existing capital resources, debt
financing and anticipated revenue from the sales of its products will be
adequate to satisfy its currently planned operating and financial
requirements through the next twelve months. The Company's future capital
requirements will largely depend upon the increased market acceptance of
its point-of-care blood chemistry analyzer products. However, the
Company's sales are not predictable due to its limited market experience
with its products. In the event the sales are significantly below the
anticipated level, the Company may need to obtain additional equity or
debt financing. There can be no assurance that any such financing will be
available on terms acceptable to the Company, if at all, and any
additional equity financing may be dilutive to shareholders, while debt
financing may involve restrictive covenants.
Year 2000 Preparedness
The Year 2000 issue is the result of computer programs which were written
with two digits rather than four to signify a year (i.e., the year 1999 is
denoted as "99" and not "1999"). Computer programs written using only
two digits may recognize the year 2000 as the year 1900. This could
result in a system failure or miscalculations causing disruption of
operations.
Readiness
The Company has identified the following areas where efforts are underway
to resolve year 2000 issues: (i) internal information technology (IT)
systems, (ii) the Piccolo and VetScan instruments the Company markets,
(iii) test equipment used in research and development, and (iv) third
party vendors and distributors who do business with the Company.
The Company has upgraded the internal IT systems to the vendor's
specifications for year 2000 compliance. The IT systems will be tested
during the second and third quarters of fiscal 2000 to determine that the
IT systems are working within the specifications. The Company's Piccolo
and VetScan systems were designed for year 2000 compliance. Tests have
been completed on the systems that confirm year 2000 compliance. The
Company intends to address year 2000 issues regarding its test equipment
used in research and development and third party vendors who do business
with the Company in the second and third quarters of fiscal 2000.
Costs
Aggregate costs for year 2000 efforts in fiscal 1999 and 2000 currently
are anticipated to be less than $250,000, including approximately $50,000
expensed in the year ended March 31, 1999 and for the year 2000
preparedness since inception for software and consulting services. The
remaining estimated costs for year 2000 issues are expected to be
consulting services, which will be expensed in the period they occur.
Risks
The Company is presently unable to assess the likelihood that the Company
will experience significant operational problems due to unresolved year
2000 problems of third parties that do business with the Company. There
can be no assurance that other entities will achieve timely year 2000
compliance; if they do not, year 2000 problems could have a material
adverse impact on the Company's operations.
Contingency Plans
The Company presently believes that the most reasonably likely worst-case
scenario that the Company might confront with respect to year 2000 issues
has to do with failure at one or more of the Company's distributors over
which the Company has no control. For example, if one or more of the
Company's distributors were unable to ship product to the end-user, the
Company would have to take orders and ship direct to the end-user
customers. There are policies and procedures in place for direct
shipments to the end-user as the Company currently ships product directly
to some national accounts. Should this worst-case scenario occur, the
Company would have to increase headcount in a number of operating areas,
such as customer service, shipping and accounting. There can be no
assurance that the Company can increase the operating capacity in a timely
manner and there can be no assurance that these additional operating
expenses would not have a material adverse financial impact on the
Company.
RISK FACTORS
The future events that we describe in these risk factors involve risks
and uncertainties. Among them are risks and uncertainties related to:
1. the market acceptance of our products;
2. our continuing development of our products;
3. obtaining required Food and Drug Administration clearance and
other federal, state and local government approvals;
4. the manufacture and distribution of our products on a commercial
scale;
5. general market conditions; and
6. competition.
When used in these risk factors, the words "anticipates," "believes,"
"expects," "intends," "plans," "future," 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.
WE ARE NOT PROFITABLE; WE MUST INCREASE SALES OF OUR PICCOLO AND VETSCAN
PRODUCTS TO BE PROFITABLE
As of March 31, 1999, we have not been profitable in any period since
our formation in 1989, and we had incurred cumulative net losses of
approximately $60.0 million. We expect our losses to continue through at
least fiscal year 2000. Our ability to become profitable will depend, in
part, on our ability to increase our sales volumes of our VetScan and
Piccolo products. Increasing our sales volume of our products will depend
upon our ability to:
1. continue to develop our products;
2. increase our sales and marketing activities;
3. increase our manufacturing activities; and
4. 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 achieve profitability.
WE ARE NOT ABLE TO PREDICT SALES IN FUTURE QUARTERS AND A NUMBER OF
FACTORS AFFECT OUR PERIODIC RESULTS
We are not able to accurately predict our sales in future quarters. In
any quarter, we derive a significant portion of our revenues from sales to
a limited number of 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 analyzers that we sold in prior
periods, we generally are unable to predict with much certainty sales of
our analyzers, as we typically sell our analyzers to new users.
Accordingly, our sales in any one quarter are not indicative of our sales
in any future period. In addition, we generally operate with 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. In
addition, we have historically experienced a decrease in our sales,
especially in Europe, in our second and third quarters. Accordingly, we
believe that period to period comparisons of our results of operations are
not necessarily meaningful.
Our periodic operating results have varied in the past. In the future,
we expect our periodic operating results to vary significantly depending
on, but not limited to, a number of factors, including:
1. the level of competition in the markets in which we compete;
2. the size and timing of sales orders that we receive from our
customers;
3. market acceptance of our current and future products;
4. new product announcements made by us or our competitors;
5. changes in our pricing structures or the pricing structures of our
competitors;
6. our ability to develop, introduce and market new products on a
timely basis;
7. the costs, and possible supply constraints, of the components that
we use to build our products;
8. our manufacturing capacities and our ability to increase the scale
of these capacities;
9. the mix of product sales between our analyzer and our reagent disc
products;
10. the different sales channels available to us;
11. the limited size of our sales force;
12. the amount we spend on research and development;
13. changes in our strategy;
14. changes in our key personnel;
15. changes in regulatory matters; and
16. general economic trends in the economy.
WE MAY NEED ADDITIONAL FUNDING IN THE FUTURE AND THESE FUNDS MAY NOT BE
AVAILABLE TO US
We believe that our existing capital resources, bank and equipment
financing loans and anticipated revenue from the sales of our products
will be adequate to satisfy our currently planned operating and financial
requirements through fiscal year 2000, although no assurances can be
given. We will need additional funds, however, if we do not achieve
anticipated revenues, from the sale of our Piccolo and VetScan products.
In addition, we expect to incur substantial additional costs to support
our future operations, including:
1. 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;
2. our need to acquire capital equipment for our manufacturing
facilities, which includes the ongoing development and
implementation of automated manufacturing lines to provide
capacity for the production of commercial volumes of our
products;
3. research and design costs related to the continuing development of
our current and future products; and
4. 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 the Piccolo and VetScan systems are insufficient to fund our
activities, we will have to raise additional funds from the issuance of
public or private securities. 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 dilute then-existing shareholders if we raise
additional funds by issuing new equity securities. Alternatively, 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 HAVE LIMITED MARKETING AND DISTRIBUTION EXPERIENCE AND FEW RESOURCES TO
DEVOTE TO MARKETING AND DISTRIBUTION; OUR INTERNATIONAL SALES EFFORTS ARE
CHARACTERIZED BY A HIGH DEGREE OF DISTRIBUTOR TURNOVER
We have been marketing our VetScan System products for less than four
years in the veterinary diagnostic market, and we have only recently begun
marketing our Piccolo System products in the human diagnostic market.
Accordingly, we have very limited marketing and distribution experience,
especially in the human diagnostic market. Further, we have limited
resources to devote to marketing and distribution. In particular, we have
only eleven full-time sales personnel involved in our sales and marketing
activities. While these individuals work with our distribution partners
both domestically and internationally to extend our market reach, the
primary selling activities are often done by these individuals. If we are
to increase our sales, we will need to increase the size of our sales
force. However, we may be constrained from growing our sales force by our
financial resources and the availability of qualified sales personnel.
This means that we may not be able to build an effective sales and
marketing organization, or we may not be able to establish an extensive
and effective distribution network. We cannot assure you that:
1. we will be able to build a successful sales and marketing
organization;
2. we will be able to establish effective distribution arrangements;
3. any distribution arrangements that we are able to establish will
be successful in marketing our products; or
4. the costs associated with marketing and distributing our products
will not be excessive.
Although we have established some international distributors, we have
limited experience and resources in marketing and distributing our
products in international markets. Moreover, we have experienced a high
degree of turnover among our international distributors. This high degree
of turnover makes it difficult for us to establish a steady distribution
network overseas. Consequently, we may not be successful in marketing our
Piccolo System and VetScan System products internationally.
WE NEED TO DEVELOP 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 systems. Currently, we have primarily developed
reagent discs suitable for the veterinary diagnostic market. In order to
be competitive in the more lucrative human diagnostic market, we need to
develop additional reagent discs that include certain standard tests for
which the medical community receives reimbursements from third party
payors such as HMOs and Medicare. The tests that we need to develop to
compete in the human diagnostic market include the standard electrolyte
tests -- potassium, sodium, chloride and carbon dioxide -- and lipid
tests. Currently, we are in clinical testing for the potassium, sodium and
carbon dioxide tests, but we are still developing the chloride and lipid
tests. We may not be able to develop these new reagent discs on a timely
and cost effective basis. Also, we may not be able to obtain regulatory
clearance for these new reagent discs. Further, even if we gain regulatory
approval, we may not be able to successfully manufacture or market the
reagent discs. Our failure to meet one or more of these challenges will
materially adversely effect our operating results and financial condition.
WE RELY ON DISTRIBUTORS TO SELL OUR PRODUCTS; WE RELY ON SOLE DISTRIBUTOR
ARRANGEMENTS IN A NUMBER OF COUNTRIES
We distribute our products primarily through 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 have a
number of distributors in the United States who distribute our VetScan
products, although one of these distributors has accounted for a majority
of our sales in the United States to date. We believe that our future
growth depends on the efforts of these distributors. If one of our
distributors were to stop selling our products, we may not be able to
replace it. Further, many of our distributors may carry our competitors'
products, and may promote our competitors' products over our own products.
Finally, we do not have at this time distribution partners in the United
States who distribute our products for the human diagnostic market.
We currently have exclusive distribution agreements in the following
countries:
1. Argentina;
2. Australia;
3. Austria;
4. France;
5. Germany;
6. Greece;
7. Hong Kong;
8. Italy;
9. Japan;
10. Korea;
11. Mexico;
12. New Zealand;
13. Norway;
14. Portugal;
15. Spain;
16. Switzerland;
17. Turkey; and
18. the United Kingdom.
Our distributor in each of these countries is responsible for obtaining
the necessary approvals to sell our products. These distributors may not
be successful in obtaining proper approvals for our products in their
respective countries, and they may not be successful in marketing our
products. We plan to enter into additional distribution agreements to
expand our international distribution base and solidify our international
presence. However, we may not be successful in entering into additional
distributor agreements. Our distributors may, and have in the past,
terminate their relationship with us at any time. If that happens, we may
not be able to negotiate acceptable alternative distribution
relationships.
OUR MANUFACTURING CAPACITY IS LIMITED AND WE MAY NOT BE ABLE TO EXPAND IT
We have limited manufacturing capacity. Because our products are highly
complex, it is difficult for us to manufacture them through an assembly
line process. While we believe that the autoline assembly system that we
are installing will be adequate for our current needs, we may not be able
to increase the scale of the autoline system to handle either (1) larger
volume production or (2) the production of new or varied products.
Further, all aspects of such a scale-up must comply with applicable
governmental regulations. We may encounter significant delays or incur
unforeseen costs in expanding our manufacturing capacity because of the
complexities described above. In addition, we will need to continue to
develop the infrastructure that we require to effectively manage our
manufacturing operations. The process of manufacturing sufficient
quantities of our products can be expensive, time-consuming and complex.
We may not be able to successfully add technical and non-technical
personnel that we need to meet the additional staffing requirements that
any increase in production would require. If we are unable to develop such
increased manufacturing capabilities and infrastructure with appropriate
quality, at acceptable costs and on a timely basis, our business or
financial condition could be materially adversely affected.
WE DEPEND ON SOLE SUPPLIERS FOR SEVERAL KEY COMPONENTS TO OUR PRODUCTS
We use several components that are currently available from limited or
sole sources. A single injection molding manufacturer currently makes 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 one manufacturer to manufacture
the molded plastic discs. Moreover, we currently depend on a single vendor
for some of the chemicals that we use to produce the dry reagent chemistry
beads. Further, our analyzer products use several technologically advanced
components that are each available only from single vendors. 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 one of these suppliers or a disruption
in our manufacturing arrangements would materially adversely affect our
business and financial condition.
COMPETITION FROM LARGER, BETTER ESTABLISHED ENTITIES SUCH AS HOSPITALS AND
COMMERCIAL LABORATORIES
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:
1. commercial clinical laboratories;
2. hospitals' clinical laboratories; and
3. manufacturers of bench top multi-test blood analyzers and other
testing systems that health care providers can use "on-site."
We may not be able to compete with these organizations or their
products or with future organizations or future products.
Historically, hospitals and commercial laboratories perform the most
human medical testing, and commercial laboratories perform the most
veterinary medical testing. Our products compete with the commercial and
hospital laboratories with respect to:
1. range of tests offered;
2. the immediacy of results;
3. cost effectiveness;
4. ease of use; and
5. 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 range of tests, we believe that our products provide a sufficient
breadth of test menus to compete successfully with clinical laboratories,
in certain limited markets, on the basis of the other four factors.
However, we cannot assure you that we will continue to be able to compete
effectively on (1) cost effectiveness, (2) ease of use, (3) immediacy of
results or (4) 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.
Most of our competitors have significantly 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 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 Health Care Financing Administration sets 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 will 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
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 Food and Drug Administration. The FDA classified our initial Piccolo
products as "Class II" devices. Class II devices 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) to 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
months to over a year, and the FDA must issue a written order finding
"substantial equivalence" before a company can market a medical device. To
date, we have received market clearance from the FDA for our Piccolo
System and 16 reagent tests that we have on four reagent discs. We are
currently developing additional tests that the FDA will have to clear
through the 510(k) notification procedures. These new test products are
crucial for our success in the human diagnostic market. If we do not
receive 510(k) clearance for a particular product, we will not be able to
sell that product in the United States.
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 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 audits. In addition, various state regulatory agencies may
regulate the manufacture of our products. For example, we have obtained a
license from the State of California to manufacture our products. In
September 1996, the FDA granted our manufacturing facility "in compliance"
status, based on the regulations for Good Manufacturing Practices for
medical devices. We are scheduled for inspection by the FDA and the State
of California on a routine basis, typically once every 24 months. We
cannot assure you that we will successfully pass a 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 affected by the Clinical Laboratory
Improvement Amendments of 1988. The Clinical Laboratory Improvement
Amendments are intended to insure the quality and reliability of all
medical testing in the United States regardless of where tests are
performed. The current Clinical Laboratory Improvement Amendments divide
laboratory tests into three categories: "simple," "moderately complex" and
"highly complex." Tests performed using the Piccolo system 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 our Piccolo products to customers who meet the standards of a
laboratory. To receive "laboratory" certification, a testing facility must
be certified by the Health Care Financing Administration. After the
testing facility receives a "laboratory" certification, it must then meet
the Clinical Laboratory Improvement Amendments regulations. Because we can
only sell our Piccolo products to testing facilities that are certified
"laboratories," the market for our products is correspondingly
constrained. In an effort to expand the market for our Piccolo products,
we have filed an application to have our Piccolo products exempted from
the Clinical Laboratory Improvement Amendments. If our exemption request
is denied, we will continue to be subject to the Clinical Laboratory
Improvement Amendments. Consequently, the market for our Piccolo products
will be confined to those testing facilities that are certified as
"laboratories" and our growth will be limited accordingly.
We are subject to various federal, state and local regulations.
Federal and state regulations regarding the manufacture and sale of
health care products and diagnostic devices may change. We cannot predict
what impact, if any, such changes would have on our business. In addition,
as we continue to sell in foreign markets, we may have to obtain
additional governmental clearances in those markets. 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 Food and Drug Administration and of the State of
California, including Quality System Regulations, current regulations
depend on administrative interpretations. Future interpretations made by
the Food and Drug Administration, the Health Care Finance Administration
or other regulatory bodies may adversely affect our business.
WE RELY ON PATENTS AND OTHER PROPRIETARY INFORMATION, THE LOSS OF ANY OF
WHICH WOULD NEGATIVELY AFFECT OUR BUSINESS
As of March 31, 1999, we have filed 25 patent applications in the
United States and have been issued 18 patents. 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 Abaxis, 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 United States
Patent and Trademark Office maintains all patent applications in secrecy
until it issues the patents and (2) publications of discoveries in the
scientific or patent literature tend to lag behind actual discoveries by
several months.
In addition, we may need to license or circumvent certain patents to
produce our products. Moreover, we may have to participate in interference
proceedings, which are proceeding in front of the U.S. Patent and
Trademark Office, to determine who will be issued a patent. These
proceedings could be costly and could be decided against us.
Although we have not had infringement claims filed against us to date,
we may in the future be sued by third parties who claim that our products
violate their intellectual property rights. We may not be successful in
defending ourselves against such claims. Even if we are successful, the
defense of such claims would be expensive and would divert management's
focus away from running our business. Consequently, any infringement
claim, even if without merit, could adversely affect our business.
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. Any of these events would negatively impact our
business.
WE DEPEND ON KEY MEMBERS OF OUR MANAGEMENT AND SCIENTIFIC STAFF, AND WE
MUST RETAIN AND RECRUIT QUALIFIED INDIVIDUALS IF WE ARE TO BE COMPETITIVE
We are highly dependent on the principal members of our management and
scientific staff. The loss of any of these key personnel might impede the
achievement of our business objectives. We currently do not maintain key
man life insurance on any of our employees. Furthermore, in order to be
successful, we must recruit and retain additional qualified marketing,
sales and manufacturing personnel. Although we believe that we will be
successful both in retaining our current management and scientific staff
and attracting and retaining skilled and experienced marketing, sales and
manufacturing personnel, we may not be able to employ such personnel on
acceptable terms because numerous medical products and other high
technology companies compete for the services of these qualified
individuals.
WE ARE SUBJECT TO PRODUCT LIABILITY CLAIMS AND WE MAY NOT HAVE SUFFICIENT
PRODUCT LIABILITY INSURANCE
Our business exposes us to potential product liability risks which are
inherent in the testing, manufacturing and marketing of human medical
products. We currently maintain product liability insurance. We believe
that this insurance is adequate for our needs, taking into account the
risks involved and cost of coverage. However, our product liability
insurance may be insufficient to cover potential liabilities. Furthermore,
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 product liability claim or recall could materially adversely
affect our business or our financial condition.
WE MUST COMPLY WITH STRICT AND COSTLY ENVIRONMENTAL REGULATIONS
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. Although we
believe that we have complied with these 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.
OUR STOCK PRICE IS HIGHLY VOLATILE AND INVESTING IN OUR STOCK INVOLVES A
HIGH DEGREE OF RISK
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. The following factors may
affect the market price of our common stock:
1. fluctuation in the Company's operating results;
2. announcements of technological innovations or new commercial
products by us or our competitors;
3. changes in governmental regulation;
4. prospects and proposals for health care reform;
5. governmental or third party payors' controls on prices that our
customers may pay for our products;
6. developments or disputes concerning patent or our other
proprietary rights;
7. public concern as to the safety of our devices or similar devices
developed by our competitors; and
8. general market conditions.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks with respect to interest
rates on the Company's accounts receivable line of credit and short-term
investments. The Company does not use derivative financial instruments for
speculative or trading purposes.
The accounts receivable line of credit monthly interest expense is based
on 2.5% over the prime rate. An increase in the prime rate would expose
the Company to higher interest expenses. The balance on the line of
credit was $683,000 as of March 31, 1999. For each 1% increase in the
prime rate the Company would pay approximately $1,700 of additional
interest expense each quarter.
The long term debt monthly interest expense is based on an interest rate
of 16%. An increase in interest rates would have exposed the Company to
higher interest expenses. The balance on the long term debt was
$1,495,000 as of March 31, 1999. For each 1% increase in interest rates
the Company would have paid approximately $3,700 of additional interest
expense each quarter.
The Company at times has investments in marketable debt securities that
are subject to interest rate risks. These investments are classified as
"available for sale" securities. The Company does not attempt to reduce
or eliminate its market exposure on these investments. Although changes in
interest rates may affect the fair market value of "available for sale"
securities and cause unrealized gains or losses, such gains or losses
would not be realized unless the investments were sold.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Independent Auditors' Report
Balance Sheets at March 31, 1999 and 1998
Statements of Operations for the Years Ended March 31, 1999, 1998 and 1997
Statements of Shareholders' Equity for the Years Ended March 31, 1999,
1998 and 1997
Statements of Cash Flows for the Years Ended March 31, 1999, 1998 and 1997
Notes to Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Abaxis, Inc.:
We have audited the accompanying balance sheets of Abaxis, Inc. (the
"Company") as of March 31, 1999 and 1998 and the related statements of
operations, shareholders' equity, and cash flows for each of the three
years in the period ended March 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of March 31, 1999 and
1998 and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 1999 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Jose, California
April 23, 1999
ABAXIS, INC
BALANCE SHEETS
March 31,
-------------------------
1999 1998
------------ ------------
Assets
Current assets:
Cash and cash equivalents ....................... $5,426,000 $1,701,000
Short-term investments .......................... -- 4,196,000
Trade and other receivables (net of allowance
for doubtful accounts of $174,000 in 1999
and $95,000 in 1998) .......................... 2,731,000 1,930,000
Interest receivable ............................. -- 130,000
Inventories ..................................... 1,933,000 1,531,000
Prepaid expenses ................................ 233,000 150,000
------------ ------------
Total current assets ................... 10,323,000 9,638,000
Property and equipment - net ...................... 2,518,000 2,309,000
Deposits and other assets ......................... 73,000 85,000
------------ ------------
Total assets ...................................... $12,914,000 $12,032,000
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Borrowings under line of credit.................. $683,000 $ --
Accounts payable ................................ 1,087,000 1,510,000
Dividend payable ................................ 88,000 --
Accrued payroll and related expenses ............ 573,000 769,000
Other accrued liabilities ....................... 410,000 392,000
Warranty reserve ................................ 737,000 707,000
Deferred rent ................................... 53,000 68,000
Deferred revenue ................................ 258,000 266,000
Current portion of long-term debt ............... 606,000 174,000
------------ ------------
Total current liabilities .............. 4,495,000 3,886,000
------------ ------------
Long-term debt .................................... 889,000 263,000
------------ ------------
Commitments and contingencies (Note 6)
Shareholders' equity:
Convertible preferred stock, no par value:
authorized shares - 5,000,000; issued and
outstanding shares - 4,000 in 1999 and
2,623 in 1998 ................................. 3,581,000 3,179,000
Common stock, no par value: authorized shares -
35,000,000; issued and outstanding shares -
12,957,580 in 1999 and 12,187,620 in 1998 ..... 63,944,000 60,362,000
Deferred compensation ........................... (28,000) --
Accumulated deficit ............................. (59,967,000) (55,658,000)
------------ ------------
Total shareholders' equity ............. 7,530,000 7,883,000
------------ ------------
Total liabilities and shareholders' equity ........ $12,914,000 $12,032,000
============ ============
See notes to financial statements
ABAXIS, INC.
STATEMENTS OF OPERATIONS
Years Ended March 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
Product sales, net .................. $13,191,000 $12,052,000 7,154,000
Development and licensing revenue.... 156,000 135,000 140,000
------------ ------------ ------------
Total product revenues .............. 13,347,000 12,187,000 7,294,000
------------ ------------ ------------
Costs and operating expenses:
Cost of product revenues .......... 9,530,000 10,461,000 7,661,000
Research and development .......... 2,627,000 1,635,000 1,315,000
Selling, general and
administrative .................. 5,352,000 4,741,000 4,867,000
------------ ------------ ------------
Total costs and operating expenses .. 17,509,000 16,837,000 13,843,000
------------ ------------ ------------
Loss from operations ................ (4,162,000) (4,650,000) (6,549,000)
Interest and other income ........... 183,000 370,000 360,000
Interest expense .................... (231,000) (73,000) --
------------ ------------ ------------
Net loss ............................ ($4,210,000) ($4,353,000) ($6,189,000)
============ ============ ============
Basic and diluted loss per
share (a) ......................... ($0.31) ($0.44) ($0.72)
============ ============ ============
Common stock used in computing
basic and diluted per
share amounts .................... 13,794,450 11,920,202 10,502,646
============ ============ ============
(a) Loss attributable to common shareholders used in computation of loss per
share for the years ended March 31, 1999, 1998 and 1997 was $(4,309,000),
$(5,233,000) and $(7,595,000), respectively (Note 1).
See notes to financial statements.
ABAXIS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Convertible Preferred
Stock Common Stock Deferred Total
--------------------- ------------------------ Compensa- Accumulated Shareholders'
Shares Amount Shares Amount tion Deficit Equity
--------- ----------- ----------- ------------ --------- ------------- ------------
Balances at April 1, 1996 ............ -- $ -- 9,857,628 $53,556,000 -- ($42,830,000) $10,726,000
Stock option exercises ............... -- -- 20,925 67,000 -- -- 67,000
Issuance of Series A preferred
stock in a private placement,
net of issuance costs
of $220,000 ........................ 500,000 2,738,000 -- 2,042,000 -- -- 4,780,000
Preferred dividends paid ............. -- -- -- -- -- (26,000) (26,000)
Accretion of preferred stock ......... -- 1,380,000 -- -- -- (1,380,000) --
Conversion of Series A preferred
stock into common stock ............ (500,000) (4,118,000) 2,007,600 4,118,000 -- -- --
Net loss ............................. -- -- -- -- -- (6,189,000) (6,189,000)
--------- ----------- ----------- ------------ --------- ------------- ------------
Balances at March 31, 1997 ........... -- -- 11,886,153 59,783,000 -- (50,425,000) 9,358,000
Stock option exercises ............... -- -- 31,650 41,000 -- -- 41,000
Issuance of common stock for services -- -- 24,944 69,000 -- -- 69,000
Issuance of Series B preferred
stock in a private placement,
net of issuance costs
of $232,000 ........................ 3,000 2,018,000 -- 750,000 -- -- 2,768,000
Accretion of preferred stock ......... -- 880,000 -- -- -- (880,000) --
Conversion of Series B preferred
stock into common stock ............ (377) (469,000) 244,873 469,000 -- -- --
Net loss ............................. -- -- -- -- -- (4,353,000) (4,353,000)
--------- ----------- ----------- ------------ --------- ------------- ------------
Balances at March 31, 1998 ........... 2,623 2,429,000 12,187,620 61,112,000 -- (55,658,000) 7,883,000
Stock option exercises ............... -- -- 33,908 16,000 -- -- 16,000
Issuance of common stock for services -- -- 77,823 159,000 -- -- 159,000
Issuance of Series C preferred
stock in a private placement,
net of issuance costs
of $419,000 ........................ 4,000 3,581,000 -- -- -- -- 3,581,000
Preferred dividend payable ........... -- -- -- -- -- (88,000) (88,000)
Accretion of preferred stock ......... -- 11,000 -- -- -- (11,000) --
Conversion of Series B preferred
stock into common stock ............ (2,623) (2,440,000) 1,658,629 2,440,000 -- -- --
Options and warrants granted
to consultants ..................... -- -- -- 217,000 (217,000) -- --
Amortization of deferred compensation. -- -- -- -- 189,000 -- 189,000
Net loss ............................. -- -- -- -- (4,210,000) (4,210,000)
--------- ----------- ----------- ------------ --------- ------------- ------------
Balances at March 31, 1999 ........... 4,000 $3,581,000 13,957,980 $63,944,000 ($28,000) ($59,967,000) $7,530,000
========= =========== =========== ============ ========= ============= ============
See notes to financial statements
ABAXIS, INC.
STATEMENTS OF CASH FLOWS
Years Ended March 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
Operating activities:
Net loss .............................. ($4,210,000) ($4,353,000) ($6,189,000)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization ....... 709,000 703,000 934,000
Common stock issued for services .... 159,000 69,000 --
Amortization of deferred compensation 189,000 -- --
Changes in assets and liabilities:
Trade and other receivables ....... (801,000) (240,000) (1,000,000)
Interest receivable ............... 130,000 (50,000) (39,000)
Inventories ....................... (402,000) 687,000 (762,000)
Prepaid expenses .................. (83,000) (15,000) (43,000)
Deposits and other assets ......... 12,000 (5,000) (18,000)
Accounts payable .................. (423,000) 815,000 (322,000)
Accrued payroll and related
expenses ........................ (196,000) 165,000 187,000
Warranty reserve and other
accrued liabilities ......... 33,000 94,000 505,000
Deferred revenue .................. (8,000) 19,000 104,000
Customer deposits ................. -- -- (175,000)
------------ ------------ ------------
Net cash used in operating
activities .................... (4,891,000) (2,111,000) (6,818,000)
------------ ------------ ------------
Investing activities:
Purchase of available-for-sale
securities .......................... (1,474,000) (10,328,000) (27,370,000)
Maturities of available-for-sale
securities .......................... 5,670,000 9,526,000 30,172,000
Sales of available-for-sale
securities .......................... -- 491,000 --
Purchase of property and equipment .... (918,000) (559,000) (960,000)
------------ ------------ ------------
Net cash provided by (used in)
investing activities .......... 3,278,000 (870,000) 1,842,000
------------ ------------ ------------
Financing activities:
Proceeds from equipment financing ..... 1,472,000 600,000 --
Repayment of equipment financing ...... (414,000) (163,000) --
Net borrowings under line-of-credit
agreement............................ 683,000 -- --
Proceeds from issuance of common
and preferred stock ................. 3,581,000 2,809,000 4,847,000
Exercise of stock options.............. 16,000 -- --
Preferred dividends paid .............. -- -- (26,000)
------------ ------------ ------------
Net cash provided by financing
activities ................... 5,338,000 3,246,000 4,821,000
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents ...................... 3,725,000 265,000 (155,000)
Cash and cash equivalents at
beginning of year ..................... 1,701,000 1,436,000 1,591,000
------------ ------------ ------------
Cash and cash equivalents at end of
year .................................. $5,426,000 $1,701,000 $1,436,000
============ ============ ============
Supplemental disclosures of cash
flow information -
Cash paid for interest ................ $298,000 $73,000 $ --
============ ============ ============
Cash paid for taxes ................... $28,000 $ -- $ --
============ ============ ============
Noncash financing activity -
Conversion of preferred stock into
common stock ........................ $2,440,000 $469,000 $4,118,000
============ ============ ============
Accretion of preferred
stock (Note 8) ...................... $11,000 $880,000 $1,380,000
============ ============ ============
Accrued dividends on preferred stock... $88,000 $ -- $ --
============ ============ ============
See notes to financial statements.
ABAXIS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
1. Organization and Summary of Significant Accounting Policies
Abaxis, Inc. (the Company) was incorporated in California in 1989 and
develops, manufactures and markets portable blood analysis systems.
Future Capital Requirements - The Company expects to incur substantial
costs in fiscal 2000 related to the continued development and
marketing of its products. In addition, future capital requirements
will include amounts necessary to fund accounts receivable,
inventories, and capital equipment acquisitions. The Company believes
that its existing capital resources, available debt facilities and
anticipated revenue from VetScan and Piccolo product sales will be
adequate to satisfy its currently planned financial requirements
through fiscal 2000. In the event revenue is significantly below the
anticipated level or there are other unexpected adverse developments
affecting cash flow, the Company will need to raise additional funds
from private or public financing if it is to sustain its currently
planned level of operating expenses during fiscal 2000, or in the
event that the Company is unsuccessful in raising sufficient funding,
the Company will have to significantly reduce its operating expenses.
Certain Significant Risks and Uncertainties - The preparation of
financial statements in accordance with generally accepted accounting
principles 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 the allowance
for doubtful accounts receivable, the net realizable value of
inventory, certain accruals and warranty reserves. Actual results
could differ from those estimates.
The Company operates in a dynamic industry, and accordingly, can be
affected by a variety of factors. For example, management of the
Company believes that changes in any of the following areas could have
a negative effect on the Company in terms of its future financial
position and results of operations: ability to obtain additional
financing; regulatory changes; uncertainty regarding health care
reforms; fundamental changes in the technology underlying blood
testing; the ability to develop new products that are accepted in the
marketplace; competition, including, but not limited to pricing and
products or product features and services; litigation or other claims
against the Company; the adequate and timely sourcing of inventories;
and the hiring, training and retention of key employees.
Cash Equivalents and Investments - Cash equivalents consist primarily
of money market accounts and short-term financial instruments with
original maturities of less than 90 days from the date of acquisition
that are readily convertible into cash.
Short-term investments have maturities of less than one year from the
balance sheet date. Short-term investments consist primarily of
marketable debt securities that are classified as "available-for-
sale" and are carried at amortized cost, which approximates quoted
market prices. Unrealized gains and losses, net of tax, are recorded
in shareholders' equity, if material. Realized gains and losses are
computed based on the specific identification method.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to a concentration of credit risk consist
primarily of cash, cash equivalents, short -term investments, and
accounts receivable. Cash and cash equivalents consist primarily of
interest-bearing accounts and are regularly monitored by management.
The Company has placed the majority of its short-term investments in
high-credit, high-quality corporate notes and commercial paper.
The Company sells its products primarily to organizations in the
United States, Japan and Europe. The Company monitors the credit
status of its customers on an ongoing basis and generally does not
require its customers to provide collateral for purchases on credit.
The Company maintains allowances for potential bad debt losses. At
March 31, 1999, one customer accounted for 32% of accounts receivable,
respectively. At March 31, 1998, two customers accounted for 39% and
20% of accounts receivable, respectively.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization are generally provided using the
straight-line method over the shorter of the estimated useful lives of
the assets (two to five years). Leasehold improvements are amortized
over the shorter of the estimated useful lives or the related lease
term. During 1999 the Company capitalized $67,000 of interest on
constructed assets.
Valuation of Long-lived Assets - The carrying value of the Company's
long-lived assets is reviewed for impairment whenever events or
changes in circumstances indicate that an asset may not be
recoverable. The Company looks to current and future profitability,
as well as current and future undiscounted cash flows, excluding
financing costs, as primary indicators of recoverability. If
impairment is determined to exist, any related impairment loss is
calculated based on fair value.
Revenue Recognition - Revenues are recognized upon shipment. Rights
of return are generally not provided and a provision for the estimated
future cost of warranty is made at the time revenue is recognized.
Revenues under extended warranty arrangements are recognized ratably
over the related warranty period.
Fair Value of Financial Instruments - The fair value of long-term debt
approximates the carrying amount based on the current rate offered to
the Company for debt of the same remaining maturities.
Income Taxes - The Company accounts for income taxes using an asset
and liability approach to recording deferred taxes.
Stock-Based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25). Stock-based awards to consultants
and other non-employees are accounted for based upon estimated fair
values in accordance with Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-based Compensation."
Per Share Information - Basic loss per share is computed based upon
the weighted average number of shares of common stock outstanding and
the net loss attributable to common shareholders. Diluted loss per
share is computed by dividing net income (loss) by the weighted
average number of common shares that would have been outstanding
during the period assuming the issuance of common shares for all
dilutive potential common shares outstanding. As a result of
operating losses, there is no difference between the basic and diluted
calculations of loss per share. Shares used in the calculation of
diluted loss per share during 1999, 1998 and 1997 exclude 1,805,000,
1,906,000, 107,000, respectively, common equivalent shares related to
options, warrants and preferred stock. Loss attributable to common
shareholders includes accrued dividends and the accretion relating to
the calculated imbedded yield representing the discount on the assumed
potential conversion of the preferred stock issued by the Company (See
Note 8).
The reconciliation of net loss to net loss attributable to common
shareholders is as follows:
Years Ended March 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
Net loss ............................. ($4,210,000) ($4,353,000) ($6,189,000)
Cumulative preferred stock dividends . (88,000) -- (26,000)
Value assigned to accretion of
preferred stock (Note 8) ........... (11,000) (880,000) (1,380,000)
------------ ------------ ------------
($4,309,000) ($5,233,000) ($7,595,000)
============ ============ ============
Comprehensive Income (Loss) - In the first quarter of fiscal year
1999, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," which requires an
enterprise to report, by major components and as a single total, the
change in its net assets during the period from nonowner sources.
Comprehensive income (loss) was the same as net income (loss) for the
years ended March 31, 1999, 1998 and 1997.
New Accounting Pronouncements - For the year ended March 31, 1999, the
Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information."
See Note 10 for the related disclosure for this standard.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), which
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS No. 133 requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. Adoption of this statement will not impact
the Company's financial position, results of operations or cash flows.
The Company is currently required to adopt this statement in the first
quarter of fiscal year 2001.
2. Inventories
Inventories at March 31 consist of the following:
1999 1998
------------ ------------
Raw materials .............................. $910,000 $909,000
Work in process ............................ 574,000 261,000
Finished goods ............................. 449,000 361,000
------------ ------------
$1,933,000 $1,531,000
============ ============
3. Property and Equipment
Property and equipment at March 31 consist of the following:
1999 1998
------------ ------------
Machinery and equipment .................... $4,137,000 $3,867,000
Furniture and fixtures ..................... 929,000 922,000
Computers and computer equipment ........... 961,000 879,000
Leasehold improvements ..................... 320,000 312,000
Construction in progress ................... 1,751,000 1,224,000
------------ ------------
8,098,000 7,204,000
Accumulated depreciation and amortization .. (5,580,000) (4,895,000)
------------ ------------
Property and equipment, net ................ $2,518,000 $2,309,000
============ ============
4. Line of Credit
The Company maintains a $2,500,000 line of credit, which is
collateralized by the Company's accounts receivable, bears interest at
the prime rate (7.75% at March 31, 1999) plus 2.5%, and expires in
August, 1999. At March 31, 1999 the amount outstanding under the line
of credit was $683,000. In connection with this line of credit
agreement, warrants to purchase 42,106 shares of the Company's common
stock at an exercise price of $1.78 per share were issued to the
lender. As of March 31, 1999, the warrants have not been exercised
and will expire on September 8, 2003.
5. Long-term Debt
At March 31, 1999, the Company had $1,495,000 outstanding under an
equipment financing agreement, which is collateralized by the
Company's equipment and bears a 16% interest rate. Payments are due
in monthly installments of principal and interest totaling
approximately $66,000, with balloon payments of $60,000 due on
April 1, 2000 and $147,000 due on September 1, 2001. In connection
with this equipment financing agreement, warrants to purchase 106,667
shares of the Company's common stock at an exercise price of $3.00 per
share were issued to the lender. As of March 31, 1999, the warrants
have not been exercised and will expire on April 30, 2004.
Future payment requirements are as follows:
Fiscal Year Ending March 31,
2000 .................................. $606,000
2001 .................................. 527,000
2002 .................................. 362,000
------------
$1,495,000
============
6. Commitments and Contingencies
Leases - The Company leases its principal facility and certain
computer and office equipment under noncancelable operating lease
agreements, which expire on various dates through February 2002.
Monthly rental payments increase based on a predetermined schedule.
The Company recognizes rent expense on a straight-line basis over the
life of the lease.
The future minimum payments under the leases at March 31, 1999 are as
follows:
Fiscal Year Ending March 31,
2000 .................................. $742,000
2001 .................................. 271,000
2002 .................................. 11,000
------------
$1,024,000
============
Rent expense under operating leases was approximately $691,000,
$652,000 and $390,000 for the years ended March 31, 1999, 1998 and
1997, respectively.
Litigation - The Company is involved in litigation in the normal
course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the
Company, the Company's financial position or results of operations.
7. Retirement Plan
The Company has a tax deferred savings plan for the benefit of
qualified employees. The plan is designed to provide employees with
an accumulation of funds at retirement. Qualified employees may elect
to have salary reduction contributions made to the plan on a quarterly
basis. The Company may make annual contributions to the plan at the
discretion of the Board of Directors. The Company has made no
contributions since the inception of the plan.
8. Shareholders' Equity
Convertible Preferred Stock - In September 1996, the Company sold
500,000 shares of Series A convertible preferred stock in a private
placement, resulting in net proceeds of $4,780,000. The Series A
convertible preferred stock included a conversion feature such that
each share was convertible into common stock at the option of the
shareholder based upon a variable exchange ratio ranging from 71% to
80% of the then current market price of the Company's common stock,
depending upon the timing of conversion. The imbedded yield to the
preferred shareholders as a result of the discounted conversion
feature was allocated to common stock and was accreted to preferred
stock over the preferred stock holding period. The imbedded yield
assumes the most beneficial conversion terms to the holder and was
determined using the intrinsic value method which represents the
aggregate difference between the conversion price and the then fair
value of the Company's common stock. In November and December 1996,
the 500,000 shares of Series A convertible preferred stock were
converted into 2,007,600 shares of common stock in accordance with the
specified exchange ratios. In connection with the conversion, a
dividend of $26,000 was paid to the holders of the Series A preferred
stock in accordance with the rights of the shareholders.
During fiscal 1998, the Board of Directors authorized and designated
3,000 shares of Series B convertible preferred stock. In July 1997,
the Company sold the 3,000 shares of Series B convertible preferred
stock in a private placement, resulting in net proceeds of $2,768,000.
The Series B convertible preferred stock included a conversion feature
such that each share was convertible into common stock at the option
of the shareholder based upon a variable exchange ratio equal to 80%
of the current market price of the Company's common stock, not to
exceed 100% of the average of the closing bid prices for the five
consecutive trading days prior to the Series B convertible preferred
stock issuance date. The imbedded yield to the preferred shareholders
as a result of the discounted conversion feature was allocated to
common stock and was accreted to preferred stock over the preferred
stock holding period. The imbedded yield assumes the most beneficial
conversion terms to the holder and was determined using the intrinsic
value method which represents the aggregate difference between the
conversion price and the then fair value of the Company's common
stock. At March 31, 1998, 377 shares of Series B preferred stock had
been converted to common stock and the remainder was converted during
fiscal 1999 in accordance with the specified exchange ratios.
In November 1998 the Company sold 4,000 shares of non-voting Series C
Convertible Preferred Stock to certain non-U.S. purchasers at a price
per share of $1,000, with net proceeds to the Company of approximately
$3,581,000. Each share of Series C Preferred Stock shall be entitled
to receive a dividend of $60 per share per annum, payable in cash or
stock at the option of the Company. The 4,000 shares of Series C
Preferred Stock are convertible into 1,600,000 shares of the Company's
common stock. The number of converted shares is determined by
dividing $1,000, the purchase price per share of Series C Preferred
Stock, by $2.50, the initial conversion price for the Series C
Preferred Stock. The conversion price may be adjusted to reflect any
stock dividends, stock splits, stock combinations, recapitalizations
or similar events. The Series C Preferred Stock will automatically
convert into common stock on October 31, 2002. A dividend of
$88,000 was accrued at March 31, 1999.
Stock Option Plan - Under the Company's 1998 Stock Option Plan (the
Option Plan), options to purchase common stock may be granted to
employees and consultants of the Company. Options granted under the
Option Plan may be either incentive stock options or nonqualified
stock options. Incentive stock options are granted at no less than
the fair market value of the common stock on the date of grant, and
nonqualified stock options are granted at no less than 85% of the
current fair market value of the common stock on the date of grant.
The stock options generally expire ten years from the date of grant
and normally become exercisable ratably over four years. Under the
Company's 1992 Outside Directors' Stock Option Plan (the Directors'
Plan), options to purchase common stock may be granted only to
directors of the Company who are not employees. Options under the
Directors' Plan are nonqualified stock options and are granted at the
fair market value on the date of grant and expire ten years from the
date of grant.
In a prior year, the Company's Board of Directors reserved 20,000
shares of common stock of which options to purchase 15,000 shares were
granted to a non-employee director at the fair market value of the
Company's common stock on the date of grant. At March 31, 1999, 5,000
of these options remained outstanding.
During the fiscal years ending March 31, 1999, 1998 and 1997, the
Company granted 135,000, 10,000 and 20,000 nonstatutory stock options
to consultants, the values of which were originally estimated at
$190,000, $15,000 and $37,000, respectively. The value attributable
to the unvested portion of the grants is being amortized over the
vesting periods of up to four years and is subject to adjustment based
upon the future value of the Company's stock.
Information with respect to stock option activity is summarized as
follows:
Options Outstanding
-------------------------
Weighted
Average
Number of Exercise
Shares Price
------------ ------------
Balances at April 1, 1996 .................. 798,605 $4.85
Granted (weighted average fair value
of $2.99 per share)....................... 634,350 4.56
Exercised .................................. (20,925) 3.23
Canceled ................................... (234,981) 5.75
------------
Balances at March 31, 1997 (464,065 shares
vested at a weighted average price
of $4.15) ................................ 1,177,049 4.54
Granted (weighted average fair value
of $1.69 per share) ...................... 323,000 2.89
Exercised .................................. (31,650) 1.28
Canceled ................................... (301,144) 4.82
------------
Balances at March 31, 1998 (605,329 shares
vested at a weighted average price
of $4.39) ................................ 1,167,255 4.10
Granted (weighted average fair value 615,050 2.37
of $1.69 per share) ......................
Exercised .................................. (33,908) 0.49
Canceled ................................... (313,454) 3.89
------------
Balances at March 31, 1999 ................. 1,434,943 $3.49
============
Additional information regarding options outstanding as of March 31,
1999 is as follows:
Options Outstanding Options Exercisable
-------------------------------- ---------------------
Weighted
Average
Remaining Weighted- Weighted-
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices of Shares (years) Price of Shares Price
- ------------------ ----------- ---------- --------- ----------- ---------
$0.32 to $1.59 87,500 4.98 $1.22 54,500 $1.01
1.63 1.88 153,000 9.57 1.85 6,500 1.72
1.88 2.13 170,000 7.72 2.04 106,313 2.06
2.19 2.50 163,633 8.58 2.41 42,492 2.47
2.52 3.06 143,768 8.51 2.73 55,666 2.75
3.13 3.50 176,833 7.52 3.31 102,000 3.23
3.78 5.00 98,000 6.27 4.47 92,086 4.50
5.13 5.13 254,000 7.23 5.13 174,708 5.13
5.25 6.25 145,209 6.17 5.72 119,245 5.73
6.50 to 9.11 43,000 3.66 7.63 39,584 7.59
----------- -----------
$0.32 $9.11 1,434,943 7.44 $3.49 793,094 $3.99
=========== ===========
At March 31, 1999, 1,134,060 and 14,750 shares were available for
future grants under the Option Plan and the Directors' Plan,
respectively.
Additional Stock Plan Information - As discussed in Note 1, the
Company continues to account for its stock-based awards using the
intrinsic value method in accordance with APB No. 25, and its related
interpretations.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), requires the disclosure of
pro forma net loss and loss per share as if the Company had adopted
the fair value method. Under SFAS No. 123, the fair value of stock-
based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time
to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions:
expected life, 23 months following vesting; volatility, 88% in 1999,
77% in 1998, and 91% in 1997; risk-free interest rate 5.5% in 1999,
5.9% in 1998, and 5.8% in 1997; and no dividends during the expected
term. The Company's calculations are based on a multiple option
valuation approach, and forfeitures are recognized as they occur. If
the computed fair values of the 1999, 1998 and 1997 awards had been
amortized to expense over the vesting period of the awards, pro forma
net loss attributable to common shareholders would have been
$4,865,000 ($0.35 per share) in 1999, $5,055,000 ($0.50 per share) in
1998, and $7,022,000 ($0.80 per share) in 1997. However, the impact
of outstanding non-vested stock options granted prior to fiscal year
1996 has been excluded from the pro forma calculation; accordingly,
the fiscal years 1999, 1998 and 1997 pro forma adjustments are not
indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.
9. Income Taxes
As of March 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $53,100,000 and $22,950,000,
respectively. The Company also had federal and state research and
development tax credit carryforwards of approximately $1,875,000 and
$990,000, respectively. The net operating loss and credit
carryforwards will expire at various dates from 2000 through 2019, if
not utilized. Use of the Company's net operating loss and tax credit
carryforwards may be limited if a change in ownership, as defined by
the Internal Revenue Code, occurs.
Significant components of the Company's deferred tax assets are as
follows:
Significant components of the Company's deferred tax assets are as
follows:
1999 1998
------------ ------------
Deferred tax assets:
Net operating loss carryforwards .......... $19,390,000 $18,000,000
Research and development credit and
manufacturer's investment credit
carryforwards ........................... 2,530,000 2,560,000
Capitalized research and development ...... 450,000 700,000
Other, net ................................ 810,000 570,000
------------ ------------
23,180,000 21,830,000
Valuation allowance for deferred tax assets . (23,180,000) (21,830,000)
------------ ------------
Total deferred tax assets ................... $ -- $ --
============ ============
The Company has not recorded any tax provision or credit for income
taxes due to the Company's historic losses and uncertainties
surrounding the ability to utilize its deferred tax assets in the
future.
10. Customer and Geographic Information
The Company currently operates in one segment. The following is a
summary of revenues from external customers for each group of products
and services provided by the Company:
Years Ended March 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
Blood chemistry analyzers.... $5,303,000 $7,453,000 $4,616,000
Reagent discs................ 7,065,000 4,351,000 2,099,000
Other........................ 823,000 248,000 439,000
------------ ------------ ------------
Product sales, net......... 13,191,000 12,052,000 7,154,000
Development and licensing
revenue.................... 156,000 135,000 140,000
------------ ------------ ------------
Total revenues............... $13,347,000 $12,187,000 $7,294,000
============ ============ ============
In fiscal year 1999, one customer accounted for 39% of total revenues.
Three customers accounted for 29%, 19% and 13%, respectively, of total
revenues for the fiscal year ended March 31, 1998. Three customers
accounted for 34%, 20% and 10%, respectively, of total revenues for
the fiscal year ended March 31, 1997.
The following is a summary of revenues by geographic region based on
customer location:
Years Ended March 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
United States ............... $11,179,000 $8,633,000 $5,017,000
Europe ...................... $1,210,000 $806,000 $695,000
Asia and Latin America....... 958,000 2,748,000 1,582,000
------------ ------------ ------------
Total ....................... $13,347,000 $12,187,000 $7,294,000
============ ============ ============
The Company's long-lived assets are located in the United States.
ITEM 9. DISSAGREEMENTS WITH AUDITORS
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
directors and executive officers of the Company as of June 25, 1999.
Name Age Title
- ------------------------------- ----- ---------------------------------------
Clinton H. Severson 51 Chairman of the Board, President, Chief
Executive Officer and Director
Richard Bastiani, Ph.D. (2) 56 Director
Brenton G. A. Hanlon (2) 53 Director
Prithipal Singh, Ph.D. (1) 60 Director
Ernest S. Tucker, III, MD (1) 66 Director
Michael Mercer 45 Vice President of Domestic Marketing
and Sales
Robert Milder 49 Vice President of Operations
Diane Oates 45 Vice President of Regulatory
Affairs/Quality Systems
Vladimir E. Ostoich, Ph.D. 53 Vice President of Engineering, Founder
Donald J. Stewart 43 Vice President of Finance and
Administration and CFO and Secretary
Daniel Wong, Ph.D. 47 Vice President of Development
- -------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Severson has served as President, Chief Executive Officer and Director
of the Company since June 1996. He was appointed Chairman of the Board in
May 1998. From February 1989 to May 1996, Mr. Severson served as
President and Chief Executive Officer of MAST Immunosystems, Inc., a
medical diagnostic company.
Dr. Bastiani joined the Company's Board of Directors in September 1995.
Since September 1995, Dr. Bastiani has been President of Dendreon, a
biotechnology company. Dr. Bastiani served as President of Syva Company,
a medical diagnostic testing company, from February 1991 until June 1995.
Mr. Hanlon joined the Company's Board of Directors in November 1996. Mr.
Hanlon is President and COO of Tri-Continent Scientific, a subsidiary of
Hitachi Chemical, and a manufacturer of instrumentation for diagnostic
applications. Mr. Hanlon served as Vice President and General Manager of
Tri-Continent Scientific from 1989 to 1996. From 1984 to 1989, Mr. Hanlon
was President of Corus Medical, a medical products company.
Dr. Prithipal Singh joined the Company's Board of Directors in June 1992.
Dr. Singh is a founder of ChemTrak, Inc., a manufacturer of medical
diagnostic equipment, currently serving as Chairman of the Board. From
1985 to August 1988, Dr. Singh was a Senior Vice President of Idetek,
Inc., an animal health care company.
Dr. Tucker joined the Company's Board of Directors in September 1995.
Currently, Dr. Tucker is Chief Compliance Officer for Scripps Health in
San Diego. Dr. Tucker was Chairman of Pathology at Scripps Clinic and
Research Foundation from 1992 to 1997.
Mr. Mercer joined Abaxis on October 26, 1998 as the Vice President of
Domestic Marketing and Sales. Prior to joining Abaxis, Mr. Mercer was a
healthcare marketing consultant in the area of cardiovascular surgery,
critical care medicine and physician point-of-care diagnostics. From 1995
to 1997 Mr. Mercer was Vice President of Sales and Marketing for Sendx
Medical, a manufacturer of blood gas, electrolyte and hematocrit
analyzers.
Mr. Milder joined Abaxis on May 22, 1998 as the Vice President of
Operations. Prior to joining Abaxis, from 1996 to 1998 Mr. Milder was the
Vice President of Manufacturing for Nidek, Inc., a manufacturer of
opthalmic and surgical lasers. From 1992 to 1996, Mr. Milder was Vice
President of Operations for Heraeus Surgical, Inc., a surgical capital
equipment manufacturer.
Ms. Oates joined Abaxis in July 1997, as the Director of Regulatory
Affairs and Quality Systems and was promoted to Vice President in April
1998. Prior to joining Abaxis, from 1990 to 1997, Ms. Oates was Director
of Regulatory and Clinical Affairs for Chiron Diagnostics Corporation, a
division of Chiron Corporation, a biotechnology corporation.
Dr. Ostoich, a co-founder of the Company, has served as Vice President in
various areas of the Company since its inception. Dr. Ostoich first
served as Vice President of Research and Development. Dr. Ostoich has
also served as Senior Vice President of Research and Development, Vice
President of Engineering and Instrument Manufacturing and Vice President
of Marketing and Sales for the United States and Canada.
Mr. Stewart joined Abaxis in July 1998, as the Vice President of Finance
and Administration and CFO and Secretary. Prior to joining Abaxis, Mr.
Stewart was the Chief Financial Officer of Mimetix, Inc., a private
pharmaceutical company. From 1984 to 1997, Mr. Stewart held various
financial management positions for SEQUUS Pharmaceuticals, Inc., most
recently as Vice President of Finance.
Dr. Wong joined Abaxis in April 1993 as Methods Development Manager and
was named Vice President of Development in May 1994. From January 1995 to
February 1996, Mr. Wong also served as Vice President of Development and
Reagent Manufacturing.
All directors hold office until the next annual meeting of shareholders of
the Company and until their successors have been elected and qualified.
The Company's Bylaws authorize the Board of Directors to fix the number of
directors at not less than four nor more than seven. The authorized
number of directors of the Company is currently six.
Each officer serves at the discretion of the Board of Directors. There
are no family relationships among any of the directors or officers of the
Company.
ITEM 11 EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the compensation
during the fiscal years ended March 31, 1999, March 31, 1998 and March 31,
1997 of the Chief Executive Officer of the Company during fiscal 1999 and
four other most highly compensated executive officers of the Company whose
total salary and bonus for fiscal 1999 exceeded $100,000, for services in
all capacities to the Company, during fiscal 1999.
Summary Compensation Table
Long-Term
Compensation
Awards
-----------
Annual Compensation($)Securities
Name and Fiscal --------------------- Underlying
Principal Position Year Salary Bonus Options
- ----------------------------------- -------- ---------- ---------- -----------
Clinton H. Severson................ 1999 $200,000 $60,450 -0-
President and Chief Executive 1998 193,254 73,950 50,000
Officer 1997 146,535 -0- 250,000
Robert Milder...................... 1999 $93,000 $20,400 65,000
Vice President of Operations 1998 -0- -0- -0-
1997 -0- -0- -0-
Vladimir E. Ostoich................ 1999 $144,740 $47,630 25,000
Vice President of Marketing and 1998 139,173 60,550 -0-
Sales for North America 1997 145,287 23,556 25,000
Diane Oates........................ 1999 $90,000 $48,605 10,000
Vice President of 1998 81,975 18,785 30,000
Regulatory/Quality Systems 1997 -0- -0- -0-
Daniel Wong........................ 1999 $135,000 $47,630 -0-
Vice President of Development 1998 129,808 60,550 -0-
1997 135,296 22,825 25,000
Stock Options Granted in Fiscal 1999
The following table provides the specified information concerning grants
of options to purchase the Company's Common Stock made during the fiscal
year ended March 31, 1999, to the persons named in the Summary
Compensation Table.
Option Grants in Fiscal 1999
Individual Grants
--------------------------------------------
Percent Potential Realizable
of Total Value at Assumed
Options Annual Rates of
Granted Stock Price
to Exercise Appreciation for
Options Employees or Base Expir- Option Term(1)
Granted in Fiscal Price per ation ----------- ------------
Name (#) (2) Year ($)/Sh(3) Date 5%($) 10%($)
- ----------------------- ---------- ---------- --------- ------------ ----------- ------------
Robert Milder....... 65,000 11.0% $2.16 10/26/2008 $88,445 $224,136
Diane Oates......... 10,000 2.0% $2.56 05/26/2008 $16,119 $40,848
Vladimir E. Ostoich. 25,000 4.4% $1.88 10/26/2008 $29,479 $74,707
- --------
(1) Potential gains are net of exercise price, but before taxes
associated with exercise. These amounts represent certain
assumed rates of appreciation only, based on the Securities and
Exchange Commission rules. Actual gains, if any, on stock
option exercises are dependent on the future performance of the
common stock, overall market conditions and the option holders'
continued employment through the vesting period. The amounts
reflected in this table may not necessarily be achieved.
(2) All options granted in fiscal 1999 were granted pursuant to the
Company's 1989 Stock Option Plan. These options vest and become
exercisable at the rate of one-fourth on the first anniversary
of the date of grant and 1/48 per month thereafter for each full
month of the optionee's continuous employment by the Company.
Under the Company's 1989 Stock Option Plan, the Board retains
discretion to modify the terms, including the price, of
outstanding options. For additional information regarding
options, see "Change of Control Arrangements."
(3) All options were granted at market value on the date of grant.
Option Exercises in Fiscal 1999 and Fiscal 1999 Year-End Option Values
The following table provides the specified information concerning
exercises of options to purchase the Company's Common Stock in the fiscal
year ended March 31, 1999, and unexercised options held as of March 31,
1999, by the persons named in the Summary Compensation Table.
Option Exercises and Fiscal 1999 and Year-End Values
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Value Options at 3/31/99 at 3/31/99 ($)(2)
on Realized ---------------------------- ----------------------------
Name Exercise(#) ($) Exercisable(1) Unexercisable Exercisable(1) Unexercisable
- ----------------------- ----------- ----------- ------------- ------------- ------------- -------------
Clinton H. Severson.. -0- -0- 215,625 84,375 -- --
Robert Milder........ -0- -0- -- 65,000 -- $1,563
Vladimir E. Ostoich.. -0- -0- 96,563 34,062 $22,125 $1,563
Diane Oates.......... -0- -0- 12,500 27,500 -- --
Daniel Wong.......... -0- -0- 75,743 9,257 -- --
---------------------------
(1) Company stock options generally vest one-fourth on the first
anniversary of the date of grant and 1/48 per month thereafter
for each full month of the optionee's continuous employment by
the Company. All options are exercisable only to the extent
vested.
(2) The value of the unexercised in-the-money options is based on
the closing price of the Company's Common Stock ($1.94 per
share) on March 31, 1999 and is net of the exercise price of
such options.
Compensation of Directors
All non-employee directors of the Company receive compensation in the
amount of $750 per Board meeting they attend plus reimbursement of
reasonable travel expenses incurred. In addition, Dr. Tucker serves as a
consultant to the Company and receives monthly compensation of $1,000 plus
reimbursement of expenses for attending meetings at or on behalf of the
Company. Each of the Company's non-employee directors also receives an
automatic annual grant of options to purchase 4,000 shares of Common Stock
under the Company's 1992 Outside Directors Stock Option Plan. In
addition, Dr. Tucker receives an additional annual grant of options to
purchase 5,000 shares for serving as a consultant. Clinton H. Severson is
a director of the Company and also an employee of the Company. He does
not receive any compensation for his services as a member of the Board of
Directors.
Change of Control Arrangements
The Company's 1998 Stock Option Plan and the 1992 Outside Directors Stock
Option Plan (the "Option Plans") provide that, in the event of a
transfer of control of the Company ("Transfer of Control"), the
surviving, continuing, successor or purchasing corporation or a parent
corporation thereof, as the case may be (the "Acquiring Corporation"),
shall either assume the Company's rights and obligations under stock
option agreements outstanding under the Option Plans (the "Options") or
substitute options for the Acquiring Corporation's stock for such
outstanding Options. In the event the Acquiring Corporation elects not to
assume or substitute for such outstanding Options in connection with a
merger constituting a Transfer of Control, the Company's Board shall
provide that any unexercisable and/or unvested portion of the outstanding
Options shall be immediately exercisable and vested as of a date prior to
the Transfer of Control, as the Company's Board so determines. Any
Options which are neither assumed by the Acquiring Corporation, nor
exercised as of the date of the Transfer of Control, shall terminate
effective as of the date of the Transfer of Control. Options which are
assumed by the Acquiring Corporation shall become exercisable and vested
as provided under the relevant stock option agreements under the Option
Plans, unless the Acquiring Corporation terminates the option holder under
certain circumstances defined in the Option Plans. Under such
circumstances, the holder's options shall become immediately exercisable
and vested as of the date of termination.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who beneficially own
more than 10% of the Company's Common Stock to file initial reports of
ownership and reports of changes in ownership with the Securities and
Exchange Commission ("SEC"). Such persons are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms
filed by such persons.
Employment Agreements
In March 1997, the Company entered into an employment agreement with
Clinton H. Severson, providing Mr. Severson as President and Chief
Executive Officer of Abaxis with six months of salary and benefits if his
employment with the Company is terminated for other than cause.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 25, 1999, certain information
with respect to the beneficial ownership of the Company's Common Stock by
(i) all persons known by the Company to be the beneficial owners of more
than 5% of the outstanding Common Stock of the Company, (ii) each director
and director-nominee of the Company, (iii) the persons named in the
Summary Compensation Table, and (iv) all executive officers and directors
of the Company as a group.
Percent
of Abaxis
Number Common
of Shares Stock
Name and Address of Beneficial Owner(1) Owned Outstanding(2)
- ---------------------------------------- ---------- --------------
Clinton H. Severson(4)................. 360,017 2.53%
Vladimir Ostoich(3).................... 226,289 1.61%
Daniel Wong(5)......................... 77,768 *
Ernest S. Tucker, III, M.D.(7)......... 51,588 *
Prithipal Singh(8)..................... 49,510 *
Robert Milder(11)...................... 41,700 *
Diane Oates(6)......................... 38,542 *
Richard Bastiani, Ph.D.(9)............. 26,542 *
Brenton G. A. Hanlon(10)............... 16,667 *
Executive officers and directors as
a group (10 persons)(12).............. 967,703 6.65%
-----------------
* Less than 1%
(1) The persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to community
property laws where applicable and to the information contained
in the footnotes to this table. Unless otherwise indicated, the
business address of each of the beneficial owners listed is
Abaxis, Inc., 1320 Chesapeake Terrace, Sunnyvale, CA 94089.
(2) The percentages shown in this column are calculated from the
13,957,980 shares of Common Stock actually outstanding on June
25, 1999 in addition to options held by that person that are
currently exercisable which are deemed outstanding in accordance
with the rules of the Securities and Exchange Commission.
(3) Includes an aggregate of 29,500 shares held by Dr. Ostoich's
IRA, 27,500 shares held by Mrs. Ostoich's IRA and 74,328 shares
held of record by the Vladimir Ostoich and Liliana Ostoich Trust
Fund, for the benefit of Dr. Ostoich and his wife. Also includes
99,167 shares subject to stock options exercisable by Dr.
Ostoich within sixty days of June 25, 1999. Does not include
shares that are held by his adult children as to which Mr.
Ostoich disclaims beneficial ownership.
(4) Includes 112,100 shares of stock held by Mr. Severson. Also
includes 247,917 shares subject to options exercisable by Mr.
Severson within sixty days of June 25, 1999.
(5) Includes 6,000 shares of stock held by Mr. Wong's spouse, as to
which Mr. Wong disclaims beneficial ownership. Also includes
78,306 shares subject to options exercisable by Dr. Wong within
sixty days of June 25, 1999.
(6) Includes 20,000 shares of stock held by Ms. Oates. Also includes
18,542 shares subject to options exercisable by Ms. Oates within
sixty days of June 25, 1999.
(7) Includes 6,545 shares of stock held by Dr. Tucker. Also
includes 45,043 shares subject to options exercisable by Dr.
Tucker within sixty days of June 25, 1999.
(8) Includes 10,000 shares of stock held by Mr. Singh. Also includes
39,510 shares subject to options exercisable by Mr. Singh within
sixty days of June 25, 1999.
(9) Includes 6,000 shares of stock held by Dr. Bastiani. Also
includes 20,542 shares subject to options exercisable by Dr.
Bastiani within sixty days of June 25, 1999.
(10) Includes 16,667 shares subject to options exercisable by Mr.
Hanlon within sixty days of June 22, 1999.
(11) Includes 29,200 shares of stock held by Mr. Milder. Also includes
12,500 shares subject to options exercisable by Mr. Milder within
sixty days of June 25, 1999.
(12) Includes 591,736 shares subject to options exercisable within
sixty days of June 25, 1999.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
1. Financial Statements
Reference is made to the Index to Financial Statements under Item 8
of Part II hereof, where these documents are included.
2. Financial Statement Schedules
Independent Auditors' Report
Schedule II - Valuation and Qualifying Accounts and Reserves
Other financial statement schedules are not included because they
are not required or the information is otherwise shown in the
financial statements or notes thereto.
3. Exhibits filed with this Report on Form 10-K (numbered in
accordance with Item 601 of Regulation S-K)
Exhibit Number Description
22.1 Subsidiaries of the Registrant
23.1 Independent Auditors Consent
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ABAXIS, INC.
BY /s/ Clinton H. Severson
------------------------------------
Clinton H. Severson
Chairman of the Board, President
and Chief Executive Officer
June 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- ---------------------------- ---------------------------------- -------------
/s/ CLINTON H. SEVERSON President, Chief Executive June 29, 1999
- ---------------------------- Officer and Director (Principal
Clinton H. Severson Executive Officer)
/s/ DONALD J. STEWART Vice President of Finance and June 29, 1999
- ---------------------------- Administration and Chief
Donald J. Stewart Financial Officer (Chief
Financial and Accounting Officer)
/s/ RICHARD BASTIANI Director June 29, 1999
- ----------------------------
Richard Bastiani
/s/ BRENTON G. A. HANLON Director June 29, 1999
- ----------------------------
Brenton Hanlon
/s/ PRITHIPAL SINGH Director June 29, 1999
- ----------------------------
Prithipal Singh
/s/ ERNEST TUCKER Director June 29, 1999
- ----------------------------
Ernest Tucker
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Abaxis Inc.:
We have audited the financial statements of Abaxis, Inc. (the "Company")
as of March 31, 1999 and 1998, and for each of the three years in the
period ended March 31, 1999, and have issued our report thereon dated
April 23, 1999; such report is included elsewhere in this Annual Report on
Form 10-K. Our audits also included the financial statement schedule
listed in Item 14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
San Jose, CA
April 23, 1999
ABAXIS, INC
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance Charged Balance
at to Costs Deductions at
Beginning and from End of
Description of Year Expenses Reserves Year
- ------------------------------ --------- --------- ----------- ---------
(Reserve deducted in the
balance sheet from the asset
to which it applies)
Reserve for doubtful accounts:
Year ended March 31, 1999..... $95,000 $79,000 $ -- $174,000
Year ended March 31, 1998..... $61,000 52,000 18,000 $95,000
Year ended March 31, 1997..... $48,000 $13,000 $ -- $61,000
EXHIBITS INDEX
Exhibit
Number Description of Document
- -------- -----------------------------------------------------------------
3.1 Restated Articles of Incorporation, as amended (5) (10)
3.2 By-laws of the Company (1)
3.3 Certificate of Determination (12)
10.5 1989 Stock Option Plan as amended and forms of agreement (3)
10.6 1992 Outside Directors Stock Option Plan and forms of agreement (4)
10.7 401(k) Plan (1)
10.8 Lease Agreement between the Company and South Bay/Caribbean dated
March 11, 1992 (3)
10.13 Exclusive Distribution Agreement dated September 20, 1991 between the
Company and Teramecs (1) (2)
10.14 Sponsored Research Agreement dated as of September 20, 1991 between
the Company and Teramecs (1) (2)
10.15 Development Agreement between the Company and Becton Dickinson and
Company (through its Becton Dickinson Immunocytometry Systems Division)
dated April 9, 1993 (5) (6)
10.16 Distribution agreement between the Company and VedCo, Inc. dated
June 20, 1994 (6)
10.17 Supply Agreement between the Company and Becton Dickinson and Company
(through its Becton Dickinson Immunocytometry Systems Division) dated
September 16, 1994 (6) (7)
10.18 Licensing agreement between the Company and Pharmacia Biotech, Inc.
dated October 1, 1994 (6) (7)
10.19 Employment Agreement with Mr. Gary H. Stroy dated March 11, 1995 (8)
10.20 Employment Agreement with Mr. Clinton H. Severson dated March 31, 1997,
as amended (11)
10.21 Amendment to the Lease Agreement between the Company and South
Bay/Caribbean dated March, 11, 1997 (11)
10.22 Equipment Loan Agreement between the Company and Transamerica Business
Credit dated March 4, 1997 (11)
10.23 Registration Rights Agreement dated July 18, 1997 between the Company
and certain shareholders (12)
10.24 Securities Purchase Agreement dated July 18, 1997 between the Company
and certain shareholders (12)
16.1 Letter from Ernst & Young LLP dated January 30, 1996 (9)
22.1 Subsidiaries of Registrant (Page 51)
23.1 Independent Auditors' Consent(Page 52)
27.1 Financial Data Schedule
(1) Incorporated by reference from Registration Statement No. 33-44326 filed
December 11, 1991.
(2) Confidential treatment of certain portions of these agreements has been
granted.
(3) Incorporated by reference to the exhibit filed with the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1992.
(4) Incorporated by reference to the exhibit filed with the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1992.
(5) Incorporated by reference to the exhibit filed with the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1993.
(6) Confidential treatment of certain portions of these agreements has been
granted.
(7) Incorporated by reference to the exhibit filed with the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.
(8) Incorporated by reference to the exhibit filed with the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1995.
(9) Incorporated by reference to the Company's Report on Form 8-K filed February
1, 1996.
(10) Incorporated by reference to the exhibit filed with the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1996.
(11) Incorporated by reference to the exhibit filed with the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997.
(12) Incorporated by reference to the exhibit filed with the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.