UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2004
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-19720
ABAXIS, INC.
(Exact name of registrant as specified in its charter)
California 77-0213001
State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
3240 Whipple Road
Union City, California 94587
(Address of principal executive offices including zip code)
(510) 675-6500
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes [X] No [ ].
As of August 3, 2004, there were approximately 19,644,504 shares of the
registrant's common stock outstanding.
ABAXIS, INC.
Report on Form 10-Q
for the Quarter Ended June 30, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1 Condensed Financial Statements:
Condensed Statements of Operations - 3
Three months ended June 30, 2004 and 2003
Condensed Balance Sheets - June 30, 2004 and
March 31, 2004 4
Condensed Statements of Cash Flows - 5
Three months ended June 30, 2004 and 2003
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk
24
Item 4 Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 25
Item 2 Changes in Securities and Use of Proceeds 25
Item 3 Defaults Upon Senior Securities 25
Item 4 Submission of Matters to a Vote of Security Holders 25
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 25
Signatures 26
2
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Abaxis, Inc.
Condensed Statements of Operations
(Unaudited)
Three Months Ended
June 30,
----------------------------
2004 2003
------------ ------------
Revenues:
Product sales, net $ 13,207,000 $ 10,291,000
Development and licensing revenue 35,000 35,000
------------ ------------
Total revenues 13,242,000 10,326,000
------------ ------------
Costs and operating expenses:
Cost of product sales 6,074,000 5,220,000
Selling, general and administrative 3,641,000 3,217,000
Research and development 1,237,000 1,032,000
------------ ------------
Total costs and operating expenses 10,952,000 9,469,000
------------ ------------
Income from operations 2,290,000 857,000
Interest and other income 60,000 48,000
Interest and other expense (6,000) (18,000)
------------ ------------
Net income before income taxes 2,344,000 887,000
Income tax provision 910,000 24,000
------------ ------------
Net income 1,434,000 863,000
Preferred dividends -- (204,000)
------------ ------------
Net income attributable to common shareholders $ 1,434,000 $ 659,000
============ ============
Basic net income per share $ 0.07 $ 0.04
============ ============
Diluted net income per share $ 0.07 $ 0.04
============ ============
Weighted average common shares outstanding - basic 19,575,000 16,921,000
============ ============
Weighted average common shares outstanding - diluted 21,901,000 17,480,000
============ ============
See notes to condensed financial statements.
3
Abaxis, Inc.
Condensed Balance Sheets
June 30, March 31,
2004 2004
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,670,000 $ 9,324,000
Short-term investments 7,998,000 7,998,000
Trade receivables (net of allowances of $328,000 at June 30, 2004
and $257,000 at March 31, 2004) 9,023,000 8,202,000
Inventories 5,829,000 5,736,000
Prepaid expenses 439,000 384,000
Net deferred tax asset - current 1,026,000 609,000
------------ ------------
Total current assets 34,985,000 32,253,000
Property and equipment, net 8,352,000 8,191,000
Intangible assets, net 656,000 675,000
Deposits and other assets 135,000 155,000
Net deferred tax asset - non-current 19,718,000 20,624,000
------------ ------------
Total assets $ 63,846,000 $ 61,898,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,548,000 $ 2,721,000
Dividends payable -- 28,000
Accrued payroll and related expenses 2,387,000 2,853,000
Other accrued liabilities 507,000 319,000
Warranty reserve 164,000 181,000
Deferred revenue 266,000 264,000
Current portion of capital lease obligations 21,000 22,000
------------ ------------
Total current liabilities 5,893,000 6,388,000
------------ ------------
Capital lease obligations, less current portion 11,000 16,000
Deferred rent 425,000 409,000
Deferred revenue, less current portion 546,000 474,000
Commission obligation, less current portion 33,000 39,000
------------ ------------
Total non-current liabilities 1,015,000 938,000
------------ ------------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock, no par value: authorized shares -
35,000,000; issued and outstanding shares - 19,634,128
at June 30, 2004 and 19,520,237 at March 31, 2004 93,373,000 92,441,000
Accumulated deficit (36,435,000) (37,869,000)
------------ ------------
Total shareholders' equity 56,938,000 54,572,000
------------ ------------
Total liabilities and shareholders' equity $ 63,846,000 $ 61,898,000
============ ============
See notes to condensed financial statements.
4
Abaxis, Inc.
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
June 30,
----------------------------
2004 2003
------------ ------------
Operating activities:
Net income $ 1,434,000 $ 863,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 438,000 377,000
Gain on disposal of equipment (2,000) --
Stock option income tax benefits 300,000 --
Common stock issued for employee benefit plans -- 38,000
Stock based compensation, including amortization
of deferred stock compensation -- 8,000
Changes in operating assets and liabilities:
Trade receivables (821,000) 427,000
Inventories (88,000) (628,000)
Prepaid expenses (55,000) 203,000
Net deferred tax assets - current (417,000) --
Deposits and other assets 20,000 32,000
Net deferred tax assets - non-current 906,000 --
Accounts payable (173,000) (276,000)
Accrued payroll and related expenses (466,000) 310,000
Warranty reserve and other accrued liabilities 171,000 (2,000)
Deferred rent 16,000 24,000
Deferred revenue 74,000 (2,000)
Long-term commission obligation (6,000) --
------------ ------------
Net cash provided by operating activities 1,331,000 1,374,000
------------ ------------
Investing activities:
Purchase of property and equipment (590,000) (140,000)
Proceeds from disposal of equipment 7,000 --
------------ ------------
Net cash used in investing activities (583,000) (140,000)
------------ ------------
Financing activities:
Repayment of equipment financing -- (116,000)
Repayment of capital lease obligations (6,000) (18,000)
Exercise of warrants and common stock options 604,000 68,000
------------ ------------
Net cash provided by (used in) financing activities 598,000 (66,000)
------------ ------------
Net increase in cash and cash equivalents 1,346,000 1,168,000
Cash and cash equivalents at beginning of period 9,324,000 10,430,000
------------ ------------
Cash and cash equivalents at end of period $ 10,670,000 $ 11,598,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 4,000 $ 18,000
============ ============
Cash paid for taxes $ 9,000 $ 14,000
============ ============
Noncash financing activities:
Preferred stock dividends $ -- $ 204,000
============ ============
Issuance of common stock for conversion of preferred stock
and payment of dividends payable $ 28,000 $ 408,000
============ ============
See notes to condensed financial statements.
5
ABAXIS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed unaudited financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. These condensed unaudited financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2004. The unaudited condensed financial statements included herein
reflect all normal recurring adjustments, which are, in the opinion of
management, necessary to state fairly the results of operations and financial
position for the periods presented. Certain amounts as presented in the
financial statements for the previous periods have been reclassified to conform
to the fiscal year ending March 31, 2005 financial statement presentation. The
results for the three months ended June 30, 2004 are not necessarily indicative
of the results to be expected for the entire fiscal year ending March 31, 2005
or for any future period.
Comprehensive Income - Comprehensive income was the same as net income for the
three months ended June 30, 2004 and 2003.
Pro Forma Net Income and Net Income per Share
The Company has adopted the disclosure provisions of SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123, "Accounting for Stock-Based Compensation." These disclosure
provisions require prominent disclosures in both annual and interim financial
statements of the method of accounting for stock-based employee compensation and
the effect of the method used on reported results. The Company did not change to
using the fair value based method of accounting for stock-based employee
compensation as permitted by the voluntary transition provisions of SFAS 148;
and therefore, adoption of SFAS No. 148 did not have an impact on the financial
position, results of operations or cash flows of the Company.
Had compensation cost been recognized based on the fair value at the date of
grant, the Company's net income and basic and diluted net income per share would
have been as follows:
Three Months Ended
June 30,
----------------------------
2004 2003
------------- -----------
Net income:
As reported $ 1,434,000 $ 863,000
Less stock-based compensation expense
determined under the fair value method for
all awards, net of related tax effects (691,000) (347,000)
------------- -----------
Pro forma net income $ 743,000 $ 516,000
------------- -----------
Net income per share:
As reported - basic $ 0.07 $ 0.04
Pro forma - basic $ 0.04 $ 0.03
As reported - diluted $ 0.07 $ 0.04
Pro forma - diluted $ 0.03 $ 0.03
The Company's calculations were made using the Black-Scholes option pricing
model, based on a multiple option valuation approach, and forfeitures were
recognized as they occurred. The following are the weighted average assumptions:
6
Three Months Ended
June 30,
-----------------------------
2004 2003
--------- -----------
Expected life of option .............. 6 years 6 years
Risk-free interest rate .............. 4.19% 2.78%
Dividend yield ....................... 0.00% 0.00%
Volatility ........................... 59% 61%
New Accounting Pronouncements - The Financial Accounting Standards Board
("FASB") issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities," in January 2003, and a revised interpretation of FIN 46
("FIN 46-R") in December 2003. FIN 46 requires certain variable interest
entities ("VIEs") to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The provisions of FIN 46 are effective immediately
for all arrangements entered into after January 31, 2003. Since January 31,
2003, the Company has not invested in any entities it believes are variable
interest entities for which the Company is the primary beneficiary. The adoption
of FIN 46-R in the first quarter of fiscal 2005 did not have an impact on the
financial position, results of operations or cash flows of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" which amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements of the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company adopted the disclosure provisions of SFAS No. 148 at the
beginning of fiscal 2003. On March 31, 2004, the FASB issued an exposure draft,
"Share-Based Payment, an Amendment of FASB Statements No. 123 and 95." This
proposed statement would require that stock-based compensation be recognized as
a cost in the financial statements and that such cost be measured based on the
fair value of the stock-based compensation. If issued in final form as proposed
by the FASB, adoption of this proposed statement would have a material, although
non-cash, impact on the Company's statement of operations.
In March 2004, the EITF reached a final consensus on Issue 03-01, "The Meaning
of Other-Than-Temporary Impairment and its Application to Certain Investments",
to provide additional guidance in determining whether investment securities have
an impairment which should be considered other-than-temporary. The Company
expects that the adoption of this issue will not have an effect on its operating
results or financial condition.
3. NET INCOME PER SHARE
Basic net income per share is computed by dividing the net income attributable
to common shareholders by the weighted average number of shares of common stock
outstanding. Diluted net income per share is computed by dividing net income
attributable to common shareholders by the weighted average number of common
shares that would have been outstanding during the period assuming the issuance
of common shares for all potential dilutive common shares outstanding.
The following is a reconciliation of the weighted average number of common
shares outstanding used in calculating basic and diluted net income per share:
Three Months Ended
June 30,
-----------------------------
2004 2003
---------- ----------
Weighted average shares of common stock outstanding
used in calculating basic net income per share 19,575,000 16,921,000
Weighted average number of dilutive stock options and
warrants outstanding using the treasury stock method 2,326,000 559,000
---------- ----------
Weighted average shares of common stock outstanding
used in calculating diluted net income per share 21,901,000 17,480,000
========== ==========
Diluted net income per share does not include the effect of the following common
equivalent shares related to outstanding options and warrants, using the
treasury stock method and related to preferred shares issuable upon conversion
of preferred
7
stock, as their effect would be antidilutive for the three months
ended June 30, 2004 and 2003:
Three Months Ended
June 30,
---------------------------
2004 2003
---------------------------
(number of shares)
Series D convertible preferred stock 0 930,000
Series E convertible preferred stock 0 857,000
Options to purchase common stock 870,000 1,291,000
Warrants to purchase common stock 185,000 1,277,000
--------- ---------
1,055,000 4,355,000
========= =========
4. INVENTORY
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of the following:
June 30, March 31,
2004 2004
---------- -----------
Raw materials $2,921,000 $2,886,000
Work-in-process 1,369,000 1,654,000
Finished goods 1,539,000 1,196,000
---------- ----------
$5,829,000 $5,736,000
========== ==========
5. WARRANTY RESERVES
The Company provides for the estimated future costs to be incurred under the
Company's standard warranty obligations of one year. Estimated contractual
warranty obligations are recorded when related sales are recognized and any
additional amounts are recorded when such costs are probable and can be
reasonably estimated.
The warranty reserve activity is summarized as follows for the three-month
periods ended June 30, 2004 and 2003:
Three Months Ended
June 30,
----------------------------
2004 2003
----------------------------
Balance beginning of period $ 181,000 $ 123,000
Provision for warranty expense 12,000 60,000
Warranty costs incurred (29,000) (38,000)
--------- ---------
Balance end of period $ 164,000 $ 145,000
========= =========
6. LINE OF CREDIT
The Company has established a line of credit with Comerica Bank-California which
provides for borrowings of up to $2,000,000, bears interest at the bank's prime
rate minus 0.25%, which totaled 4.00% at June 30, 2004, and is payable monthly.
Of the $2,000,000 available, $820,000 was committed to secure a letter of credit
for the Company's facilities lease. At June 30, 2004, there was no amount
outstanding under the Company's line of credit. The weighted average interest
rate on the line of credit during the three months ended June 30, 2004 and 2003
was 3.75% and 4.24%, respectively.
The line of credit agreement contains certain financial covenants, which are
evaluated on a quarterly basis. Included in these financial covenants, among
other stipulations, is a requirement that the Company have a minimum net income
of $25,000 before preferred stock dividends and accretion in any three quarters
of a fiscal year, provided that any loss before preferred stock dividends and
accretion incurred in the remaining quarter is not to exceed $250,000. The
Company is also required to be profitable, as defined, on a fiscal year to date
basis beginning with the six month period ending September 30, 2004 and to have
net income before preferred stock dividends and accretion on preferred stock of
$1,150,000 for the fiscal year ending March 31, 2005. In addition, the Company
is required to have a quick ratio, as defined, of not less than 1.00 to 1.00,
cash flow coverage, as defined, of not less than 1.25 to 1.00, debt to net worth
ratio, as defined, not greater than 1.00 to 1.00 and to maintain a tangible
effective net worth, as defined, of not less than $25,731,000. At June 30, 2004,
the Company was in compliance with these covenants.
Borrowings under the line of credit are collateralized by the Company's net book
value of assets of $56.9 million at June 30, 2004 including its intellectual
property.
8
7. COMMITMENTS AND CONTINGENCIES
In November 2003, the Company entered into an OEM agreement with Diatron
Messtechnik GmbH (DIATRON) of Austria to purchase DIATRON hematology
instruments. Under the terms of the agreement, the Company is committed to
purchase a minimum number of hematology units from DIATRON once the product was
qualified for sale. Qualification occurred in May 2004 and accordingly, the
Company has minimum purchase commitments. As of June 30, 2004, the outstanding
commitment for fiscal 2005 through 2009 was $1,386,000, $2,657,000, $2,657,000,
$2,657,000 and $2,657,000, respectively.
8. CUSTOMER AND GEOGRAPHIC INFORMATION
The Company currently operates in one segment and develops, manufactures and
markets portable blood analysis systems for use in any veterinary or human
patient-care setting to clinicians with rapid blood constituent measurement
requirements. The following is a summary of revenues from external customers for
each group of products and services provided by the Company:
Three Months Ended
June 30,
-------------------------------
2004 2003
----------- -----------
Blood chemistry analyzers $ 4,155,000 $ 3,152,000
Reagent discs and kits 8,456,000 6,478,000
Other 596,000 661,000
----------- -----------
Product sales, net
13,207,000 10,291,000
Development and licensing revenue 35,000 35,000
----------- -----------
Total revenues $13,242,000 $10,326,000
=========== ===========
The following is a summary of revenues by customer group:
Three Months Ended
June 30,
-------------------------------
2004 2003
----------- -----------
Medical Market $ 2,240,000 $ 1,607,000
Veterinary Market 10,510,000 8,246,000
Other 492,000 473,000
----------- -----------
Total revenues $13,242,000 $10,326,000
=========== ===========
Two distributors, Vedco Inc. and DVM Resources accounted for 26% and 16%,
respectively, of total revenues for the three-month period ended June 30, 2004
and 2003. The following is a summary of revenues by geographic region based on
customer location:
Three Months Ended
June 30,
-------------------------------
2004 2003
----------- -----------
United States $11,512,000 $ 9,088,000
Europe 1,296,000 988,000
Asia and Latin America 434,000 250,000
----------- -----------
Total revenues $13,242,000 $10,326,000
=========== ===========
Substantially all of the Company's long-lived assets are located in the United
States.
9. Redeemable Convertible Preferred Stock -- Series E
Redeemable Convertible Preferred Stock - Series E - In October 2003, under the
terms of the Company's Certificate of Determination with respect to the Series E
Preferred Stock (the "Series E Preferred"), the Series E convertible preferred
stock automatically converted into shares of common stock after twenty
consecutive trading days where the per share closing price of the Company's
common stock as reported on the Nasdaq National Market exceeded $12.00. During
fiscal 2004, 5,570 shares of Series E convertible preferred stock were converted
into 856,907 shares of common stock in accordance with the specified exchange
ratio.
9
10. SHAREHOLDERS' EQUITY
Convertible Preferred Stock - Series D - In October 2003, under the terms of the
Company's Certificate of Determination with respect to the Series D Preferred
Stock (the "Series D Preferred"), the Series D convertible preferred stock
automatically converted into shares of common stock after twenty consecutive
trading days where the per share closing price of the Company's common stock as
reported on the Nasdaq National Market exceeded $14.00. During fiscal 2004,
6,508 shares of Series D convertible preferred stock were converted into 929,699
shares of common stock in accordance with the specified exchange ratio.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements which reflect Abaxis'
current views with respect to future events and financial performance. In this
report, the words "will," "anticipates," "believes," "expects," "future,"
"intends," "plans," and similar expressions identify forward-looking statements.
These forward-looking statements are subject to certain risks and uncertainties,
including but not limited to those discussed below, that could cause actual
results to differ materially from historical results or those anticipated. Such
risks and uncertainties include the market acceptance of our products and the
continuing development of our products, required United States Food and Drug
Administration ("FDA") clearance and other government approvals, risks
associated with manufacturing and distributing our products on a commercial
scale, free of defects, risks related to the introduction of new instruments
manufactured by third parties, risks associated with entering the human
diagnostic market on a larger scale, risks related to the protection of the
Company's intellectual property or claims of infringement of intellectual
property asserted by third parties, risks involved in carrying of inventory,
risks associated with the ability to attract, train and retain competent sales
personnel, general market conditions and competition. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. Abaxis assumes no obligation to update any forward-looking
statements as circumstances change.
Business Overview
Abaxis, Inc. ("us" or "we"), incorporated in California in 1989, develops,
manufactures and markets portable blood analysis systems for use in any
veterinary or human patient-care setting to provide clinicians with rapid blood
constituent measurements. Our principal offices are located at 3240 Whipple
Road, Union City, California 94587 and our telephone number at that location is
(510) 675-6500. Our Internet address is www.abaxis.com. We make available free
of charge on or through our Internet website our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments
to those reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange
Commission. Our common stock trades on the Nasdaq National Market under the
symbol "ABAX."
Our primary product is a blood analysis system, consisting of a compact 6.9
kilogram (15 pounds) analyzer and a series of single-use plastic discs, called
reagent discs, containing all the chemicals required to perform a panel of up to
13 tests on veterinary patients and 14 tests on human patients. The system can
be operated with minimal training and performs multiple routine tests on whole
blood, serum or plasma samples. The system provides test results in less than 14
minutes with the precision and accuracy equivalent to a clinical laboratory
analyzer. We currently market this system for veterinary use under the name
VetScan(R) and in the human medical market under the name Piccolo(R).
Through April 2004, we marketed a veterinary hematology analyzer under the name
VetScan HMT, which provided a complete blood count including three-part white
blood cell differential in less than 2 minutes and required only 12 microliters
of whole blood. It provided results for eight selectable species, plus two user
configurable programs. We marketed one type of reagent kit with this analyzer.
We purchased the hematology analyzer and reagent kits from Melet Schloesing
Laboratoires of France. We will continue to support and service our current
population of VetScan HMT hematology customers.
In May 2004, we introduced a hematology instrument ("VetScan HMII") that offers
an 18-parameter CBC (complete blood count) analysis, including a three-part
white blood cell differential for the diagnostic assessment of patients by the
veterinarian in their clinic. We entered into an original equipment
manufacturing ("OEM") agreement with Diatron Messtechnik GmbH (DIATRON) of
Austria to purchase the DIATRON hematology instruments commencing in the fiscal
quarter that the instruments were qualified, which was the first quarter of
fiscal 2005. We market the combination of the VetScan and the VetScan HMII under
the name VetScan DXS.
Sales for any future periods are not predictable with a significant degree of
certainty. We generally operate with limited order backlog because our 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. Our expense levels, which are to a large extent fixed, are based
in part on our expectations of future revenues. Accordingly, we may be unable to
adjust spending in a timely manner to
10
compensate for any unexpected revenue shortfall. As a result, any such
shortfall would negatively affect our operating results and financial
condition. Our sales may be adversely impacted by pricing pressure
from competitors. Our ability to be consistently profitable will
depend, in part, on our ability to increase our sales volumes of our
VetScan DXS and Piccolo products and to compete with other competitors
successfully. We believe that period to period comparisons of our
results of operations are not necessarily meaningful.
Results of Operations
Total Revenues
Three Months Ended Percentage
June 30, Change
-------------------------------- -----------
2004 2003
--------------------------------
Blood chemistry analyzers $ 4,155,000 $ 3,152,000 32%
Percentage of total revenues 31% 31%
Reagent discs and kits 8,456,000 6,478,000 31%
Percentage of total revenues 64% 63%
Other 596,000 661,000 (10%)
Percentage of total revenues 5% 6%
----------- ----------- -----------
Product sales, net 13,207,000 10,291,000 28%
Development and licensing revenue 35,000 35,000 0%
----------- ----------- -----------
Total revenues $13,242,000 $10,326,000 28%
=========== =========== ===========
Total revenues increased 28% from $10,326,000 for the three months ended June
30, 2003 to $13,242,000 for the three months ended June 30, 2004. The growth in
revenue was partially due to increased sales of our VetScan and Piccolo systems
of 52% or $1,004,000 resulting from improved sales productivity of our VetScan
systems per sales personnel in the United States and the increasing awareness of
our Piccolo systems sold to the physicians office market segment. The growth in
revenue is also due to increased sales of veterinary and medical reagent discs
and hematology reagent kits of 31% or $1,978,000, which is attributable to
increased worldwide demand in both the veterinary and medical markets and driven
by increased unit sales due to a higher consumption rate of users and to the
expanded installed base of our VetScan and Piccolo systems. This increase in the
sales of our reagent discs and hematology reagent kits is consistent with our
belief that there will be increasing recurring reagent disc revenue as our
product lines achieve greater market penetration and more consistent
utilization.
Revenues from the medical market increased by 39% or $633,000 from $1,607,000
for the three months ended June 30, 2003 to $2,240,000 for the three months
ended June 30, 2004. In the medical market, sales of our Piccolo system
increased 51% or $403,000 primarily due to the increasing awareness of the
Piccolo systems sold to the physicians office market segment. We sold 95 Piccolo
systems during the three months ended June 30, 2004, a 73% increase from 55
Piccolo systems during the three months ended June 30, 2003. We sold 89,000
reagent discs in the medical market during the three months ended June 30, 2004,
a 62% increase from 55,000 reagent discs during the three months ended June 30,
2003.
Revenues from the veterinary market increased by 27% or $2,264,000 from
$8,246,000 for the three months ended June 30, 2003 to $10,510,000 for the three
months ended June 30, 2004. In the veterinary market, sales of our VetScan and
hematology systems increased 25% or $600,000, mainly resulting from improved
sales productivity of our VetScan systems per sales personnel in the United
States. We sold a total of 369 instruments, including both VetScan and
hematology systems during the three months ended June 30, 2004, a 23% increase
from 301 instruments during the three months ended June 30, 2003. We sold
612,000 reagent discs in the veterinary market during the three months ended
June 30, 2004, a 28% increase from 479,000 reagent discs during the three months
ended June 30, 2003. Also, we sold 2,974 hematology reagent kits during the
three months ended June 30, 2004, an increase of 32% from 2,256 hematology
reagent kits sold during the three months ended June 30, 2003. The increase in
the sales of our reagent discs and hematology reagent kits is due to a higher
consumption rate of users and to the expanded installed base of our VetScan DXS
systems.
11
Revenues by Geographical Location
The following is a summary of revenues by geographic region based on customer
location for the three months ended June 30, 2004 and 2003:
Three Months Ended Percentage
June 30, Change
--------------------------- -----------
2004 2003
---------------------------
United States $11,512,000 $ 9,088,000 27%
Percentage of total revenues 87% 88%
Europe 1,296,000 988,000 31%
Percentage of total revenues 10% 10%
Asia and Latin America 434,000 250,000 74%
Percentage of total revenues 3% 2%
----------- ----------- -----------
Total revenues $13,242,000 $10,326,000 28%
=========== =========== ===========
Total revenues in the United States increased by 27% or $2,424,000 for the three
months ended June 30, 2004, compared to the three months ended June 30, 2003.
The increase in the United States was attributed to increases in instrument
sales of 33% or $876,000 (inclusive of an 18% or $106,000 increase in instrument
sales to the U.S. military) and sales of our reagent disc and hematology reagent
kits of 28% or $1,607,000. The increase in instrument sales is primarily due to
improved sales productivity of our VetScan systems per sales personnel in the
United States and the increasing awareness of our Piccolo systems sold to the
physicians office market segment. The increase in the sales of our reagent discs
and hematology kits is due to both a higher consumption rate of institutional
users and to the expanded installed base of VetScan and Piccolo systems.
In the United States, two distributors, Vedco Inc. and DVM Resources accounted
for 26% and 16%, respectively, of total worldwide revenues for the three months
ended June 30, 2004 and 2003. In April 2004, we signed a distributor agreement
with the Veterinary Division of Henry Schein, Inc., a distributor of animal
healthcare products and services to veterinary practitioners to sell and
distribute the VetScan DXS, along with the associated reagent discs and kits.
Total revenues in Europe increased by 31% or $308,000 for the three months ended
June 30, 2004, compared to the three months ended June 30, 2003. The increase in
Europe was primarily due to increases in instrument sales of 7% or $27,000 and
sales of our reagent disc and hematology reagent kits of 49% or $282,000.
Total revenues in Asia and Latin America increased by 74% or $184,000 for the
three months ended June 30, 2004, compared to the three months ended June 30,
2003. The increase in Asia and Latin America was primarily due to increases in
instrument sales of 141% or $100,000 and sales of our reagent disc and
hematology reagent kits of 53% or $89,000. One distributor, T. Chatani & Co,
Ltd. accounted for 63% and 37% of total revenues in Asia and Latin America for
the three months ended June 30, 2004 and 2003.
Our goal for fiscal 2005 is to continue the increase in instrument sales
worldwide by allocating additional resources to product selling and marketing.
We intend to introduce marketing programs emphasizing instrument sales in both
the veterinary and medical market. Also, we plan to increase our sales force and
offer incentive programs to retain highly skilled sales professionals. We intend
to continue our marketing efforts of our Piccolo systems to the U.S. military.
Internationally, we will continue to focus our sales efforts in Asia and Europe.
Cost of Product Sales
Three Months Ended Percentage
June 30, Change
------------------------------- -----------
2004 2003
-------------------------------
Cost of product sales $6,074,000 $5,220,000 16%
Percentage of total revenues 46% 51%
12
Cost of product sales includes the costs associated with manufacturing,
assembly, package, warranty repairs, test and quality assurance for our
instrument analyzers and reagent discs and manufacturing overhead, including
costs of personnel and equipment associated with manufacturing support. The 5%
decrease in cost of product sales as a percent of revenue during the three
months ended June 30, 2004, compared to the three months ended June 30, 2003 was
attributable to continued increases in sales volume of reagent discs and lower
unit costs resulting from improved manufacturing processes and absorption of
fixed costs of our facilities. The increase in cost of product sales in absolute
dollars was primarily attributable to continued increases in sales volume of
instruments and reagent discs.
Selling, General and Administrative Expense
Three Months Ended Percentage
June 30, Change
------------------------ ----------
2004 2003
------------------------
Selling, general and administrative $3,641,000 $3,217,000 13%
Percentage of total revenues 27% 31%
Selling, general and administrative expenses consist primarily of salaries and
benefits, commissions and related expenses for personnel engaged in marketing,
advertising, costs associated with promotional and other marketing expenses,
customer service and technical service, general corporate functions, including
accounting, human resources and legal. We anticipate the dollar amount of
selling, general and administrative expenses to increase in fiscal 2005 from
fiscal 2004 due to our plan to increase our sales force and offer incentive
programs to retain highly skilled sales professionals and we expect an increase
in expenses relating to Sarbanes-Oxley compliance and an increase in premiums
for our general business insurance.
Research and Development Expense
Three Months Ended Percentage
June 30, Change
------------------------------ ----------
2004 2003
------------------------------
Research and development $1,237,000 $1,032,000 20%
Percentage of total revenues 9% 10%
Research and development expenses consist of salaries and benefits, related
expenses associated with the development of clinical trials of new test methods
and the enhancement of existing products. Research and development expenses
increased by 20% or $205,000 in the three months ended June 30, 2004, as
compared to the three months ended June 30, 2003. The increase is primarily due
to new product development in both the veterinary and medical markets. We
anticipate the dollar amount of research and development expenses to increase in
fiscal 2005 from fiscal 2004 but remain consistent as a percentage of total
revenues, as we complete new products for both the veterinary and medical
markets. There can be no assurance, however, that we will undertake such
research and development activities in future periods or, if we do, that such
activities will be successful.
Interest and Other, Net
The following table sets forth our interest and other income, net for the three
months ended June 30, 2004 and 2003:
Three Months Ended Percentage
June 30, Change
---------------------- ---------
2004 2003
----------------------
Interest income $ 60,000 $ 48,000 25%
Interest expense and other income (expense), net (6,000) (18,000) (67)%
-------- -------- -------
$ 54,000 $ 30,000 80%
======== ======== =======
Interest Income
Interest income was $60,000 and $48,000 for the three months ended June 30, 2004
and 2003, respectively. Interest income primarily consists of interest earned on
cash and cash equivalents. The increase of 25% or $12,000, in the three months
ended June 30, 2004, as compared to the three months ended June 30, 2003 was
primarily due to higher average invested balances.
13
Interest Expense and Other Income (Expense), Net
Interest expense and other income (expense), net was $6,000 and $18,000 for the
three months ended June 30, 2004 and 2003, respectively. Interest expense
primarily consists of interest incurred on our capital lease, equipment
financing loan and on our co-promotion agreement with Abbott Laboratories. The
decrease in interest expense was primarily due to the reduced balances on our
capital lease and the repayment of our equipment loan in March 2004.
Income Tax Provision
For the three months ended June 30, 2004 and 2003, income tax expense totaled
$910,000 and $24,000, respectively, which primarily relates to taxes for federal
alternative minimum tax and various state tax jurisdictions. The effective tax
rate was 39% and 3% for the three months ended June 30, 2004 and 2003,
respectively. The increase in our effective tax rate is attributable to the
elimination of the valuation allowance relating to our deferred tax assets in
fiscal 2004. The valuation allowance was eliminated because we concluded that it
was more likely than not that the deferred tax assets would be realized.
Preferred Dividends
Preferred dividends accounted for $0 and $204,000 for the three months ended
June 30, 2004 and 2003, respectively. In October 2003, under the terms of our
respective Certificate of Determination with respect to both the Series D
Preferred Stock and Series E Preferred Stock, all outstanding shares of the
Series D Preferred and the Series E Preferred automatically converted into
shares of common stock after twenty consecutive trading days where the per share
closing price of our common stock as reported on the Nasdaq National Market
exceeded $14.00 and $12.00, respectively. Consequently, we have eliminated our
obligation to pay an ongoing annual dividend to the holders of the Series D
Preferred and Series E Preferred.
Liquidity and Capital Resources
As of June 30, 2004, we had $18,668,000 in cash, cash equivalents and short-term
investments as compared to $17,322,000 at March 31, 2004.
Cash provided (used) in the three months ended June 30, 2004 and 2003 was as
follows:
Three Months Ended
June 30,
---------------------------
2004 2003
---------------------------
Cash provided by operating activities $ 1,331,000 $ 1,374,000
Cash used in investing activities (583,000) (140,000)
Cash provided by (used in) financing activities 598,000 (66,000)
----------- -----------
Net increase in cash and cash equivalents $ 1,346,000 $ 1,168,000
=========== ===========
Operating Activities - Net cash provided by operating activities for the three
months ended June 30, 2004 was $1,331,000. This was primarily the result of net
income of $1,434,000 offset by the effects of non-cash expenses including
depreciation and amortization of $438,000, stock option income tax benefits of
$300,000, an increase in current net deferred tax assets of $417,000 and a
decrease in non-current net deferred tax assets of $906,000. Other changes
included a decrease of $20,000 in deposits and other assets, increases totaling
$261,000 in deferred rent, deferred revenue, and warranty reserve and other
accrued liabilities. Uses of cash from operating activities included increases
totaling $964,000 in accounts receivables, inventories and prepaid expenses and
decreases totaling $645,000 in accounts payable, accrued payroll and related
expenses and long-term commission obligation.
We anticipate that we will incur incremental additional costs to support our
future operations, including further commercialization of our products and
development of new test methods that will allow us to expand our veterinary
market and further penetrate the human diagnostic market; acquisition of capital
equipment for our manufacturing facility, which includes the ongoing costs
related to continuing development of our current and future products; and
additional pre-clinical testing and clinical trials for our current and future
products; and the design and production of our next generation blood chemistry
analyzers.
We anticipate that our existing capital resources, available line of credit and
anticipated revenue from the sales of our products will be adequate to satisfy
our currently planned operating and financial requirements through at least the
next twelve months. Our future capital requirements will largely depend upon the
increased market acceptance of our point-of-care blood analyzer products.
However, our sales for any future periods are not predictable with a significant
degree of certainty. Regardless, we may seek to raise additional funds to
leverage our internal expansion into the human medical market or pursue
strategic acquisition opportunities.
14
Investing Activities - Net cash used in investing activities for the three
months ended June 30, 2004 was $583,000, and was primarily related to the
purchase of $590,000 of property and equipment. Net cash used in investing
activities for the three months ended June 30, 2003 was $140,000. The increase
in property and equipment primarily related to purchases in property and
equipment to support our increasing capacity requirements and new product
introduction.
We anticipate that we will continue to purchase property and equipment necessary
in the normal course of our business.
Financing Activities - Net cash provided by financing activities of $598,000 for
the three months ended June 30, 2004 included $604,000 from the exercise of
common stock options and warrants offset by repayments totaling $6,000 on our
capital lease obligations. Net cash used in financing activities of $66,000 for
the three months ended June 30, 2003 included net cash proceeds of $68,000 from
the exercise of common stock options and warrants offset by repayments totaling
$134,000 on our capital equipment loan and capital lease obligations. In March
2004, we paid off the outstanding balance on our equipment financing loan.
Preferred Stock - In October 2003, under the terms of our respective Certificate
of Determination with respect to both the Series D Preferred Stock (the "Series
D Preferred") and Series E Preferred Stock (the "Series E Preferred"), the
Series D Preferred and the Series E Preferred automatically converted into
shares of common stock after twenty consecutive trading days where the per share
closing price of our common stock as reported on the Nasdaq National Market
exceeded $14.00 and $12.00, respectively. Elective conversions, coupled with the
automatic conversion of all remaining outstanding Series E Preferred Stock,
resulted in the conversion of 5,570 shares of Series E Preferred Stock into
856,907 shares of common stock during fiscal 2004. Elective conversions, coupled
with the automatic conversion of all remaining outstanding Series D Preferred
Stock, resulted in the conversion of 6,508 shares of Series D Preferred Stock
into 929,699 shares of common stock during fiscal 2004. Consequently, we have
eliminated our obligation to pay an ongoing annual dividend that the holders of
the Series D Preferred and Series E Preferred would have otherwise received in
either cash or shares of our common stock.
Line of Credit - We have established a line of credit with Comerica
Bank-California which provides for borrowings of up to $2,000,000, bears
interest at the bank's prime rate minus 0.25%, which totaled 4.00% at June 30,
2004, and is payable monthly. Of the $2,000,000 available, $820,000 was
committed to secure a letter of credit for our facilities lease. At June 30,
2004, there was no amount outstanding under our line of credit. The weighted
average interest rate on the line of credit during the three months ended June
30, 2004 and 2003 was 3.75% and 4.24%, respectively.
The line of credit agreement contains certain financial covenants, which are
evaluated on a quarterly basis. Included in these financial covenants, among
other stipulations, is a requirement that we have a minimum net income of
$25,000 before preferred stock dividends and accretion in any three quarters of
a fiscal year, provided that any loss before preferred stock dividends and
accretion incurred in the remaining quarter is not to exceed $250,000. We are
also required to be profitable, as defined, on a fiscal year to date basis
beginning with the six month period ending September 30, 2004 and to have net
income before preferred stock dividends and accretion on preferred stock of
$1,150,000 for the fiscal year ending March 31, 2005. In addition, we are
required to have a quick ratio, as defined, of not less than 1.00 to 1.00, cash
flow coverage, as defined, of not less than 1.25 to 1.00, debt to net worth
ratio, as defined, not greater than 1.00 to 1.00 and to maintain a tangible
effective net worth, as defined, of not less than $25,731,000. At June 30, 2004,
we were in compliance with these covenants.
Borrowings under the line of credit are collateralized by our net book value of
assets of $56.9 million at June 30, 2004 including our intellectual property.
Critical Accounting Policies - We have identified certain accounting policies as
critical to our business operations and the understanding of our results of
operations. The impact and any associated risks related to the identified
critical accounting policies on our business operations are discussed in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2004 filed with
the Securities and Exchange Commission.
Contingencies - We are involved from time to time in various litigation matters
in the normal course of business. We believe that the ultimate resolution of
these matters will not have a material effect on our financial position or
results of operations.
New Accounting Pronouncements - The Financial Accounting Standards Board
("FASB") issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities," in January 2003, and a revised interpretation of FIN 46
("FIN 46-R") in December 2003. FIN 46 requires certain variable interest
entities ("VIEs") to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The provisions of FIN 46 are effective immediately
for all arrangements entered into after January 31, 2003. Since January 31,
2003, we have not invested in any entities that we believe are variable interest
entities for which we are the primary beneficiary. The adoption of FIN 46-R in
the first quarter of fiscal 2005 did not have an impact on our financial
position, results of operations or cash flows.
15
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" which amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements of the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We adopted the disclosure provisions of SFAS No. 148 at the beginning
of fiscal 2003. On March 31, 2004, the FASB issued an exposure draft,
"Share-Based Payment, an Amendment of FASB Statements No. 123 and 95." This
proposed statement would require that stock-based compensation be recognized as
a cost in the financial statements and that such cost be measured based on the
fair value of the stock-based compensation. If issued in final form as proposed
by the FASB, our adoption of this proposed statement would have a material,
although non-cash, impact on our statement of operations.
In March 2004, the EITF reached a final consensus on Issue 03-01, "The Meaning
of Other-Than-Temporary Impairment and its Application to Certain Investments",
to provide additional guidance in determining whether investment securities have
an impairment which should be considered other-than-temporary. We expect that
the adoption of this issue will not have an effect on our operating results or
financial condition.
RISK FACTORS THAT MAY AFFECT OUR PERFORMANCE
Our future performance is subject to a number of risks. If any of the
following risks actually occur, our business could be harmed and the trading
price of our common stock could decline. You should also refer to other
information contained in our annual report for the fiscal year ended March 31,
2004, as filed on Form 10-K, including the financial statements included therein
and the notes related thereto.
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 Have Not Been Consistently Profitable; We Must Increase Sales Of Our Piccolo
And VetScan DXS Products To Maintain Consistent Profitability
We recognized a net loss attributable to common shareholders in four of
the last twelve fiscal quarters ended June 30, 2004. There can be no assurance
that we will experience profitability in the future. As of June 30, 2004, we
have incurred cumulative net losses of $36 million. Our ability to be
consistently profitable will depend, in part, on our ability to increase our
sales volumes of our VetScan DXS and Piccolo products. Increasing our sales
volume of our products will depend upon our ability to:
o continue to develop our products;
o increase our sales and marketing activities;
o effectively manage our manufacturing activities; and
o 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 sustained 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 almost half of our revenues from two distributors who resell
our products to the ultimate user. While we are better able to predict sales of
our reagent discs, as we sell these discs primarily for use with blood chemistry
analyzers that we sold in prior periods, we generally are unable to predict with
much certainty sales of our 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,
ending in September and December of each year,
16
which we believe is due to seasonal patterns in the decision making processes to
acquire our products. 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
anticipate our periodic operating results to vary significantly depending on,
but not limited to, a number of factors, including, in addition to those factors
discussed elsewhere in this section:
o new product announcements made by us or our competitors;
o changes in our pricing structures or the pricing structures of our
competitors;
o our ability to develop, introduce and market new products on a
timely basis;
o our manufacturing capacities and our ability to increase the scale
of these capacities;
o the mix of product sales between our analyzer and our reagent disc
products;
o the amount we spend on research and development; and
o changes in our strategy.
We Could Fail to Achieve Anticipated Revenue If The Market Does Not Accept Our
Products
Our core compact blood chemistry analyzer product differs substantially
from current blood chemistry analyzers on the market. Our primary competition is
from centralized laboratories that offer a greater number of tests than our
products, but do so at greater cost and requiring more time. We also compete
with other point-of-care analyzers that cost more, require more maintenance and
offer a narrower range of tests. However, these point-of-care analyzers are
generally marketed by larger companies which have greater resources for sales
and marketing, in addition to a recognized brand name and established
distribution relationships.
Historically we have marketed our VetScan analyzer to veterinarians and we
have relatively limited experience in large scale sales of our Piccolo analyzer
into the human medical market. We continue to develop new animal blood tests
that we cannot be assured will be accepted by the veterinary market. Although we
believe that our blood analyzers offer consumers many advantages, including
according to our analyses substantial cost savings, in terms of the actual
product and implementation of it procedurally, these advantages involve changes
to current standard practices, such as using large clinical laboratories, that
will require changes in both the procedures and mindset of care providers. The
human medical market in particular is highly regulated, structured and often
slow to adopt new product offerings. If we are unable to convince large numbers
of medical clinics, hospitals and other point-of-care environments of the
benefits of our products, we will suffer lost sales and could fail to achieve
anticipated revenue.
We are Dependent Upon Our Profitability, and If We Cannot Remain Profitable We
May Need Additional Funding In The Future And These Funds May Not Be Available
To Us
We believe that our existing capital resources, available line of credit
and anticipated revenue from the sales of our products will be adequate to
satisfy our currently planned operating and financial requirements through March
31, 2005, although no assurances can be given. Our bank financing documents
contain a number of covenants concerning financial tests that we must meet that
are more fully detailed in the agreements that we have filed with the SEC as
exhibits to our periodic reports. We may need additional funds if we are unable
to meet requirements for continuing access to bank financing or if we do not
achieve anticipated revenues from the sale of our Piccolo and VetScan products.
Further, we expect to incur incremental additional costs to support our
future operations, including:
o 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;
o our need to acquire capital equipment for our manufacturing
facilities, which includes the ongoing implementation of our
semi-automated manufacturing lines to provide capacity for the
production of commercial volumes of our products;
o research and design costs related to the continuing development of
our current and future products; and
o additional pre-clinical testing and clinical trials for our current
and future products.
17
To the extent that our existing resources and anticipated revenue from the
sale of our products are insufficient to fund our activities or if we are unable
to meet the financial tests contained in our bank financing documents, we may
have to raise additional funds from the issuance of public or private
securities. In the event that we cannot maintain compliance with the financial
covenants of our bank financing agreements, we may also be subject to increased
interest rate expenses. We may not be able to raise additional funding, or if we
are able to, we may not be able to raise funding on acceptable terms. We may
also dilute then-existing shareholders if we raise additional funds by issuing
new equity securities. Alternately, we may have to relinquish rights to certain
of our technologies, products and/or sales territories if we are required to
obtain funds through arrangements with collaborative partners. If we are unable
to raise needed funds, we may be required to curtail our operations
significantly. This would materially adversely affect our operating results and
financial condition.
We Rely On Patents And Other Proprietary Information, The Loss Of Any Of Which
Would Negatively Affect Our Business
As of June 30, 2004, 33 patent applications have been filed on behalf of
Abaxis with the United States Patent and Trademark Office, of which 28 have been
issued. 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 that are not filed in any
foreign jurisdictions in secrecy until it issues the patents (unless a patent
application owner files a request for publication) and (2) publications of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months. We may have to participate in interference
proceedings, which are proceedings in front of the 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.
We also rely upon copyrights, trademarks and unpatented trade secrets.
Others may independently develop substantially equivalent proprietary
information and techniques that would undermine our proprietary technologies.
Further, others may gain access to our trade secrets or disclose such
technology. Although we require our employees, consultants and advisors to
execute agreements that require that our corporate information be kept
confidential and that any inventions by these individuals are property of
Abaxis, there can be no assurance that these agreements will provide meaningful
protection or adequate remedies for our trade secrets in the event of
unauthorized use or disclosure of such information. The unauthorized
dissemination of our confidential information would negatively impact our
business.
We Continue to Develop Our Marketing And Distribution Experience In the Human
Diagnostic Market
Although we have gained experience marketing our VetScan system products
for the past eight years in the veterinary diagnostic market, we have much less
experience in marketing the Piccolo System in the human diagnostic market.
Accordingly, we have limited sales, marketing and distribution experience,
especially in the human diagnostic market. We cannot assure you that:
o we will be able to establish and maintain effective distribution
arrangements in the human medical market;
o any distribution arrangements that we are able to establish will be
successful in marketing our products; or
o the costs associated with marketing and distributing our products
will not be excessive.
Should we fail to effectively develop our marketing and distribution
efforts, our growth will be limited and our results of operations will be
adversely affected.
We May Inadvertently Produce Defective Products, Which May Subject Us to
Significant Warranty Liabilities or Product Liability Claims And We May Have
Insufficient Product Liability Insurance
Our business exposes us to potential warranty and product liability risks
which are inherent in the testing, manufacturing and marketing of human and
veterinary medical products. We strive to apply sophisticated methods to raw
materials and produce defect-free medical test equipment. Although we have
established procedures for quality control on both the raw materials that we
receive from suppliers and our manufactured final products, these procedures may
prove inadequate to detect a defect that either occurs in limited quantities or
that we have not anticipated. We believe that our Piccolo and VetScan systems
detect the vast majority of errors that occur on our reagent discs and
automatically reject such tests, prompting the medical provider to retest the
patient. However, our Piccolo and VetScan systems may be unable to detect
18
errors which could result in the misdiagnosis of human or veterinary patients.
Should we inadvertently ship defective products, we may be subject to
substantial claims under our warranty policy or product liability law. In
addition, our policy is to credit medical providers for any defective product
that we produce, including those reagent discs that are rejected by our Piccolo
and VetScan systems. Therefore, even if a mass defect within a lot or lots of
reagent discs were detected by our Piccolo and VetScan systems, our need to
replace such reagent discs free of charge would materially harm our financial
condition. Further, in the event that a product defect is not detected by our
Piccolo system, our relatively recent expansion into the human medical market
greatly increases the risk that the amount of damages involved with just one
product defect would be material to our operations. We currently maintain
limited product liability insurance that we believe is adequate for our needs,
taking into account the risks involved and cost of coverage. However, our
product liability insurance and cash may be insufficient to cover potential
liabilities. In addition, in the future the coverage that we require may be
unavailable on commercially reasonable terms, if at all. Even with our current
insurance coverage, a mass product defect, product liability claim or recall
would materially adversely affect our business or our financial condition.
Many of Our Sales Force Have Been Employed by Us for Less Than One Year And We
Must Effectively Train And Integrate Our Sales Team In Order To Achieve Our
Anticipated Revenue
We have thirty-one full-time sales personnel involved in our sales and
marketing activities, many of whom have been employed by us for a limited period
of time. 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 train new salespeople and supervise them closely. We also will
continue hiring additional sales personnel. If we are unable to retain our
existing personnel, or attract and train additional qualified personnel, our
growth may be limited due to our lack of capacity to market our products.
We Need to Successfully Manufacture and Market Additional, Recently Approved
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
DXS. Historically, we primarily developed reagent discs suitable for the
veterinary diagnostic market. We recently received approval from the U.S. Food
and Drug Administration to begin selling additional tests, namely magnesium
assay, HDL and triglycerides, for the more lucrative human diagnostic market.
These tests are included in standard tests for which the medical community
receives reimbursements from third party payors such as HMOs and Medicare. We
may not be able to successfully manufacture or market these newly developed
reagent discs. Our failure to meet these challenges will materially adversely
affect 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. Two
distributors, Vedco Inc. and DVM Resources accounted for 26% and 16%,
respectively, of total revenues for the three- month periods ended June 30, 2004
and 2003. We believe that our future growth depends on the efforts of these
distributors. If one of our distributors, particularly Vedco Inc., were to stop
selling our products we may not be able to replace such lost revenue. We operate
on a purchase order basis with Vedco Inc. and DVM Resources and each of these
distributors is under no contractual obligation to continue carrying our
products. Further, many of our distributors may carry our competitors' products,
and may promote our competitors' products over our own products. Finally, we do
not have at this time distribution partners in the United States who distribute
our products for the human diagnostic market. Internationally, we have one
distributor in Japan for our products in both the human and veterinary
diagnostic markets.
We currently have distribution agreements for our VetScan products in
Argentina, Australia, Austria, Bahrain, Belgium, France, Germany, Greece,
Israel, Italy, Japan, Korea, Kuwait, Mexico, New Zealand, Nigeria, Norway,
Poland, Portugal, South Africa, Spain, Switzerland, United Arab Emirates, the
United Kingdom and Venezuela. 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 terminate their relationship with
us at any time. Historically, 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 and VetScan
products internationally.
19
We Depend On Sole Suppliers For Several Key Components To Our Products, Many of
Whom We Have Not Entered Into Contractual Relationships With
We use several key components that are currently available from limited or
sole sources as discussed below:
o Reagent Discs: Two injection molding manufacturers, C. Brewer & Co.
and Nypro Oregon, Inc., currently make the molded plastic discs
which, when loaded with reagents and welded together, form our
reagent disc products. We believe that only a few manufacturers are
capable of producing these discs to the narrow tolerances that we
require; to date, we have only qualified these two manufacturers,
with Nypro Oregon, Inc. being qualified at two separate facilities,
to manufacture the molded plastic discs.
o Reagent Chemicals: We currently depend on the following single
source vendors for some of the chemicals that we use to produce the
dry reagent chemistry beads that are either inserted in our reagent
discs or sold as a stand-alone product: Amano Enzyme USA Co., Ltd.,
Genzyme Corporation, Kikkoman Corporation Biochemical Division,
Microgenics Corporation, Roche Molecular Biochemicals of Roche
Diagnostics Corporatioin, a division of F. Hoffmann-La Roche, Ltd.,
Shinko American Inc. and Sigma Aldrich Inc.
o Blood Analyzer Components: Our analyzer products use several
technologically advanced components that we currently purchase from
two single source vendors, PerkinElmer, Inc. and Electro Alliance,
Inc. Our analyzers use a printer that is only made by Seiko North
America Corporation. The loss of the supply of any of these
components could force us to redesign our analyzers.
o Hematology Instrument and Reagents: We purchase the HMII instruments
from DIATRON of Austria. To date, we have qualified two suppliers to
produce the reagents for the hematology instruments: Mallinckrodt
Baker BV and Clinical Diagnostic Solutions, Inc.
For our hematology instruments purchased from Diatron, we are subject to
minimum purchase requirements for a period of five years. We operate on a
purchase order basis with all of the suppliers of our molded plastic reagent
discs, reagent chemicals, and blood analyzer components and thus these suppliers
are under no contractual obligation to supply us with their products or to do so
at specified prices. Although we believe that there are potential alternate
suppliers available for these critical components, to date we have not qualified
additional vendors beyond those referenced above.
Because we are dependent on a limited number of suppliers and
manufacturers for critical components to our products, we are particularly
susceptible to any interruption in the supply of these products or the viability
of our assembly arrangements. The loss of any one of these suppliers or a
disruption in our manufacturing arrangements could materially adversely affect
our business and financial condition.
We Compete With 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:
o commercial clinical laboratories;
o hospitals' clinical laboratories; and
o 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
diagnostic testing, and commercial laboratories perform the most veterinary
medical testing. We have identified five principal factors that customers
typically use to evaluate our products and those of our competitors. These
factors are:
o range of tests offered;
o the immediacy of results;
o cost effectiveness;
o ease of use; and
o reliability of results.
20
We believe that we compete effectively on each of these factors except for
the range of tests offered. Clinical laboratories are effective at processing
large panels of tests using skilled technicians and complex equipment. While our
current offering of reagent discs cannot provide the same broad range of tests,
we believe that in certain limited markets our products provide a sufficient
breadth of test menus to compete successfully with clinical laboratories given
the advantages of our products with respect to the other four factors. However,
we cannot assure you that we will continue to be able to compete effectively on
cost effectiveness, ease of use, immediacy of results or reliability of results.
We also cannot assure you that we will ever be able to compete effectively
solely on the basis of range of tests offered.
Competition in the human and veterinary diagnostic markets is intense. Our
principal competitors in the human blood analyzer market are Alfa Wassermann
S.P.A., Hemagen Diagnostics, Inc., i-STAT Corporation (which was recently
purchased by Abbott Laboratories), Johnson & Johnson (including its subsidiary,
Ortho-Clinical Diagnostics, Inc.), Novitron International, Inc. and Roche. Our
principal competitors in the veterinary blood analyzer market are Idexx
Laboratories, Inc. and Heska Corporation. 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 Centers
for Medicare and Medicaid Services ("CMS") 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
o 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 has classified our Piccolo products as "Class
I" and "Class II" devices. These classifications require us to submit to the FDA
a pre-market notification form or 510(k). The FDA uses the 510(k) to
substantiate product claims that are made by medical device manufacturers prior
to marketing. In our 510(k) notification, we must, among other things, establish
that the product we plan to market is "substantially equivalent" to (1) a
product that was on the market prior to the adoption of the 1976 Medical Device
Amendment or (2) 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 to six months, 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 25 reagent tests that we have on eleven 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.
o Need to Comply with Manufacturing Regulations
The 1976 Medical Device Amendment also requires us to manufacture our
Piccolo products in accordance with Good Manufacturing Practices guidelines.
Current Good Manufacturing Practice requirements are set forth in the 21 CFR 820
Quality System Regulation. These requirements regulate the methods used in, and
the facilities and controls used for, the design, manufacture, packaging,
storage, installation and servicing of our medical devices intended for human
use. Our manufacturing facility is subject to periodic 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 April 2001, the State of California Food and Drug
Branch granted our manufacturing facility "in compliance" status, based on the
regulations for Good Manufacturing Practices for medical devices. In May 2001,
the State of California Food and Drug Branch granted licensing for our new Union
City facility. The most recent inspection was in March 2003 when the U.S. FDA
21
conducted a facility inspection and verified our compliance with the 21 CFR 820
Regulation. 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.
o 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 Centers for Medicare and Medicaid Services. 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.
Recently, the U.S. Food and Drug Administration (FDA) granted waived
status under CLIA regulations for our lipids test panel when used in conjunction
with our Piccolo point of care analyzer. Waived status permits untrained
personnel to run the Piccolo using the Lipid Panel and, thus, extending the
sites (doctors' offices and other point-of-care environments) that can use the
Piccolo. We cannot assure you that we will successfully receive the waived
status from the FDA for our other products. Consequently, the market for our
Piccolo products may be confined to those testing facilities that are certified
as "laboratories" and our growth will be limited accordingly.
o We Are Subject to Various Federal, State, Local, and International
Regulations
Federal and state regulations regarding the manufacture and sale of health
care products and diagnostic devices may change. In addition, as we continue to
sell in foreign markets, we may have to obtain additional governmental
clearances in those markets. For example, in December 2003, we received
certification from the British Standards Institute to the ISO 13485:1996 quality
system standard for medical devices. This quality system certification, along
with successful completion of product testing to current European standards and
the translation of Piccolo product documentation into the required languages,
enabled us to meet the compliance requirements of the CE Mark and the current
European In Vitro Device Directive. We cannot predict what impact, if any, such
current or future regulatory changes would have on our business. We may not be
able to obtain regulatory clearances for our products in the United States or in
foreign markets, and the failure to obtain these regulatory clearances will
materially adversely affect our business and results of operations.
Although we believe that we will be able to comply with all applicable
regulations of the Food and Drug Administration and of the State of California,
including the Quality System Regulation, current regulations depend on
administrative interpretations. Future interpretations made by the Food and Drug
Administration, the Centers for Medicare and Medicaid Services (CMS) or other
regulatory bodies may adversely affect 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, including in
particular Clinton H. Severson, our President, Chief Executive Officer and
Chairman of our Board of Directors, might impede the achievement of our business
objectives. Mr. Severson's amended and restated employment agreement with us was
filed with the SEC on August 14, 2001 as an exhibit to our quarterly report for
the quarter ended June 30, 2001. We are not aware of any member of our executive
management team who intends to retire within one year of the date of this
filing. We currently do not maintain key man life insurance on any of our
employees. Although historically we have been relatively 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 in the future
because numerous medical products and other high technology companies compete
for the services of these qualified individuals.
22
Legislative Actions, Higher Insurance Cost And Potential New Accounting
Pronouncements Are Likely To Cause Our General And Administrative Expenses To
Increase And Impact Our Future Financial Position And Results Of Operations
In order to comply with the Sarbanes-Oxley Act of 2002, as well as changes
to Nasdaq listing standards and proposed accounting changes by the Securities
and Exchange Commission, we will be required to enhance our internal controls,
hire additional personnel and utilize additional outside legal, accounting and
advisory services, all of which will cause our general and administrative costs
to increase. Insurers are also likely to increase premiums as a result of the
high claims rates incurred over the past year, and so our premiums for our
various insurance policies, including our directors' and officers' insurance
policies, are likely to increase.
If Requirements Relating to Accounting Treatment For Employee Stock Options Are
Changed, We May Be Forced to Change Our Business Practices
We currently account for the issuance of stock options under APB Opinion
No. 25, "Accounting for Stock Issued to Employees." If proposals currently under
consideration by accounting standards organizations and governmental authorities
are adopted, we may be required to treat the value of the stock options granted
to employees as a compensation expense. As a result, we could decide to reduce
the number of stock options granted to employees or to grant options to fewer
employees. This could affect our ability to retain existing employees and
attract qualified candidates, and increase the cash compensation we would have
to pay to them. In addition, such a change could have a negative effect on our
earnings.
We Must Comply With Strict And Potentially 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. We handle and dispose of human and veterinary blood
samples for testing (whole blood, plasma, serum) and we pay approximately
$54,000 per year to comply with applicable environmental regulations. Although
we believe that we have complied with applicable laws and regulations in all
material respects and have not been required to take any action to correct any
noncompliance, we may have to incur significant costs to comply with
environmental regulations if our manufacturing to commercial levels continues to
increase. In addition, if a government agency determines that we have not
complied with these laws, rules and regulations, we may have to pay significant
fines and/or take remedial action that would be expensive and we do not carry
environmental-related insurance coverage.
System Failures Or Delays May Harm Our Business And Our Facilities And
Manufacturing Operations Are Vulnerable To Natural Disasters And Other
Unexpected Losses
Our success depends on the efficient and uninterrupted operation of our
manufacturing operations, which are co-located with our corporate headquarters
in Union City, California. A failure of manufacturing operations, be it in the
development and manufacturing of our Piccolo or VetScan analyzers or the reagent
discs used in the analyzers could result in our inability to supply customer
demand.
We do not have a backup facility to provide redundant manufacturing capacity in
the event of a system failure. Accordingly, if our Union City location
experienced a system failure, or regulatory problem that temporarily shut-down
our manufacturing facility, our manufacturing ability would become unavailable
until we were able to bring an alternative facility online, a process which
could take several weeks or even months. These manufacturing operations are also
vulnerable to damage from earthquakes, fire, floods, power loss,
telecommunications failures, break-ins and similar events. Although we carry
property and business interruption insurance, our coverage may not be adequate
to compensate us for all losses that may occur. Additionally, our computer
servers may be vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions.
Fluctuations In Foreign Exchange Rates And The Possible Lack Of Financial
Stability In Foreign Countries Could Prevent Overseas Sales Growth
Our international sales are overwhelmingly currently U.S.
dollar-denominated. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies could make our products less competitive in
international markets. For the limited amount of our sales denominated in local
currencies, we are subject to fluctuations in exchange rates between the U.S.
dollar and the particular local currency. Our operating results could also be
adversely affected by the seasonality of international sales and the economic
conditions of our overseas markets.
Our 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. During the past two years, our stock price
closed at a high of $22.80 on January 26, 2004 and a low of $3.00 on August 19,
2002. The following factors may affect the market price of our common stock:
23
o fluctuation in our operating results;
o announcements of technological innovations or new commercial
products by us or our competitors;
o changes in governmental regulation;
o prospects and proposals for health care reform;
o governmental or third party payors' controls on prices that our
customers may pay for our products;
o developments or disputes concerning patent or our other proprietary
rights;
o public concern as to the safety of our devices or similar devices
developed by our competitors; and
o 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.
Our Shareholders Rights Plan And Our Ability To Issue Preferred Stock May Delay
Or Prevent A Change Of Control Of Abaxis
Our Shareholder Rights Plan, adopted by our board of directors on
April 22, 2003 may make it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, control of Abaxis. The
Shareholder Rights Plan could limit the price that investors might be willing to
pay in the future for shares of our common stock.
In addition, our board of directors has the authority to issue up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders, except to the
extent required by NASDAQ rules. The issuance of preferred stock, while
providing flexibility in connection with possible financings or acquisitions or
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks with respect to interest rates on our
line of credit, cash equivalent investments and short-term investments.
For our line of credit, which provides for borrowings of up to $2,000,000, the
interest rate is equal to the prime rate minus 0.25%, which totaled 4.00% at
June 30, 2004. Consequently, an increase in the prime rate would expose us to
higher interest expenses. There was no outstanding balance on our line of credit
at June 30, 2004.
As a matter of management policy, we do not currently enter into transactions
involving derivative financial instruments. In the event we do enter into such
transactions in the future, such items will be accounted for in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," in which case we will formally document all
relationships between hedging instruments and hedged items, as well as our risk
management objective and strategy for undertaking such hedge transactions.
Item 4. Controls and Procedures
(a) Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this quarterly report.
(b) There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of the evaluation referenced in paragraph (a) above.
CEO and CFO Certifications
Attached, as Exhibits 31 and 32, are two separate forms of certifications of the
CEO and the CFO. The certifications attached as Exhibits 31.1 and 31.2 are
required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the
"Section 302
24
Certification"). The information contained in this Item 4 relates to the
Controls Evaluation referred to in the Section 302 Certifications, and should be
read with the Section 302 Certifications for a more complete understanding of
the topics presented.
Disclosure Controls and Internal Controls
Our management, including the CEO and CFO, has a responsibility for establishing
and maintaining adequate disclosure and internal controls over our financial
reporting. Disclosure Controls are procedures that are designed with the
objective of ensuring that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934, such as this Quarterly Report
on Form 10-Q, is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. Internal Controls are
procedures that are designed with the objective of providing reasonable
assurance that our transactions are properly authorized, our assets are
safeguarded against unauthorized or improper use, and our transactions are
properly recorded and reported, all to permit the preparation of our financial
statements in conformity with GAAP.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
We are from time to time involved in various litigation matters in the
normal course of business. We believe that the ultimate resolution of these
matters will not have a material effect on our financial position or results of
operations.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits included herein
Exhibit Number Description
- -------------- -----------
31.1 Certification of President and Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer and Vice President of
Finance pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of President and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer and Vice President of
Finance pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
On April 29, 2004, we submitted a Current Report on Form 8-K to release our
quarterly earnings announcement.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABAXIS, INC.
(Registrant)
Date: August 9, 2004 BY: /s/ Clinton H. Severson
---------------------------
Clinton H. Severson
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: August 9, 2004 BY: /s/ Alberto R. Santa Ines
Alberto R. Santa Ines
Chief Financial Officer and Vice President of Finance
(Principal Financial and Accounting Officer)
26