UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		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 (State of Incorporation)		77-0213001 (I.R.S. Employer Identification No.)

Union City, California 94587
(Address of principal executive offices)

(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 such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of February 5, 2010, there were 22,081,000 shares of the Registrant’s common stock outstanding.

 

 

ABAXIS, INC.
Form 10-Q

For the Quarter Ended December 31, 2009

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2009 and 2008			3
Condensed Consolidated Balance Sheets as of December 31, 2009 and March 31, 2009			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2009 and 2008			5
Notes to the Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			34
Item 4T. Controls and Procedures			34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			34
Item 1A. Risk Factors			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3. Defaults Upon Senior Securities			45
Item 4. Submission of Matters to a Vote of Security Holders			45
Item 5. Other Information			45
Item 6. Exhibits			46
SIGNATURES			47
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

ABAXIS, INC.

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Revenues		$	31,005			$	26,964			$	90,892			$	79,224
Cost of revenues			12,709				11,859				37,590				35,274
Gross profit			18,296				15,105				53,302				43,950
Operating expenses:
Research and development			2,835				2,037				8,002				6,116
Sales and marketing			7,486				6,061				21,428				18,382
General and administrative			2,552				2,241				7,739				5,855
Total operating expenses			12,873				10,339				37,169				30,353
Income from operations			5,423				4,766				16,133				13,597
Interest and other income (expense), net			(11	)			352				795				1,140
Income before income tax provision			5,412				5,118				16,928				14,737
Income tax provision			1,982				1,762				6,545				5,308
Net income		$	3,430			$	3,356			$	10,383			$	9,429
Net income per share:
Basic net income per share		$	0.16			$	0.15			$	0.47			$	0.43
Diluted net income per share		$	0.15			$	0.15			$	0.46			$	0.42
Shares used in the calculation of net income per share:
Weighted average common shares outstanding — basic			22,035,000				21,879,000				22,002,000				21,798,000
Weighted average common shares outstanding — diluted			22,617,000				22,264,000				22,549,000				22,325,000
Share-based compensation expense by function:
Cost of revenues		$	107			$	33			$	243			$	108
Research and development			235				64				589				178
Sales and marketing			335				143				884				401
General and administrative			771				225				1,997				613
Total share-based compensation expense		$	1,448			$	465			$	3,713			$	1,300

See accompanying Notes to the Condensed Consolidated Financial Statements.

ABAXIS, INC.

		December 31,				March 31,
		2009				2009
ASSETS
Current assets:
Cash and cash equivalents		$	48,282			$	49,237
Short-term investments			21,284				20,776
Receivables (net of allowances of $450 at December 31, 2009 and $388 at March 31, 2009)			21,951				21,983
Inventories			17,551				15,735
Prepaid expenses			1,600				957
Net deferred tax asset, current			3,576				4,676
Total current assets			114,244				113,364
Long-term investments			23,605				4,886
Property and equipment, net			14,571				14,798
Intangible assets, net			4,744				5,175
Other assets			76				24
Net deferred tax asset, non-current			2,653				2,464
Total assets		$	159,893			$	140,711
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	7,634			$	3,963
Accrued payroll and related expenses			4,678				3,698
Accrued taxes			481				34
Other accrued liabilities			1,275				1,116
Deferred revenue			1,128				1,024
Warranty reserve			1,373				1,714
Total current liabilities			16,569				11,549
Non-current liabilities:
Deferred rent			—				137
Deferred revenue			1,402				1,550
Warranty reserve			245				583
Total non-current liabilities			1,647				2,270
Commitments and contingencies (Note 8)
Shareholders’ equity:
Preferred stock, no par value; 5,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock, no par value; 35,000,000 shares authorized; 22,047,000 and 21,933,000 shares issued and outstanding at December 31, 2009 and at March 31, 2009, respectively			122,248				117,846
Retained earnings			19,429				9,046
Total shareholders’ equity			141,677				126,892
Total liabilities and shareholders’ equity		$	159,893			$	140,711

See accompanying Notes to the Condensed Consolidated Financial Statements.

ABAXIS, INC.

		Nine Months Ended
		December 31,
		2009				2008
Cash flows from operating activities:
Net income		$	10,383			$	9,429
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			3,768				3,179
Investment premium amortization			118				—
(Gain) loss on disposals of property and equipment			32				(8	)
(Gain) loss on foreign exchange translation			(60	)			81
Share-based compensation expense			3,713				1,300
Excess tax benefits from share-based awards			(838	)			(5,120	)
Provision for deferred income taxes			1,698				4,051
Changes in assets and liabilities:
Receivables, net			80				(753	)
Inventories			(3,079	)			(114	)
Prepaid expenses			(643	)			(814	)
Other assets			(52	)			(24	)
Accounts payable			3,670				(487	)
Accrued payroll and related expenses			980				(1,455	)
Accrued taxes			264				109
Other accrued liabilities			159				(84	)
Deferred rent			(137	)			(103	)
Deferred revenue			(44	)			485
Warranty reserve			(679	)			437
Net cash provided by operating activities			19,333				10,109
Cash flows from investing activities:
Purchases of available-for-sale investments			(3,030	)			—
Purchases of held-to-maturity investments			(41,212	)			(21,579	)
Proceeds from redemptions of available-for-sale investments			3,000				36,975
Proceeds from maturities of held-to-maturity investments			21,897				14,081
Purchases of property and equipment			(1,819	)			(1,992	)
Proceeds from disposals of property and equipment			—				20
Net cash (used in) provided by investing activities			(21,164	)			27,505
Cash flows from financing activities:
Proceeds from issuance of common stock under stock plans, net			14				242
Excess tax benefits from share-based awards			838				5,120
Net cash provided by financing activities			852				5,362
Effect of exchange rate changes on cash and cash equivalents			24				(37	)
Net (decrease) increase in cash and cash equivalents			(955	)			42,939
Cash and cash equivalents at beginning of period			49,237				17,219
Cash and cash equivalents at end of period		$	48,282			$	60,158
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds		$	4,874			$	1,147
Supplemental disclosure of non-cash flow information:
Change in unrealized gain (loss) on investments, net of tax		$	—			$	1,415
Transfers of equipment between inventory and property and equipment, net		$	1,323			$	1,674
Net change in capitalized share-based compensation		$	60			$	7
Common stock withheld for employee taxes in connection with share-based compensation		$	441			$	280

See accompanying Notes to the Condensed Consolidated Financial Statements.

ABAXIS, INC.

NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business. Abaxis, Inc. (“Abaxis,” the “Company,” or “we”), incorporated in California in 1989, develops, manufactures, markets and sells portable blood analysis systems for use in the human or veterinary patient-care setting to provide clinicians with rapid blood constituent measurements.

On July 1, 2008, our sales office in Darmstadt, Germany was incorporated as Abaxis Europe GmbH to market, promote and distribute diagnostic systems for medical and veterinary uses. Abaxis Europe GmbH, our wholly-owned subsidiary, was formed to provide customer support in a timely manner in response to the growing and increasingly diverse services needs of customers in the European market.

Principles of Consolidation. The accompanying unaudited condensed consolidated financial statements as of and for the three and nine month periods ended December 31, 2009 include the accounts of Abaxis and our wholly-owned subsidiary, Abaxis Europe GmbH. All intercompany transactions and balances have been eliminated in consolidation.

Basis of Presentation. We have prepared the unaudited condensed consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim periods. The unaudited condensed consolidated financial statements included herein reflect all normal recurring adjustments, which are, in the opinion of our management, necessary to state fairly the results of operations and financial position for the periods presented. The results for the three and nine month periods ended December 31, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2010 or for any interim or future period.

These unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

In preparing the accompanying unaudited condensed consolidated financial statements, we have reviewed, as determined necessary by our management, events that have occurred after December 31, 2009 and through the time of filing these condensed consolidated financial statements on Form 10-Q with the SEC on February 9, 2010. There were no subsequent events requiring recognition or disclosure in the financial statements.

Reclassifications. Certain reclassifications have been made to prior periods’ financial statements to conform to the current period presentation. These reclassifications had no material impact on previously reported results of operations or financial position.

Use of Estimates in Preparation of Financial Statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such management estimates include allowance for doubtful accounts, fair value of investments, sales and other allowances, valuation of inventory, fair values of purchased intangible assets, useful lives of intangible assets, income taxes, valuation allowance for deferred tax assets, share-based compensation and warranty reserves. Our management bases their estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Our actual results may differ materially from these estimates.

Significant Accounting Policies. The significant accounting policies used in preparation of these condensed consolidated financial statements are consistent with those disclosed in our Annual Report on Form 10-K for the year ended March 31, 2009 filed with the SEC on June 12, 2009, except for the adoption of new accounting standards as discussed below.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

In October 2009, the Financial Accounting Standards Board (the “FASB”) issued amendments to the accounting standard addressing multiple-deliverable revenue arrangements. The amendments provide guidance in addressing how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, and how to allocate the consideration to each unit of accounting. In an arrangement with multiple deliverables, the delivered items shall be considered a separate unit of accounting if the delivered items have value to the customer on a stand-alone basis. Items have value on a stand-alone basis if they are sold separately by any vendor or the customer could resell the delivered items on a stand-alone basis; and if the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in the control of the vendor. This amendment is effective for the Company on April 1, 2011. We are currently evaluating the impact of adopting these amendments on our financial statements.

In June 2009, the FASB issued the “FASB Accounting Standards Codification” (the “Codification”) as the single source of authoritative United States generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents were superseded and all other accounting literature not included in the Codification were considered non-authoritative. While the adoption of the Codification as of September 30, 2009 and for the three month period then ended and all subsequent annual and interim periods changes how we reference accounting standards, the adoption did not have an impact on our consolidated financial position, results of operations or cash flows.

In June 2009, the FASB issued the consolidation guidance for variable-interest entities to replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. These new standards will be effective for the Company in the first quarter of fiscal year 2011. We are currently assessing the potential impact, if any, these new standards may have on our consolidated financial position, results of operations or cash flows.

On June 30, 2009, we adopted amendments to the accounting standard addressing subsequent events. The amendments provide guidance on the definition of what qualifies as a subsequent event — those events or transactions that occur following the balance sheet date, but before the financial statements are issued, or are available to be issued — and requires companies to disclose the date through which subsequent events were evaluated and the basis for determining that date. This disclosure should alert all users of financial statements that a company has not evaluated subsequent events after that date in the set of financial statements being presented. The amendments required additional disclosures only, and therefore did not have a material impact on our consolidated financial position, results of operations or cash flows.

On June 30, 2009, we adopted amendments to the accounting standard addressing debt securities. The amendments provide guidance in determining whether impairments in debt securities are other than temporary, and modify the presentation and disclosures surrounding such instruments. The adoption of these amendments did not have a material impact on our consolidated financial position, results of operations or cash flows.

On June 30, 2009, we adopted amendments to the accounting standard addressing fair value of financial instruments in interim reporting periods. The amendments provide guidance on the disclosure requirements about fair value of financial instruments in interim reporting periods. Such disclosures were previously required only in annual financial statements. The adoption of these amendments did not have a material impact on our consolidated financial position, results of operations or cash flows.

On June 30, 2009, we adopted amendments to the accounting standard addressing estimating fair value. The amendments provide additional authoritative guidance to assist both issuers and users of financial statements in determining whether a market is active or inactive, and whether a transaction is distressed. The adoption of these amendments did not have a material impact on our consolidated financial position, results of operations or cash flows.

On April 1, 2009, we adopted amendments to the accounting standard addressing intangibles, goodwill and other assets. The amendments provide guidance to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under U.S. GAAP. The adoption of these amendments did not have a material impact on our consolidated financial position, results of operations or cash flows.

On April 1, 2009, we adopted amendments to the accounting standard addressing derivatives and hedging. The amendments change the disclosure requirements for derivative instruments and hedging activities, requiring enhanced disclosures about how and why an entity uses derivative instruments, how instruments are accounted for under U.S. GAAP, and how derivatives and hedging activities affect an entity’s financial position, financial performance and cash flows. The adoption of these amendments required additional disclosure only, and therefore did not have an impact on our consolidated financial position, results of operations or cash flows.

NOTE 3. INVESTMENTS

The following table summarizes short-term and long-term investments by major security type (in thousands):

		December 31, 2009
		Cost or				Gross Unrealized				Fair
		Amortized Cost				Gain (Loss)				Value
Short-term investments
Held-to-maturity:
Certificates of deposits		$	13,214			$	—			$	13,214
Corporate bonds			2,015				—				2,015
Municipal bonds			6,055				—				6,055
Total short-term investments in held-to-maturity		$	21,284			$	—			$	21,284
Long-term investments
Held-to-maturity:
Certificates of deposits		$	6,562			$	—			$	6,562
Corporate bonds			11,110				—				11,110
Municipal bonds			3,433				—				3,433
U.S. agency securities			2,500				—				2,500
Total long-term investments in held-to-maturity		$	23,605			$	—			$	23,605

		March 31, 2009
		Cost or				Gross Unrealized				Fair
		Amortized Cost				Gain (Loss)				Value
Short-term investments
Held-to-maturity:
Certificates of deposits		$	20,776			$	—			$	20,776
Total short-term investments in held-to-maturity		$	20,776			$	—			$	20,776
Long-term investments
Held-to-maturity:
Certificates of deposits		$	2,376			$	—			$	2,376
Corporate bonds			2,510				—				2,510
Total long-term investments in held-to-maturity		$	4,886			$	—			$	4,886

As of December 31, 2009 and March 31, 2009, we had no unrealized gain (loss) on investments, net of related income taxes.

The contractual maturities of short-term and long-term investments as of December 31, 2009, are as follows (in thousands):

Investments		Fair Value
Due in less than one year		$	21,284
Due in 1 to 4 years			23,605
Total investments		$	44,889

NOTE 4. FAIR VALUE MEASUREMENTS

On April 1, 2008, we adopted amendments to the accounting standard addressing the measurement of the fair value of financial assets and financial liabilities. The amendments provide guidance on defining fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The amendments establish a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

Level 3: Unobservable inputs that are supported by little or no market data and require the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

The following table summarizes financial assets, measured at fair value on a recurring basis, by level within the fair value hierarchy as of December 31, 2009 (in thousands):

		As of December 31, 2009
		Quoted Prices in								Significant
		Active Markets for				Significant Other				Unobservable
		Identical Assets				Observable Inputs				Inputs
		Level 1				Level 2				Level 3				Total
Assets
Cash equivalents		$	30,318			$	—			$	—			$	30,318
Total assets at fair value		$	30,318			$	—			$	—			$	30,318

Our Level 1 financial assets are cash equivalents, comprised of money market mutual funds, which are highly liquid instruments with original or remaining maturities of three months or less at the time of purchase that are readily convertible into cash. The fair value of our Level 1 financial assets is based on quoted market prices of the underlying security. As of December 31, 2009, we did not have any Level 2 or Level 3 financial assets or liabilities.

NOTE 5. INVENTORIES

Inventories, include material, labor and overhead, and are stated at the lower of cost (first-in, first-out method) or market. Components of inventories were as follows (in thousands):

		December 31,				March 31,
		2009				2009
Raw materials		$	8,407			$	8,539
Work-in-process			3,030				2,592
Finished goods			6,114				4,604
Total Inventories		$	17,551			$	15,735

NOTE 6. WARRANTY RESERVES

We provide for the estimated future costs to be incurred under our standard warranty obligation on our instruments and reagent discs.

Instruments. Our standard warranty obligation on instruments ranges from one to three years. The estimated contractual warranty obligation is recorded when the related revenue is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. Cost of revenue reflects estimated warranty expense for instruments sold in the current period and any adjustments in estimated warranty expense for the installed base under our standard warranty obligation based on our quarterly evaluation of service experience. The estimated accrual for warranty exposure is based on historical experience, estimated product failure rates, material usage, freight incurred in repairing the instrument after failure and known design changes.

Reagent Discs. We record a provision for defective reagent discs when the related sale is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. The warranty cost includes the replacement costs and freight of a defective reagent disc. During the three and nine months ended December 31, 2009, the provision for warranty expense related to replacement of defective reagent discs was $66,000 and $91,000, respectively. The balance of accrued warranty reserve related to replacement of defective reagent discs at December 31, 2009 and 2008 was $325,000 and $392,000, respectively, which was classified as a current liability on the balance sheet.

We evaluate our estimates for warranty reserves on an ongoing basis and believe we have the ability to reasonably estimate warranty costs. However, unforeseeable changes in factors may impact the estimate for warranty and such changes could cause a material change in our warranty reserve accrual in the period in which the change was identified.

The change in our accrued warranty reserve during the three and nine months ended December 31, 2009 and 2008 is summarized as follows (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Balance at beginning of period		$	2,228			$	2,242			$	2,297			$	1,948
Provision for warranty expense			198				387				599				1,406
Warranty costs incurred			(140	)			(244	)			(610	)			(969	)
Adjustment to pre-existing warranties			(668	)			—				(668	)			—
Balance at end of period			1,618				2,385				1,618				2,385
Non-current portion of warranty reserve			245				748				245				748
Current portion of warranty reserve		$	1,373			$	1,637			$	1,373			$	1,637

NOTE 7. LINE OF CREDIT

We have a line of credit with Comerica Bank-California which provides for borrowings of up to $2.0 million. The line of credit may be terminated upon notification by either party and any outstanding balance is payable upon demand by Comerica Bank-California. The line of credit bears interest at the bank’s prime rate minus 0.25%, which totaled 3.00% at December 31, 2009, and is payable monthly. At December 31, 2009, of the $2.0 million of borrowings available, $97,000 was committed to secure a letter of credit for our facilities lease. At December 31, 2009, there was no amount outstanding under our line of credit. The weighted average interest rates on our line of credit during the three months ended December 31, 2009 and 2008 were 3.00% and 3.81%, respectively.

The line of credit agreement contains certain financial covenants, which are evaluated on a quarterly basis. At December 31, 2009, we were in compliance with each of these covenants. Included in these financial covenants, among other stipulations, are the following requirements:

•

We must have a minimum net income of $25,000 before preferred stock dividends and accretion on preferred stock in any three quarters of a fiscal year, provided that any loss before preferred stock dividends and accretion on preferred stock incurred in the remaining quarter is not to exceed $250,000.

•

We are required to be profitable, as defined, on a fiscal year to date basis beginning, with respect to the current fiscal year, with the six month period ended September 30, 2009 and to have net income before preferred stock dividends and accretion on preferred stock of at least $1.2 million for the fiscal year ending March 31, 2010.

•

We are required to comply with certain financial covenants as follows:

Financial Covenants		Requirements
Quick ratio, as defined		Not less than 2.00 to 1.00
Cash flow coverage, as defined		Not less than 1.25 to 1.00
Debt to net worth ratio, as defined		Not greater than 1.00 to 1.00
Tangible effective net worth, as defined		Not less than $25.7 million

Borrowings under the line of credit are collateralized by our net book value of assets of $141.7 million at December 31, 2009, including our intellectual property.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Purchase Commitments. In October 2008, we entered into an original equipment manufacturing (“OEM”) agreement with Scandinavian Micro Biodevices APS (“SMB”) of Denmark to purchase coagulation analyzers and coagulation cartridges. In the fourth quarter of fiscal 2009, we started marketing the products and, upon achievement of certain milestones by SMB outlined in the agreement, we will be subject to the minimum purchase commitments under the OEM agreement. These milestones have not yet been met and we are currently purchasing coagulation analyzers and coagulation cartridges on a purchase order basis, but all such purchases will count towards the minimum purchase obligations if and when they are triggered.

Patent License Agreement. Effective January 2009, we entered into a license agreement with Inverness Medical Switzerland GmbH (“Inverness”). Under our license agreement, we licensed co-exclusively certain worldwide patent rights related to lateral flow immunoassay technology in the field of animal health diagnostics in the professional marketplace. The license agreement provides that Inverness shall not grant any future rights to any third parties under its current lateral flow patent rights in the animal health diagnostics field in the professional marketplace. The license agreement enables us to develop and market products under rights from Inverness to address animal health and laboratory animal research markets.

In exchange for the license rights, we (i) paid an up-front license fee of $5.0 million to Inverness in January 2009, (ii) agreed to pay royalties during the term of the agreement, based solely on sales of products in a jurisdiction country covered by valid and unexpired claims in that jurisdiction under the licensed Inverness patent rights, and (iii) agreed to pay a yearly minimum license fee of between $500,000 to $1.0 million per year, which fee will be creditable against any royalties due during such calendar year. The royalties, if any, are payable through the date of the expiration of the last valid patent licensed under the agreement that includes at least one claim in a jurisdiction covering products we sell in that jurisdiction. The yearly minimum fees are payable starting in fiscal 2011 for so long as we desire to maintain exclusivity under the agreement.

Litigation. 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.

NOTE 9. SHARE-BASED COMPENSATION

We recognize share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award to employees and directors. Share-based compensation has been classified in the statements of operations or capitalized on the balance sheets in the same manner as cash compensation paid to employees. Non-cash compensation expense recognized for share-based awards during the three months ended December 31, 2009 and 2008 was $1.4 million and $465,000, respectively, and during the nine months ended December 31, 2009 and 2008 was $3.7 million and $1.3 million, respectively. Capitalized share-based compensation costs at December 31, 2009 and 2008 were $93,000 and $34,000, respectively, which were included in inventories on our Condensed Consolidated Balance Sheets.

Cash Flow Impact

The accounting standard with respect to share-based payment requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised stock options and vested restricted stock units in excess of the deferred tax asset attributable to share-based compensation expense for such share-based awards. Excess tax benefits are considered realized when the tax deductions reduce taxes that otherwise would be payable. Excess tax benefits classified as a financing cash inflow for the three months ended December 31, 2009 and 2008 were $487,000 and $2.0 million, respectively, and for the nine months ended December 31, 2009 and 2008 were $838,000 and $5.1 million, respectively.

Equity Compensation Plans

Our share-based compensation plans are described below.

2005 Equity Incentive Plan. Our 2005 Equity Incentive Plan (the “Equity Incentive Plan”) restated and amended our 1998 Stock Option Plan. The Equity Incentive Plan allows for the awards of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares, performance units, deferred compensation awards or other share-based awards to employees, directors and consultants. On October 28, 2008, our shareholders approved an amendment to the Equity Incentive Plan to increase the shares reserved for issuance under the Equity Incentive Plan by 500,000 shares. As of December 31, 2009, the Equity Incentive Plan provides for the issuance of a maximum of 5,386,000 shares, of which 454,000 shares of common stock were then available for future issuance.

Options granted to employees and directors generally expire ten years from the grant date. Options granted to employees generally become exercisable over a period of four years based on cliff-vesting terms and continuous employment. Options granted to non-employee directors generally become exercisable over a period of one year based on monthly vesting terms and continuous service. See the “Stock Options” section in this Note for additional information.

Restricted stock units awarded to employees generally vest over a period of four years and the awards may also be subject to accelerated vesting upon achieving certain performance-based milestones and continuous employment during the vesting period. Restricted stock units awarded to non-employee directors generally vest in full one year after the grant date based on continuous service. See the “Restricted Stock Units” section in this Note for additional information.

1992 Outside Directors’ Stock Option Plan. Under our 1992 Outside Directors’ Stock Option Plan (the “Directors Plan”), options to purchase shares of common stock were automatically granted, annually, to non-employee directors. Options under the Directors Plan were nonqualified stock options and were granted at the fair market value on the date of grant and expired ten years from the date of grant. Options granted to non-employee directors generally become exercisable over a period of one year based on monthly vesting terms and continuous service. The Directors Plan provided for the issuance of a maximum of 250,000 shares. As of December 31, 2009, all outstanding options under the Directors Plan were fully vested and fully exercisable and no shares of common stock were available for future issuance because the time period for granting options expired in accordance with the terms of the Directors Plan in June 2002.

Our current practice is to issue new shares of common stock from our authorized shares for share-based awards upon the exercise of stock options or vesting of restricted stock units.

Stock Options

Prior to April 1, 2006, we granted stock options to employees, with an exercise price equal to the closing market price of our common stock on the date of grant and with cliff-vesting terms over four years, conditional on continuous employment with the Company. In addition, prior to April 1, 2006, we granted stock options to non-employee directors with an exercise price equal to the closing market price of our common stock on the date of grant and became exercisable over a period of one year based on monthly vesting terms, conditional on continuous service to the Company. There were no stock options granted since the beginning of fiscal 2007 or during the nine months ended December 31, 2009.

We used the Black-Scholes option pricing model to determine the fair value of stock options granted prior to March 31, 2006. The fair value of each stock option granted was estimated on the date of the grant using the Black-Scholes option pricing model, based on a multiple option valuation approach. We have recognized compensation expense during the requisite service period of the stock option. As of December 31, 2009, we had no unrecognized compensation expense related to stock options granted.

Stock Option Activity

The following table summarizes information regarding options outstanding and options exercisable at December 31, 2009 and the changes during the nine-month period then ended:

						Weighted				Weighted
						Average				Average				Aggregate
						Exercise				Remaining				Intrinsic
		Number of				Price				Contractual				Value
		Shares				Per Share				Life (Years)				(In thousands)
Outstanding at March 31, 2009			848,000			$	8.86
Granted			—				—
Exercised			(63,000	)			7.18
Canceled or forfeited			—				—
Outstanding at December 31, 2009			785,000			$	8.99				2.58			$	12,995
Vested and expected to vest at December 31, 2009			785,000			$	8.99				2.58			$	12,995
Exercisable at December 31, 2009			785,000			$	8.99				2.58			$	12,995

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on our closing stock price as of December 31, 2009, that would have been received by the option holders had all option holders exercised their stock options as of that date. Total intrinsic value of stock options exercised during the three months ended December 31, 2009 and 2008 was $368,000 and $1.3 million, respectively, and during the nine months ended December 31, 2009 and 2008 was $1.0 million and $2.4 million, respectively. Cash proceeds from stock options exercised during the three months ended December 31, 2009 and 2008 were $250,000 and $181,000, respectively, and during the nine months ended December 31, 2009 and 2008 were $455,000 and $522,000, respectively.

Restricted Stock Units

We grant restricted stock unit awards to employees and directors as part of our share-based compensation program which began in fiscal 2007. The restricted stock unit awards entitle holders to receive shares of common stock at the end of a specified period of time. Vesting for restricted stock unit awards is based on continuous employment or service of the holder. Upon vesting, the equivalent number of common shares are typically issued net of tax withholdings. If the vesting conditions are not met, unvested restricted stock unit awards will be forfeited. Generally, the restricted stock unit awards vest according to one of the following time-based vesting schedules:

•

Restricted stock unit awards to employees: Four-year time-based vesting as follows: five percent vesting after the first year; additional ten percent after the second year; additional 15 percent after the third year; and the remaining 70 percent after the fourth year of continuous employment with the Company.

•

Restricted stock unit awards to non-employee directors: 100 percent vesting after one year of continuous service to the Company.

Certain restricted stock unit awards granted to employees in fiscal 2007 may also be subject to accelerated vesting upon achieving certain performance-based milestones. Additionally, the Compensation Committee of our Board of Directors (the “Compensation Committee”), in its discretion, may provide in the event of a change in control for the acceleration of vesting and/or settlement of the restricted stock unit held by a participant upon such conditions and to such extent as determined by the Compensation Committee. Our Board of Directors has adopted an executive change in control severance plan, which it may terminate or amend at any time, that provides that awards granted to executive officers will accelerate fully on a change of control. The vesting of non-employee director awards granted under the Equity Incentive Plan automatically will also accelerate in full upon a change in control.

The fair value of restricted stock unit awards used in our expense recognition method is measured based on the number of shares granted and the closing market price of our common stock on the date of grant. Such value is recognized as an expense over the corresponding requisite service period. The share-based compensation expense is reduced for an estimate of the restricted stock unit awards that are expected to be forfeited. The forfeiture estimate is based on historical data and other factors, and compensation expense is adjusted for actual results. As of December 31, 2009, the total unrecognized compensation expense related to restricted stock unit awards granted amounted to $13.8 million, which is expected to be recognized over a weighted average service period of 2.14 years.

Restricted Stock Unit Activity

The following table summarizes restricted stock unit activity for the nine months ended December 31, 2009:

						Weighted
						Average
		Number of				Grant Date
		Shares				Fair Value(1)
Unvested at March 31, 2009			690,000			$	23.43
Granted			308,000				18.32
Vested(2)			(75,000	)			23.70
Canceled or forfeited			(59,000	)			23.54
Unvested at December 31, 2009			864,000			$	21.57

Total intrinsic value of restricted stock units vested during the three months ended December 31, 2009 and 2008 was $52,000 and $14,000, respectively, and during the nine months ended December 31, 2009 and 2008 was $1.3 million and $1.1 million, respectively. The total grant date fair value of restricted stock units vested during the three months ended December 31, 2009 and 2008 was $63,000 and $30,000, respectively, and during the nine months ended December 31, 2009 and 2008 was $1.8 million and $1.0 million, respectively.

NOTE 10. NET INCOME PER SHARE

Basic net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding using the treasury stock method. Dilutive potential common shares outstanding include outstanding stock options and restricted stock units.

The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net income per share (in thousands, except share and per share data):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Numerator:
Net income		$	3,430			$	3,356			$	10,383			$	9,429
Denominator:
Weighted average common shares outstanding — basic			22,035,000				21,879,000				22,002,000				21,798,000
Weighted average effect of dilutive securities:
Stock options			404,000				381,000				399,000				493,000
Restricted stock units			178,000				4,000				148,000				34,000
Weighted average common shares outstanding — diluted			22,617,000				22,264,000				22,549,000				22,325,000
Net income per share:
Basic net income per share		$	0.16			$	0.15			$	0.47			$	0.43
Diluted net income per share		$	0.15			$	0.15			$	0.46			$	0.42

We excluded the following stock options from the computation of diluted weighted average shares outstanding because the exercise price of the stock options is greater than the average market price of our common stock during the period and, therefore, the inclusion of these stock options would be antidilutive to net income per share:

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Weighted average number of shares underlying antidilutive stock options			—				185,000				—				159,000
Weighted average exercise price per share underlying antidilutive stock options			N/A			$	21.02				N/A			$	21.65

We excluded the following restricted stock units from the computation of diluted weighted average shares outstanding because the inclusion of these awards would be antidilutive to net income per share:

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Weighted average number of shares underlying antidilutive restricted stock units			68,000				679,000				64,000				190,000

NOTE 11. INCOME TAXES

Our effective tax rate for the three months ended December 31, 2009 and 2008 was 37% and 34%, respectively, and for the nine months ended December 31, 2009 and 2008 was 39% and 36%, respectively.

The increase in the effective tax rate for the three and nine months ended December 31, 2009, as compared to the three and nine months ended December 31, 2008, was primarily due to an increase in non-deductible share-based compensation expense and a change in our investment portfolio, and partially offset by an increase in tax benefits for federal qualified production activities.

We did not have any unrecognized tax benefits as of December 31, 2009 or December 31, 2008. During the three and nine months ended December 31, 2009 and 2008, we did not recognize any interest or penalties related to unrecognized tax benefits.

NOTE 12. COMPREHENSIVE INCOME

The following is a summary of comprehensive income for the three and nine months ended December 31, 2009 and 2008 (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Net income		$	3,430			$	3,356			$	10,383			$	9,429
Other comprehensive income:
Change in unrealized gain (loss) on investments, net of tax			3				393				—				1,415
Comprehensive income		$	3,433			$	3,749			$	10,383			$	10,844

NOTE 13. SEGMENT REPORTING INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by our chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

Abaxis develops, manufactures, markets and sells portable blood analysis systems for use in the human or veterinary patient-care setting to provide clinicians with rapid blood constituent measurements. We identify our reportable segments as those customer groups that represent more than 10% of our combined revenue or gross profit or loss of all reported operating segments. We manage our business on the basis of the following two reportable segments: (i) the medical market and (ii) the veterinary market, which are based on the products sold by market and customer group. Each reportable segment has similar manufacturing processes, technology and shared infrastructures. The accounting policies for segment reporting are the same as for the Company as a whole. We do not segregate assets by segments since our chief operating decision maker does not use assets as a basis to evaluate a segment’s performance.

Medical Market

In the medical market reportable segment, we serve a worldwide customer group consisting of military installations (ships, field hospitals and mobile care units), physicians office practices across all specialties, urgent care and walk-in clinics (free-standing or hospital-connected), home care providers (national, regional or local), nursing homes, ambulance companies, oncology treatment clinics, hospital labs and draw stations. The products manufactured and sold in this segment primarily consist of Piccolo chemistry analyzers and medical reagent discs.

Veterinary Market

In the veterinary market reportable segment, we serve a worldwide customer group consisting of companion animal hospitals, animal clinics with mixed practices of small animals, birds and reptiles, equine and bovine practitioners, veterinary emergency clinics, veterinary referral hospitals, universities, government, pharmaceutical companies, biotechnology companies and private research laboratories. The products manufactured and sold in this segment primarily consist of VetScan chemistry analyzers and veterinary reagent discs. We also sell OEM supplied products in this segment consisting of hematology instruments and related reagent kits, VetScan VSpro coagulation analyzers and related consumables, which we launched in the fourth quarter of fiscal 2009, canine heartworm rapid tests, which we launched in our fourth quarter of fiscal 2009, and i-STAT analyzers and related consumables, which we launched in our fiscal 2010.

The table below summarizes revenues, cost of revenues and gross profit from our two operating segments and from certain unallocated items for the three and nine months ended December 31, 2009 and 2008 (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
Revenues:
Medical Market		$	5,172			$	7,175			$	17,280			$	19,719
Veterinary Market			23,889				17,907				67,396				54,465
Other(1)			1,944				1,882				6,216				5,040
Total revenues			31,005				26,964				90,892				79,224
Cost of revenues:
Medical Market			2,198				3,548				7,552				9,772
Veterinary Market			9,955				7,389				26,993				22,672
Other(1)			556				922				3,045				2,830
Total cost of revenues			12,709				11,859				37,590				35,274
Gross profit:
Medical Market			2,974				3,627				9,728				9,947
Veterinary Market			13,934				10,518				40,403				31,793
Other(1)			1,388				960				3,171				2,210
Gross profit		$	18,296			$	15,105			$	53,302			$	43,950

(1) Represents unallocated items, not specifically identified to any particular business segment.

NOTE 14. REVENUES BY PRODUCT CATEGORY AND GEOGRAPHIC REGION AND SIGNIFICANT CONCENTRATIONS

Revenue Information

The following is a summary of our revenues by product category (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
Revenues by Product Category		2009				2008				2009				2008
Instruments(1)		$	8,461			$	7,976			$	21,291			$	22,670
Consumables(2)			20,105				16,751				61,993				50,378
Other products			1,569				1,340				5,015				3,767
Product sales, net			30,135				26,067				88,299				76,815
Development and licensing revenue			870				897				2,593				2,409
Total revenues		$	31,005			$	26,964			$	90,892			$	79,224

The following is a summary of revenues by geographic region based on customer location (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
Revenues by Geographic Region		2009				2008				2009				2008
North America		$	24,907			$	22,852			$	73,792			$	65,560
Europe			4,855				3,040				13,704				10,835
Asia Pacific and rest of the world			1,243				1,072				3,396				2,829
Total revenues		$	31,005			$	26,964			$	90,892			$	79,224

Significant Concentrations

Revenues from significant customers as a percentage of total revenues were as follows:

				Three Months Ended								Nine Months Ended
		Geographical		December 31,								December 31,
Distributor		Location		2009				2008				2009				2008
Walco International, Inc., d/b/a DVM Resources		United States			12	%			<10	%			11	%			<10	%

During the three and nine months ended December 31, 2008, there were no distributors or direct customers that accounted for more than 10% of our total worldwide revenues.

At December 31, 2009, one distributor in the United States accounted for 17% of our total receivables balance. At December 31, 2008, one distributor in the United States accounted for 14% of our total receivables balance.

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

FORWARD-LOOKING STATEMENTS

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,” “intends,” “plans,” “future,” “projects,” “estimates,” “would,” “may,” “could,” “should,” “might,” and similar expressions identify forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties, including but not limited to those discussed below, in Part II, Item 1A of this report and in Part I, Item 1A of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”), that could cause actual results to differ materially from historical results or those anticipated. Such risks and uncertainties include, but are not limited to, the market acceptance of our products and the continuing development of our products, regulatory clearance and approvals required by the United States Food and Drug Administration (“FDA”) and other government regulatory authorities, 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 Abaxis’ intellectual property or claims of infringement of intellectual property asserted by third parties, risks involved in carrying of inventory, risks associated with the ability to attract, train and retain competent sales personnel, general market conditions and competition. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Abaxis assumes no obligation to update any forward-looking statements as circumstances change.

BUSINESS OVERVIEW

Abaxis, Inc. (“Abaxis,” “us” or “we”) was incorporated in California in 1989. Our principal offices are located at 3240 Whipple Road, Union City, California 94587. Our telephone number is (510) 675-6500 and our Internet address is www.abaxis.com. We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our common stock trades on the NASDAQ Global Market under the symbol “ABAX.”

We develop, manufacture, market and sell portable blood analysis systems for use in the human or veterinary patient-care setting to provide clinicians with rapid blood constituent measurements. Our primary product is a blood analysis system, consisting of a compact portable analyzer and a series of single-use plastic discs, called reagent discs, containing all the chemicals required to perform a panel of up to 14 tests on human patients and 13 tests on veterinary patients. We manufacture the system in our manufacturing facility in Union City, California and we market our blood chemistry analyzers in both the medical market and in the veterinary market, as described below.

•

Medical Market: We currently market the blood analysis system in the medical market under the name Piccolo® xpress. Through October 2006, we marketed the blood analysis system in the medical market as the Piccolo®, now referred to as the Piccolo Classic. We continue to support and service our current population of Piccolo xpress and Piccolo Classic chemistry analyzers.

•

Veterinary Market: We currently market the blood analysis system in the veterinary market under the name VetScan VS2®. Through March 2006, we marketed the blood analysis system in the veterinary market as the VetScan®, now referred to as the VetScan Classic. We continue to support and service our current population of VetScan VS2 and VetScan Classic chemistry analyzers.

In September 2007, we introduced a veterinary hematology instrument under the name VetScan HM5. The VetScan HM5 offers a 22-parameter complete blood count (CBC) analysis, including a five-part differential cell counter specifically designed for veterinary applications. In May 2004, we introduced a veterinary hematology instrument that offers an 18-parameter CBC analysis, including a three-part white blood cell differential, marketed originally as the VetScan HMII, and is now referred to as the VetScan HM2. We currently purchase the hematology instruments from Diatron Medical Instruments PLC. of Budapest, Hungary. Through April 2004, we marketed a veterinary hematology instrument under the name VetScan HMT. We continue to support and service our current population of VetScan HM5, VetScan HM2, VetScan HMII and VetScan HMT hematology instruments. We also market reagent kits to be used with our hematology instruments which we currently purchase from three suppliers: Clinical Diagnostic Solutions, Inc., Diatron Medical Instruments PLC. and Mallinckrodt Baker BV.

In July 2008, our sales office in Darmstadt, Germany was incorporated as Abaxis Europe GmbH to market, promote and distribute diagnostic systems for medical and veterinary uses. As a result, Abaxis Europe GmbH became a wholly-owned subsidiary of Abaxis. The subsidiary was formed to provide customer support in a timely manner in response to the growing and increasingly diverse services needs of customers in the European market.

In January 2009, we introduced a veterinary coagulation analyzer under the name VetScan VSpro. The VetScan VSpro assists in the diagnosis and evaluation of suspected bleeding disorders, toxicity/poisoning, evaluation of Disseminated Intravascular Disease, hepatic disease and monitoring therapy and progression of disease states. The point-of-care coagulation analyzer is offered with a combination assay (PT/aPTT test cartridge) for canine testing. We currently purchase the coagulation analyzers and coagulation cartridges from Scandinavian Micro Biodevices APS of Farum, Denmark.

In January 2009, we introduced a canine heartworm rapid test under the name VetScan Canine Heartworm Rapid Test. The VetScan Canine Heartworm Rapid Test is a highly sensitive and specific test for the detection of Dirofilaria immitis in canine whole blood, serum or plasma. The lateral flow immunoassay technology in the canine heartworm rapid tests provides immediate results.

In May 2009, we entered into an exclusive agreement with Abbott Point of Care Inc., granting us the right to sell and distribute Abbott’s i-STAT^® 1 handheld instrument (i-STAT 1 analyzer) and associated consumables (for blood gas, electrolyte, basic blood chemistry and immunoassay testing) in the animal health care market worldwide. Our right to sell and distribute these products is initially non-exclusive, but becomes exclusive in all countries of the world, except for Japan, on November 1, 2009. Our rights in Japan remain non-exclusive for the term of the agreement. The initial term of the agreement ends on December 31, 2014, and after this initial term, our agreement continues automatically for successive one-year periods unless terminated by either party. We started marketing and sales activities of the i-STAT cartridges in the first quarter of fiscal 2010. In the second quarter of fiscal 2010, we started marketing and sales activities of the i-STAT instrument. We launched an Abaxis-branded version of the i-STAT 1 instrument as part of our VetScan line in the third quarter of fiscal 2010.

Our sales for any future periods are not predictable with a significant degree of certainty, and may depend on a number of factors outside of our control, including but not limited to inventory or timing considerations by our distributors. We generally operate with a limited order backlog because our products are typically shipped shortly after orders are received. As a result, product sales in any quarter are generally dependent on orders booked and shipped in that quarter. Our expense levels, which are to a large extent fixed, are based in part on our expectations of future revenues. Accordingly, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, any such shortfall would negatively affect our operating results and financial condition. In addition, our sales may be adversely impacted by pricing pressure from competitors. Our ability to be consistently profitable will depend, in part, on our ability to increase the sales volumes of our Piccolo and VetScan products and to successfully compete with other competitors. We believe that period to period comparisons of our results of operations are not necessarily meaningful indicators of future results.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the SEC. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and the sensitivity of these estimates to deviations in the assumptions used in making them. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. However, there can be no assurance that our actual results will not differ from these estimates.

We have identified the policies below as critical because they are not only important to understanding our financial condition and results of operations, but also because application and interpretation of these policies requires both judgment and estimates of matters that are inherently uncertain and unknown. Accordingly, actual results may differ materially from our estimates. The impact and any associated risks related to these policies on our business operations are discussed below. A more detailed discussion on the application of these and other accounting policies are included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

Revenue Recognition and Deferred Revenue. Our primary customers are distributors and direct customers in both the medical and veterinary markets. Revenues from product sales, net of estimated sales allowances and rebates, are recognized when (i) evidence of an arrangement exists, (ii) upon shipment of the products to the customer, (iii) the sales price is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured. Rights of return are not provided.

We recognize revenue associated with extended maintenance agreements ratably over the life of the contract. Amounts collected in advance of revenue recognition are recorded as a current or non-current liability based on the time from the balance sheet date to the future date of revenue recognition. We provide incentives in the form of free goods or extended maintenance agreements to customers in connection with the sale of our instruments. Revenues from such sales are allocated separately to the instruments and incentives based on the relative fair value of each element. Revenues allocated to incentives are deferred until the goods are shipped to the customer or are recognized ratably over the life of the maintenance contract.

We periodically offer trade-in programs to customers for trading in an existing instrument to purchase a new instrument and we will either provide incentives in the form of free goods or reduce the sales price of the instrument. These incentives in the form of free goods are recorded according to the policies described above.

Distributor and Customer Rebates. We offer distributor pricing rebates and customer incentives from time to time. The distributor pricing rebates are offered to distributors upon meeting the sales volume requirements during a qualifying period. The distributor pricing rebates are recorded as a reduction to gross revenues during a qualifying period. Cash rebates are offered to distributors or customers who purchase certain products or instruments during a promotional period. Cash rebates are recorded as a reduction to gross revenues.

Sales and Other Allowances. We estimate a provision for defective reagent discs as part of sales allowances when we issue credits to customers for defective reagent discs. We also establish, upon shipment of our products to distributors, a provision for potentially defective reagent discs, based on estimates derived from historical experience. The provision for potentially defective reagent discs was recorded in sales allowances, using internal data available to estimate the level of inventory in the distribution channel, the lag time for customers to report defective reagent discs and the historical rates of defective reagent discs. Starting on July 1, 2007, the provision for potentially defective reagent discs is recorded as part of warranty reserves, instead of sales allowances, since we replace defective reagent discs rather than issue a credit to customers. Changes in our estimates for accruals related to provisions for defective reagent discs have not been material to our financial position or results of operations. In the future, the actual defective reagent discs may exceed our estimates, which could adversely affect our financial results.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts based on our assessment of the collectability of the amounts owed to us by our customers. In determining the amount of the allowance, we make judgments about the creditworthiness of customers which is mostly determined by the customer’s payment history and the outstanding period of accounts. We specifically identify amounts that we believe to be uncollectible and the allowance for doubtful accounts is adjusted accordingly. An additional allowance is recorded based on certain percentages of our aged receivables, using historical experience to estimate the potential uncollectible and our assessment of the general financial condition of our customer base. If our actual collections experience changes, revisions to our allowances may be required, which could adversely affect our operating income.

Fair Value Measurements. On April 1, 2008, we adopted amendments to the accounting standard addressing the measurement of the fair value of financial assets and financial liabilities. The amendments provide guidance on defining fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The amendments establish a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. As of December 31, 2009, we used Level 1 assumptions for our cash equivalents, which are traded in an active market. The valuations are based on quoted prices of the underlying security that are readily and regularly available in an active market, and accordingly, a significant degree of judgment is not required.

Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument. As of December 31, 2009, we did not have any Level 2 financial assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market data and require the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. As of December 31, 2009, we did not have any Level 3 financial assets or liabilities.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are developed to reflect those that market participants would use in pricing the asset or liability at the measurement date.

Warranty Reserves. We provide for the estimated future costs to be incurred under our standard warranty obligation on our instruments. Our standard warranty obligation on instruments ranges from one to three years. The estimated contractual warranty obligation is recorded when the related revenue is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. Cost of revenue reflects estimated warranty expense for instruments sold in the current period and any adjustments in estimated warranty expense for the installed base under our standard warranty obligation based on our quarterly evaluation of service experience. While we engage in product quality programs and processes, including monitoring and evaluating the quality of our suppliers, our estimated accrual for warranty exposure is based on historical experience, estimated product failure rates, material usage and freight incurred in repairing the instrument after failure and known design changes.

A provision for defective reagent discs is recorded when the related sale is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated, at which time they are included in cost of revenues. The warranty cost includes the replacement costs and freight of a defective reagent disc.

We analyze the adequacy of the ending accrual balance of warranty reserves each quarter. The determination of warranty reserves requires us to make estimates of the expected costs to repair or replace the instruments and to replace defective reagent discs under warranty. If actual repair or replacement costs of instruments or replacement costs of reagent discs differ significantly from our estimates, adjustments to cost of revenues may be required.

Inventories. We state inventories at the lower of cost or market, cost being determined using standard costs which approximates actual costs using the first-in, first-out (FIFO) method. Inventories include material, labor and overhead. We establish provisions for excess, obsolete and unusable inventories after evaluation of future demand and market conditions. If future demand or actual market conditions are less favorable than those estimated by management or if a significant amount of the material were to become unusable, additional inventory write-downs may be required, which would have a negative effect on our operating income.

Valuation of Long-Lived Assets. The carrying value of our long-lived assets, such as property and equipment and amortized intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with guidance on the accounting for impairment or disposal of long-lived assets. We look to current and future profitability, as well as current and future undiscounted cash flows, excluding financing costs, as primary indicators of recoverability. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposal is less than the carrying amount. If impairment is determined to exist, any related impairment loss is calculated based on fair value.

Income Taxes. We account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts to be recovered.

On April 1, 2007, we adopted amendments to the accounting standard addressing the provisions of accounting for uncertainty in income taxes. The amendments provide guidance on the accounting for uncertainty in income taxes recognized in the consolidated financial statements and prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The amendments also provide guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Our policy to include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes did not change despite the adoption of these amendments.

Share-Based Compensation Expense. On April 1, 2006, we adopted the amendments to the accounting standard addressing the fair value provisions of share-based payment. We recognize share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award to employees and directors.

We did not grant stock options during fiscal 2007, 2008 or 2009, or during the nine months ended December 31, 2009. For stock options granted prior to March 31, 2006, we use the Black-Scholes option pricing model to determine the fair value. Determining the appropriate fair value model and calculating the fair value of share-based awards requires highly subjective assumptions, as described below.

•

Risk-free interest rate: The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option.

•

Expected stock price volatility: We estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock.

•

Expected term: We estimate the expected term of stock options granted based on historical exercise and post-vesting termination patterns, which we believe are representative of future behavior.

•

Expected dividends: We have not paid cash dividends on our common stock and we do not anticipate paying cash dividends in the foreseeable future; consequently, we use an expected dividend yield of zero.

For restricted stock units, the assumptions to calculate compensation expense is based on the fair value of our stock at the grant date. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future.

As required by fair value provisions of share-based compensation, employee share-based compensation expense recognized is calculated over the requisite service period of the awards and reduced for estimated forfeitures. The forfeiture rate is estimated based on historical data of our share-based compensation awards that are granted and cancelled prior to vesting and upon historical experience of employee turnover. Changes in estimated forfeiture rates and differences between estimated forfeiture rates and actual experience may result in significant, unanticipated increases or decreases in share-based compensation expense from period to period. To the extent we revise our estimate of the forfeiture rate in the future, our share-based compensation expense could be materially impacted in the quarter of revision, as well as in following quarters.

RESULTS OF OPERATIONS

We develop, manufacture, market and sell portable blood analysis systems for use in the human or veterinary patient-care setting to provide clinicians with rapid blood constituent measurements. We operate in two segments: (i) the medical market and (ii) the veterinary market. See “Segment Results” in this section for a detailed discussion.

Total Revenues

Revenues by Geographic Region and by Product Category. Revenues by geographic region based on customer location and revenues by product category during the three and nine months ended December 31, 2009 and 2008 were as follows (in thousands, except percentages):

		Three Months Ended																Nine Months Ended
		December 31,								Change								December 31,								Change
										Increase/				Percent												Increase/				Percent
Revenues by Geographic Region		2009				2008				(Decrease)				Change				2009				2008				(Decrease)				Change
North America		$	24,907			$	22,852			$	2,055				9	%		$	73,792			$	65,560			$	8,232				13	%
Percentage of total revenues			80	%			85	%											81	%			83	%
Europe			4,855				3,040				1,815				60	%			13,704				10,835				2,869				26	%
Percentage of total revenues			16	%			11	%											15	%			14	%
Asia Pacific and rest of the world			1,243				1,072				171				16	%			3,396				2,829				567				20	%
Percentage of total revenues			4	%			4	%											4	%			3	%
Total revenues		$	31,005			$	26,964			$	4,041				15	%		$	90,892			$	79,224			$	11,668				15	%

		Three Months Ended																Nine Months Ended
		December 31,								Change								December 31,								Change
										Increase/				Percent												Increase/				Percent
Revenues by Product Category		2009				2008				(Decrease)				Change				2009				2008				(Decrease)				Change
Instruments(1)		$	8,461			$	7,976			$	485				6	%		$	21,291			$	22,670			$	(1,379	)			(6	%)
Percentage of total revenues			27	%			30	%											23	%			29	%
Consumables(2)			20,105				16,751				3,354				20	%			61,993				50,378				11,615				23	%
Percentage of total revenues			65	%			62	%											68	%			63	%
Other products			1,569				1,340				229				17	%			5,015				3,767				1,248				33	%
Percentage of total revenues			5	%			5	%											6	%			5	%
Product sales, net			30,135				26,067				4,068				16	%			88,299				76,815				11,484				15	%
Percentage of total revenues			97	%			97	%											97	%			97	%
Development and licensing revenue			870				897				(27	)			(3	%)			2,593				2,409				184				8	%
Percentage of total revenues			3	%			3	%											3	%			3	%
Total revenues		$	31,005			$	26,964			$	4,041				15	%		$	90,892			$	79,224			$	11,668				15	%

Three Months Ended December 31, 2009 Compared to Three Months Ended December 31, 2008

North America. During the three months ended December 31, 2009, total revenues in North America increased 9%, or $2.1 million, as compared to the three months ended December 31, 2008. The increase in total revenues in North America was attributed to the following:

•

Sales of our VetScan chemistry analyzers in North America increased 26%, or $577,000, primarily due to the timing of inventory purchases by a distributor during the three months ended December 31, 2009.

•

Total sales from our original equipment manufacturing (“OEM”) supplied products, which include our VetScan VSpro coagulation analyzers and related consumables (launched in the fourth quarter of fiscal 2009), i-STAT analyzers and related consumables (launched in fiscal 2010), and canine heartworm rapid tests (launched in the fourth quarter of fiscal 2009), were $3.3 million in North America during the three months ended December 31, 2009.

The net increase in total revenues in North America was partially offset by the following:

•

Sales of our Piccolo chemistry analyzers in North America (excluding the U.S. government) decreased 47%, or $679,000, primarily due to inventory stock adjustments by distributors during the three months ended December 31, 2009.

•

Sales of our Piccolo chemistry analyzers to the U.S. government decreased 92%, or $708,000, primarily due to a decrease in the U.S. Military’s needs for our products in the third quarter of fiscal 2010, which were not predictable.

•

Medical reagent discs sales in North America (excluding the U.S. government) decreased 14%, or $428,000, primarily due to inventory stock adjustments by distributors during the three months ended December 31, 2009.

Europe. During the three months ended December 31, 2009, total revenues in Europe increased 60%, or $1.8 million, as compared to the three months ended December 31, 2008. The increase in total revenues in Europe was attributed to the following:

•

Sales of our VetScan chemistry analyzers in Europe increased 56%, or $357,000, primarily due to the timing of inventory purchases by our distributors and higher average selling prices during the three months ended December 31, 2009.

•

Veterinary reagent discs sales in Europe increased 182%, or $1.6 million, primarily due to an increase in units sold resulting from an expanded installed base of our VetScan chemistry analyzers and higher average selling prices.

The net increase in total revenues in Europe was partially offset by a decrease in medical reagent discs sold in Europe of 40%, or $325,000, primarily due to the timing of inventory purchases by our distributors during the three months ended December 31, 2009.

Significant concentration. One distributor in the United States, DVM Resources, accounted for 12% of our total worldwide revenues during the three months ended December 31, 2009. There were no distributors or direct customers that accounted for more than 10% of our total worldwide revenues for the three months ended December 31, 2008.

Nine Months Ended December 31, 2009 Compared to Nine Months Ended December 31, 2008

North America. During the nine months ended December 31, 2009, total revenues in North America increased 13%, or $8.2 million, as compared to the nine months ended December 31, 2008. The increase in total revenues in North America was attributed to the following:

•

Veterinary reagent discs sales in North America increased 15%, or $4.2 million, primarily due to an increase in units sold resulting from an expanded installed base of our VetScan chemistry analyzers.

•

Sales of our hematology reagent kits in North America increased 12%, or $373,000, primarily due to an increase in units sold resulting from an expanded installed base of our VetScan hematology instruments.

•

Total sales from our OEM supplied products, which include our VetScan VSpro coagulation analyzers and related consumables (launched in the fourth quarter of fiscal 2009), i-STAT analyzers and related consumables (launched in fiscal 2010), and canine heartworm rapid tests (launched in the fourth quarter of fiscal 2009), were $6.3 million in North America during the nine months ended December 31, 2009.

•

Revenues from other products sold in North America increased 31%, or $1.1 million. The net increase was primarily due to (a) a decrease in maintenance contracts offered to customers from time to time as incentives in the form of free goods in connection with the sale of our products, for which revenue is deferred and recognized ratably over the life of the maintenance contract and (b) an increase in demand for products using the Orbos Discrete Lyophilization Process, which is strongly affected by seasonal demands.

The net increase in total revenues in North America was partially offset by the following:

•

Sales of our Piccolo chemistry analyzers in North America (excluding the U.S. government) decreased 49%, or $2.1 million, primarily due to inventory stock adjustments by distributors during the nine months ended December 31, 2009.

•

Sales of our Piccolo chemistry analyzers to the U.S. government decreased 42%, or $814,000, primarily due to a decrease in the U.S. Military’s needs for our products in the third quarter of fiscal 2010, which were not predictable.

•

Sales of our VetScan chemistry analyzers in North America decreased 10%, or $685,000, primarily due to lower average selling prices, and partially offset by an increase in units sold, primarily in the third quarter of fiscal 2010.

•

Sales of our hematology instruments in North America decreased 5%, or $283,000.

Europe. During the nine months ended December 31, 2009, total revenues in Europe increased 26%, or $2.9 million, as compared to the nine months ended December 31, 2008. The increase in total revenues in Europe was attributed to the following:

•

Sales of our VetScan chemistry analyzers in Europe increased 38%, or $732,000, primarily due to the timing of inventory purchases by our distributors and higher average selling prices during the nine months ended December 31, 2009.

•

Total sales of our VetScan hematology instruments and hematology reagent kits in Europe increased 60%, or $321,000, primarily due to an increase in units sold resulting from our promotion strategy for our VetScan hematology instruments.

•

Medical reagent discs sales in Europe increased 9%, or $131,000, primarily due to the expanded installed base of our Piccolo chemistry analyzers and higher average selling prices during the nine months ended December 31, 2009.

•

Veterinary reagent discs sales in Europe increased 25%, or $1.4 million, primarily due to an increase in units sold resulting from an expanded installed base of our VetScan chemistry analyzers and higher average selling prices.

Significant concentration. One distributor in the United States, DVM Resources, accounted for 11% of our total worldwide revenues during the nine months ended December 31, 2009. There were no distributors or direct customers that accounted for more than 10% of our total worldwide revenues during the nine months ended December 31, 2008.

Segment Results

Three Months Ended December 31, 2009 Compared to Three Months Ended December 31, 2008

The following table presents revenues, cost of revenues, gross profit and percent of revenues by operating segments for the three months ended December 31, 2009 and 2008 (in thousands, except percentages):

		Three Months Ended
		December 31,																Change
						Percent of								Percent of				Increase/				Percent
		2009				Revenues(1)				2008				Revenues(1)				(Decrease)				Change
Revenues:
Medical Market		$	5,172				100	%		$	7,175				100	%		$	(2,003	)			(28	%)
Percentage of total revenues			17	%							27	%
Veterinary Market			23,889				100	%			17,907				100	%			5,982				33	%
Percentage of total revenues			77	%							66	%
Other(2)			1,944								1,882								62				3	%
Percentage of total revenues			6	%							7	%
Total revenues			31,005								26,964								4,041				15	%
Cost of revenues:
Medical Market			2,198				42	%			3,548				49	%			(1,350	)			(38	%)
Veterinary Market			9,955				42	%			7,389				41	%			2,566				35	%
Other(2)			556								922								(366	)			(40	%)
Total cost of revenues			12,709								11,859								850				7	%
Gross profit:
Medical Market			2,974				58	%			3,627				51	%			(653	)			(18	%)
Veterinary Market			13,934				58	%			10,518				59	%			3,416				32	%
Other(2)			1,388								960								428				45	%
Gross profit		$	18,296							$	15,105							$	3,191				21	%