We expect our effective tax rate will be approximately 37% for federal and various state tax jurisdictions in the near term.
In October 2003, under the terms of our respective Certificates 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.
During fiscal 2006, we generated $9,817,000 of cash from operating activities compared to $6,321,000 in fiscal 2005. This change was primarily the result of net income of $7,475,000 adjusted for the effects of non-cash expenses including depreciation and amortization of $2,136,000, stock option income tax benefits of $523,000, a decrease in current net deferred tax assets of $333,000 and a decrease in non-current net deferred tax assets of $2,907,000.
Our net trade receivable balances were $14,638,000 and $10,509,000 as of March 31, 2006 and March 31, 2005, respectively. The increase of $4,129,000 in our receivable balance was due to higher sales during the fourth quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005. Inventories increased to $10,396,000 as of March 31, 2006 from $8,355,000 as of March 31, 2005, primarily related to new product introduction. Current net deferred tax assets decreased to $4,294,000 as of March 31, 2006 from $4,677,000 as of March 31, 2005, as a result of the utilization of net operating losses on income during fiscal 2006. Non-current net deferred tax assets decreased to $12,125,000 as of March 31, 2006 from $15,032,000 as of March 31, 2005, as a result of utilization of net operating loss carryforwards in fiscal 2006.
Accounts payable increased to $4,614,000 as of March 31, 2006 from $3,850,000 as of March 31, 2005, primarily related to the timing and payments of services and inventory purchases. Accrued payroll and related expenses increased to $3,890,000 as of March 31, 2006 from $1,867,000 as of March 31, 2005, as a result of personnel-related costs due to an increase in employee-related benefits and an increase in headcount, primarily in sales and marketing to support the growth in both our veterinary and medical markets. Warranty reserves increased to $472,000 as of March 31, 2006 from $245,000 as of March 31, 2005, due to the change in the standard warranty policy in fiscal 2006. The non-current portion of deferred revenue decreased to $938,000 as of March 31, 2006 from $1,146,000 as of March 31, 2005, due to the reduction of incentives in the form of free goods given to customers.
Fiscal 2005 Compared with Fiscal 2004
During fiscal 2005, we generated $6,321,000 of cash from operating activities compared to $7,198,000 in fiscal 2004. This change was primarily the result of net income of $4,851,000 adjusted for the effects of non-cash expenses including depreciation and amortization of $1,896,000, stock option income tax benefits of $608,000, an increase in current net deferred tax assets of $4,068,000 and a decrease in non-current net deferred tax assets of $5,592,000.
Our net trade receivable balances were $10,509,000 and $8,202,000 as of March 31, 2005 and March 31, 2004, respectively. The increase in our trade receivable balance was primarily due to a higher increase in sales in the last month of the fourth quarter of fiscal 2005 as compared to fiscal 2004. Inventories increased to $8,355,000 as of March 31, 2005 from $5,736,000 as of March 31, 2004, primarily related to purchases due to a higher projected sales volume. Current net deferred tax assets increased to $4,677,000 as of March 31, 2005 from $609,000 as of March 31, 2004, as a result of anticipated utilization of net operating losses on projected income for fiscal 2006. Non-current net deferred tax assets decreased to $15,032,000 as of March 31, 2005 from $20,624,000 as of March 31, 2004, as a result of utilization of net operating loss carryforwards in fiscal 2005 and anticipated utilization of net operating losses for fiscal 2006.
Accounts payable increased to $3,850,000 as of March 31, 2005 from $2,721,000 as of March 31, 2004, related to inventory purchases due to a higher projected sales volume. Accrued payroll and related expenses decreased to $1,867,000 as of March 31, 2005 from $2,853,000 as of March 31, 2004, due to a reduction in accrued bonus at March 31, 2005 since qualifiers for bonus payments were not met in the fourth quarter of fiscal 2005. Other accrued liabilities increased to $828,000 as of March 31, 2005 from $319,000 as of March 31, 2004, related to an increase in income taxes payable and other accrued expenses related to professional services. The current portion of deferred revenue increased to $907,000 as of March 31, 2005 from $264,000 as of March 31, 2004 and the non-current portion of deferred revenue increased to $1,146,000 as of March 31, 2005 from $474,000 as of March 31, 2004, as a result of incentives in the form of free goods given to customers.
We anticipate that we will incur incremental additional costs to support our future operations, including further additional pre-clinical testing and clinical trials for our current and future products; research and design costs related to the continuing development of our current and future products; and acquisition of capital equipment for our manufacturing facility, which includes the ongoing costs related to the continuing development of our current and future products.
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 pursue strategic opportunities.
Investing Activities
Fiscal 2006 Compared with Fiscal 2005
Net cash used in investing activities during fiscal 2006 was $6,751,000. The investing activities included purchases of $58,359,000 of short-term investments consisting of auction rate, corporate obligations and U.S. Treasury and Agency securities. The purchases were offset by maturities of short-term investments totaling $54,899,000. Cash used in investing activities also included purchases of property and equipment of $3,291,000 to support our increased product demand and new product introduction and our goal of more efficient production lines.
Fiscal 2005 Compared with Fiscal 2004
Net cash used in investing activities for fiscal 2005 was $11,344,000. The cash used in fiscal 2005 was primarily due to purchases of $16,787,000 in short-term investments consisting of corporate obligations, U.S. Treasury and Agency securities and certificate of deposits, offset partially by the maturities of certificate of deposits totaling $7,998,000 that were purchased in fiscal 2004. Cash used in investing activities also included purchases of property and equipment of $2,562,000, primarily to support our increased product demand and new product introduction and our goal of more efficient production lines.
We anticipate that we will continue to purchase property and equipment necessary in the normal course of our business.
37
Financing Activities
Fiscal 2006 Compared with Fiscal 2005
Net cash provided by financing activities in fiscal 2006 was $1,322,000, which primarily consisted of proceeds from the exercise of stock options of $990,000 and warrants to purchase common stock of $348,000.
Fiscal 2005 Compared with Fiscal 2004
Net cash provided by financing activities in fiscal 2005 was $1,475,000, which primarily consisted of proceeds from the exercise of stock options of $810,000 and warrants to purchase common stock of $687,000.
Line of Credit
We have established a line of credit with Comerica Bank-California which provides for borrowings of up to $2,000,000. The line of credit terminates upon notification by either party and the outstanding balance is payable upon demand. The line of credit bears interest at the bank’s prime rate minus 0.25%, which totaled 7.50% at March 31, 2006, and is payable monthly. Of the $2,000,000 available, $410,000 was committed to secure a letter of credit for our facilities lease at March 31, 2006. At March 31, 2006, there was no amount outstanding under our line of credit. The weighted average interest rate on the line of credit during fiscal 2006 and 2005 was 6.43% and 4.45%, 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 on preferred stock 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 ended September 30, 2005 and to have net income before preferred stock dividends and accretion on preferred stock of $1,150,000 for the fiscal year ended March 31, 2006. In addition, we are required to have a quick ratio, as defined, of not less than 2.00 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 March 31, 2006, we were in compliance with these covenants.
Borrowings under the line of credit are collateralized by our net book value of assets of $71.0 million at March 31, 2006, including our intellectual property.
Contractual Obligations
As of March 31, 2006, our contractual obligations for the next five years were as follows:
| | Payments Due by Period | |
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| | | | | Due in Fiscal | |
| | | | |
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| | Total | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | |
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|
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Operating leases | | $ | 5,307,000 | | $ | 1,066,000 | | $ | 1,104,000 | | $ | 1,128,000 | | $ | 1,134,000 | | $ | 875,000 | |
Purchase commitments | | | 5,539,000 | | | 323,000 | | | 2,608,000 | | | 2,608,000 | | | — | | | — | |
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|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total contractual obligations | | $ | 10,846,000 | | $ | 1,389,000 | | $ | 3,712,000 | | $ | 3,736,000 | | $ | 1,134,000 | | $ | 875,000 | |
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Operating Leases – We lease our principal facility and certain office equipment under operating lease agreements, which expire on various dates through fiscal 2011.
Purchase Commitments – In November 2003, we entered into an OEM agreement with Diatron Messtechnik GmbH (DIATRON) of Austria to purchase DIATRON hematology instruments. Under the terms of the agreement, we are committed to purchase a minimum number of hematology units through fiscal 2009 from DIATRON once the product was qualified for sale, which occurred in May 2004.
Line of Credit – At March 31, 2006, there was no outstanding balance on our line of credit with Comerica Bank-California. The line of credit terminates upon notification by either party and the outstanding balance is payable upon demand. In connection with our facility lease agreement, we have established a letter of credit for $410,000, which is secured by our line of credit.
38
Contingencies
We are from time to time involved in various litigation matters in the normal course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, we believe that the ultimate resolution of these matters will not have a material effect on our financial position or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R eliminates the alternative of applying the intrinsic value measurement provisions of Opinion 25 to stock compensation awards issued to employees. Rather, the new standard requires enterprises to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). SFAS 123R will be effective for the Company’s first quarter of fiscal 2007, which starts April 1, 2006. SFAS 123R is applied to new awards and to awards modified, repurchased, or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (such as unvested options) that are outstanding as of the date of adoption shall be recognized as the remaining requisite services are rendered.
The Company has not yet quantified the effects of the adoption of SFAS 123R, but it is expected that the new standard may result in significant stock-based compensation expense. The pro forma effects on net income and earnings per share if the Company had applied the fair value recognition provisions of the original SFAS 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of Opinion 25) are disclosed in Note 1 in Item 8 Financial Statements and Supplementary Data. Although such pro forma effects of applying the original SFAS 123 may be indicative of the effects of adopting SFAS 123R, the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123R will be dependent on numerous factors including, but not limited to, the valuation model chosen by the Company to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period; and the type of equity based incentives the Company grants.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” — an amendment of Accounting Research Bulletin ARB No. 43, Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and requires that those items be recognized as current-period charges. SFAS No. 151 also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material impact on the Company’s financial statements.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” — a replacement of APB Opinion No. 20, “Accounting Changes” and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle. Under previous guidance, changes in accounting principle were recognized as a cumulative affect in the net income of the period of the change. The new statement requires retrospective application of changes in accounting principle, limited to the direct effects of the change, to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. The statement also requires that correction of errors in previously issued financial statements should be termed a “restatement”. SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material impact on the Company’s financial statements.
39
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to the impact of interest rate changes with respect to our line of credit and our 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 bank’s prime rate minus 0.25%, which totaled 7.50% at March 31, 2006. Consequently, an increase in the prime rate would expose us to higher interest expenses. At March 31, 2006, there was no amount outstanding on our line of credit.
We invest excess cash in cash equivalents and in various types of short-term investments. Our investment objective is to maximize yields without significantly increased risk. At March 31, 2006, our short-term investments totaled $20,372,000, which includes net unrealized gains of $126,000. The short-term investments consisted of corporate obligations and auction rate securities, with maturities of one year or less from the date of purchase.
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 8. Financial Statements and Supplementary Data
| Reports of Independent Registered Public Accounting Firms |
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| Balance Sheets at March 31, 2006 and 2005 |
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| Statements of Operations for the Years Ended March 31, 2006, 2005 and 2004 |
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| Statements of Shareholders’ Equity and Comprehensive Income for the Years Ended March 31, 2006, 2005 and 2004 |
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| Statements of Cash Flows for the Years Ended March 31, 2006, 2005 and 2004 |
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| Notes to Financial Statements |
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Abaxis, Inc.
We have audited the accompanying balance sheet of Abaxis, Inc. as of March 31, 2006 and the related statements of operations, shareholders’ equity and comprehensive income, and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index to this Annual Report on Form 10-K at Part IV Item 15(a) 2, as of and for the year ended March 31, 2006. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Abaxis, Inc. as of March 31, 2006 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, as of and for the year ended March 31, 2006, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of March 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 13, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/s/ Burr, Pilger & Mayer LLP | | |
| | |
Palo Alto, California
June 13, 2006 | | |
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Abaxis, Inc.:
We have audited the accompanying balance sheet of Abaxis, Inc. (the “Company”) as of March 31, 2005 and the related statements of operations, stockholders’ equity and comprehensive income, and cash flows for the years ended March 31, 2005 and 2004. Our audits also included the financial statement schedule for the years ended March 31, 2005 and 2004 listed in the Index to this Annual Report on Form 10-K at Part IV Item 15 (a) 2. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Abaxis, Inc. as of March 31, 2005, and the results of its operations and its cash flows for the years ended March 31, 2005 and 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP | | |
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San Jose, California
June 13, 2005 | | |
42
ABAXIS, INC.
BALANCE SHEETS
| | March 31, | |
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| | 2006 | | 2005 | |
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ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 10,164,000 | | $ | 5,776,000 | |
Short-term investments | | | 20,372,000 | | | 16,858,000 | |
Trade receivables (net of allowances of $343,000 in 2006 and $482,000 in 2005) | | | 14,638,000 | | | 10,509,000 | |
Inventories | | | 10,396,000 | | | 8,355,000 | |
Prepaid expenses | | | 446,000 | | | 282,000 | |
Net deferred tax asset - current | | | 4,294,000 | | | 4,677,000 | |
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Total current assets | | | 60,310,000 | | | 46,457,000 | |
Property and equipment, net | | | 10,038,000 | | | 8,824,000 | |
Intangible assets, net | | | 525,000 | | | 600,000 | |
Deposits and other assets | | | 80,000 | | | 96,000 | |
Net deferred tax asset - non-current | | | 12,125,000 | | | 15,032,000 | |
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Total assets | | $ | 83,078,000 | | $ | 71,009,000 | |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | 4,614,000 | | $ | 3,850,000 | |
Accrued payroll and related expenses | | | 3,890,000 | | | 1,867,000 | |
Other accrued liabilities | | | 705,000 | | | 828,000 | |
Warranty reserve | | | 472,000 | | | 245,000 | |
Deferred revenue | | | 939,000 | | | 907,000 | |
Current portion of capital lease obligations | | | — | | | 16,000 | |
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Total current liabilities | | | 10,620,000 | | | 7,713,000 | |
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Deferred rent | | | 478,000 | | | 462,000 | |
Deferred revenue, less current portion | | | 938,000 | | | 1,146,000 | |
Commission obligation, less current portion | | | 4,000 | | | 21,000 | |
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Total non-current liabilities | | | 1,420,000 | | | 1,629,000 | |
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Commitments and contingencies (Note 8) | | | | | | | |
Preferred stock, no par value: authorized shares - 5,000,000; no shares issued and outstanding in 2006 and 2005 | | | — | | | — | |
Common stock, no par value: authorized shares - 35,000,000; issued and outstanding shares - 20,135,337 in 2006 and 19,891,607 in 2005 | | | 96,506,000 | | | 94,614,000 | |
Accumulated deficit | | | (25,543,000 | ) | | (33,018,000 | ) |
Accumulated other comprehensive income | | | 75,000 | | | 71,000 | |
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Total shareholders’ equity | | | 71,038,000 | | | 61,667,000 | |
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Total liabilities and shareholders’ equity | | $ | 83,078,000 | | $ | 71,009,000 | |
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See notes to financial statements.
43
ABAXIS, INC.
STATEMENTS OF OPERATIONS
| | Year Ended March 31, | |
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| | 2006 | | 2005 | | 2004 | |
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Revenues: | | | | | | | | | | |
Product sales, net | | $ | 67,556,000 | | $ | 52,464,000 | | $ | 46,599,000 | |
Development and licensing revenue | | | 1,372,000 | | | 294,000 | | | 275,000 | |
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Total revenues | | | 68,928,000 | | | 52,758,000 | | | 46,874,000 | |
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Costs and operating expenses: | | | | | | | | | | |
Cost of product sales | | | 30,075,000 | | | 24,811,000 | | | 22,966,000 | |
Selling, general and administrative | | | 21,994,000 | | | 15,701,000 | | | 14,431,000 | |
Research and development | | | 6,127,000 | | | 5,150,000 | | | 4,757,000 | |
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Total costs and operating expenses | | | 58,196,000 | | | 45,662,000 | | | 42,154,000 | |
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Income from operations | | | 10,732,000 | | | 7,096,000 | | | 4,720,000 | |
Interest and other income | | | 819,000 | | | 302,000 | | | 173,000 | |
Interest and other expense | | | (32,000 | ) | | (33,000 | ) | | (68,000 | ) |
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Income before income taxes | | | 11,519,000 | | | 7,365,000 | | | 4,825,000 | |
Income tax provision (benefit) | | | 4,044,000 | | | 2,514,000 | | | (19,208,000 | ) |
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Net income | | | 7,475,000 | | | 4,851,000 | | | 24,033,000 | |
Preferred dividends | | | — | | | — | | | (419,000 | ) |
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Net income attributable to common shareholders | | $ | 7,475,000 | | $ | 4,851,000 | | $ | 23,614,000 | |
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Net income per share: | | | | | | | | | | |
Basic net income per share | | $ | 0.37 | | $ | 0.25 | | $ | 1.30 | |
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Diluted net income per share | | $ | 0.35 | | $ | 0.22 | | $ | 1.16 | |
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Shares used in the calculation of net income per share: | | | | | | | | | | |
Weighted average common shares outstanding - basic | | | 19,985,000 | | | 19,696,000 | | | 18,128,000 | |
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Weighted average common shares outstanding - diluted | | | 21,492,000 | | | 21,662,000 | | | 20,387,000 | |
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See notes to financial statements.
44
ABAXIS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
| | Convertible Preferred Stock | | Common Stock | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income | | Shareholders’
Equity | | Comprehensive
Income | |
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| | Shares | | Amount | | Shares | | Amount | | |
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Balances at April 1, 2003 | | | 6,508 | | $ | 3,143,000 | | | 16,816,095 | | $ | 80,608,000 | | $ | (61,483,000 | ) | $ | — | | $ | 22,268,000 | | $ | — | |
Common stock issued for employee benefit plans | | | — | | | — | | | 15,313 | | | 73,000 | | | — | | | — | | | 73,000 | | | — | |
Option exercises and related tax benefits | | | — | | | — | | | 266,327 | | | 3,049,000 | | | — | | | — | | | 3,049,000 | | | — | |
Warrant exercises | | | — | | | — | | | 497,498 | | | 1,569,000 | | | — | | | — | | | 1,569,000 | | | — | |
Accrued dividends on Series D convertible preferred stock | | | — | | | — | | | — | | | — | | | (238,000 | ) | | — | | | (238,000 | ) | | — | |
Accrued dividends on Series E convertible preferred stock | | | — | | | — | | | — | | | — | | | (181,000 | ) | | — | | | (181,000 | ) | | — | |
Common stock issued for dividends payable | | | — | | | — | | | 138,398 | | | 799,000 | | | — | | | — | | | 799,000 | | | — | |
Conversion of Series D convertible preferred stock into common stock | | | (6,508 | ) | | (3,143,000 | ) | | 929,699 | | | 3,143,000 | | | — | | | — | | | — | | | — | |
Conversion of Series E convertible preferred stock into common stock | | | — | | | — | | | 856,907 | | | 3,176,000 | | | — | | | — | | | 3,176,000 | | | — | |
Stock-based compensation expense | | | — | | | — | | | — | | | 24,000 | | | — | | | — | | | 24,000 | | | — | |
Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | — | | | — | | | — | | | 24,033,000 | | | — | | | 24,033,000 | | | 24,033,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| |
Comprehensive income | | | — | | | — | | | — | | | — | | | — | | | — | | | | | | 24,033,000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balances at March 31, 2004 | | | — | | | — | | | 19,520,237 | | | 92,441,000 | | | (37,869,000 | ) | | — | | | 54,572,000 | | | | |
Option exercises and related tax benefits | | | — | | | — | | | 185,086 | | | 1,418,000 | | | — | | | — | | | 1,418,000 | | | — | |
Warrant exercises | | | — | | | — | | | 184,944 | | | 687,000 | | | — | | | — | | | 687,000 | | | — | |
Common stock issued for dividends payable | | | — | | | — | | | 1,340 | | | 28,000 | | | — | | | — | | | 28,000 | | | — | |
Stock-based compensation expense | | | — | | | — | | | — | | | 40,000 | | | — | | | — | | | 40,000 | | | — | |
Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | — | | | — | | | — | | | 4,851,000 | | | — | | | 4,851,000 | | | 4,851,000 | |
Unrealized gain on investments, net of tax | | | — | | | — | | | — | | | — | | | — | | | 71,000 | | | 71,000 | | | 71,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| |
Comprehensive income | | | — | | | — | | | — | | | — | | | — | | | — | | | | | | 4,922,000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balances at March 31, 2005 | | | — | | | — | | | 19,891,607 | | | 94,614,000 | | | (33,018,000 | ) | | 71,000 | | | 61,667,000 | | | | |
Common stock issued for employee benefit plans | | | — | | | — | | | 3,875 | | | 43,000 | | | — | | | — | | | 43,000 | | | — | |
Option exercises and related tax benefits | | | — | | | — | | | 173,736 | | | 1,513,000 | | | — | | | — | | | 1,513,000 | | | — | |
Warrant exercises | | | — | | | — | | | 66,119 | | | 348,000 | | | — | | | — | | | 348,000 | | | — | |
Stock-based compensation expense adjustment | | | — | | | — | | | — | | | (12,000 | ) | | — | | | — | | | (12,000 | ) | | — | |
Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | — | | | — | | | — | | | 7,475,000 | | | — | | | 7,475,000 | | | 7,475,000 | |
Unrealized gain on investments, net of tax | | | — | | | — | | | — | | | — | | | — | | | 4,000 | | | 4,000 | | | 4,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| |
Comprehensive income | | | — | | | — | | | — | | | — | | | — | | | — | | | | | $ | 7,479,000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balances at March 31, 2006 | | | — | | $ | — | | | 20,135,337 | | $ | 96,506,000 | | $ | (25,543,000 | ) | $ | 75,000 | | $ | 71,038,000 | | | | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | |
See notes to financial statements.
45
ABAXIS, INC.
STATEMENTS OF CASH FLOWS
| | Year Ended March 31, | |
| |
| |
| | 2006 | | 2005 | | 2004 | |
| |
|
| |
|
| |
|
| |
Operating activities: | | | | | | | | | | |
Net income | | $ | 7,475,000 | | $ | 4,851,000 | | $ | 24,033,000 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | | | 2,136,000 | | | 1,896,000 | | | 1,708,000 | |
Loss on disposal of property and equipment | | | 7,000 | | | 14,000 | | | — | |
Stock option income tax benefits | | | 523,000 | | | 608,000 | | | 1,902,000 | |
Common stock issued for employee benefit plans | | | 43,000 | | | — | | | 73,000 | |
Stock-based compensation | | | (12,000 | ) | | 40,000 | | | 24,000 | |
Changes in assets and liabilities: | | | | | | | | | | |
Trade receivables | | | (4,129,000 | ) | | (2,307,000 | ) | | (720,000 | ) |
Inventories | | | (2,032,000 | ) | | (2,614,000 | ) | | (717,000 | ) |
Prepaid expenses | | | (164,000 | ) | | 102,000 | | | 283,000 | |
Net deferred tax assets - current | | | 333,000 | | | (4,068,000 | ) | | (609,000 | ) |
Deposits and other assets | | | 16,000 | | | 59,000 | | | 72,000 | |
Net deferred tax assets - non-current | | | 2,907,000 | | | 5,592,000 | | | (20,624,000 | ) |
Accounts payable | | | 764,000 | | | 1,211,000 | | | 637,000 | |
Accrued payroll and related expenses | | | 2,023,000 | | | (986,000 | ) | | 1,042,000 | |
Other accrued liabilities | | | (123,000 | ) | | 509,000 | | | (58,000 | ) |
Warranty reserve | | | 227,000 | | | 64,000 | | | 58,000 | |
Deferred rent | | | 16,000 | | | 53,000 | | | 88,000 | |
Deferred revenue | | | (176,000 | ) | | 1,315,000 | | | 42,000 | |
Long-term commission obligation | | | (17,000 | ) | | (18,000 | ) | | (36,000 | ) |
| |
|
| |
|
| |
|
| |
Net cash provided by operating activities | | | 9,817,000 | | | 6,321,000 | | | 7,198,000 | |
| |
|
| |
|
| |
|
| |
Investing activities: | | | | | | | | | | |
Purchase of short-term investments | | | (58,359,000 | ) | | (16,787,000 | ) | | (7,998,000 | ) |
Proceeds from maturities of short-term investments | | | 54,899,000 | | | 7,998,000 | | | — | |
Purchase of property and equipment | | | (3,291,000 | ) | | (2,562,000 | ) | | (1,281,000 | ) |
Proceeds from disposal of property and equipment | | | — | | | 7,000 | | | — | |
Purchase of intangible assets | | | — | | | — | | | (750,000 | ) |
| |
|
| |
|
| |
|
| |
Net cash used in investing activities | | | (6,751,000 | ) | | (11,344,000 | ) | | (10,029,000 | ) |
| |
|
| |
|
| |
|
| |
Financing activities: | | | | | | | | | | |
Repayment of equipment financing | | | — | | | — | | | (933,000 | ) |
Repayment of capital lease obligations | | | (16,000 | ) | | (22,000 | ) | | (58,000 | ) |
Exercise of common stock options | | | 990,000 | | | 810,000 | | | 1,147,000 | |
Exercise of common stock warrants | | | 348,000 | | | 687,000 | | | 1,569,000 | |
| |
|
| |
|
| |
|
| |
Net cash provided by financing activities | | | 1,322,000 | | | 1,475,000 | | | 1,725,000 | |
| |
|
| |
|
| |
|
| |
Net increase (decrease) in cash and cash equivalents | | | 4,388,000 | | | (3,548,000 | ) | | (1,106,000 | ) |
Cash and cash equivalents at beginning of year | | | 5,776,000 | | | 9,324,000 | | | 10,430,000 | |
| |
|
| |
|
| |
|
| |
Cash and cash equivalents at end of year | | $ | 10,164,000 | | $ | 5,776,000 | | $ | 9,324,000 | |
| |
|
| |
|
| |
|
| |
Supplemental cash flow information: | | | | | | | | | | |
Cash paid for interest | | $ | 17,000 | | $ | 16,000 | | $ | 58,000 | |
| |
|
| |
|
| |
|
| |
Cash paid for income taxes, net of refunds | | $ | 552,000 | | $ | 130,000 | | $ | 211,000 | |
| |
|
| |
|
| |
|
| |
Non-cash investing and financing activities: | | | | | | | | | | |
Preferred stock dividends | | $ | — | | $ | — | | $ | 419,000 | |
| |
|
| |
|
| |
|
| |
Issuance of common stock for conversion of preferred stock and payment of dividends payable | | $ | — | | $ | 28,000 | | $ | 12,877,000 | |
| |
|
| |
|
| |
|
| |
Change in unrealized gains on short-term investments, net of tax | | $ | 4,000 | | $ | 71,000 | | $ | — | |
| |
|
| |
|
| |
|
| |
See notes to financial statements.
46
ABAXIS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2006, 2005, AND 2004
1. | The Company and Summary of Significant Accounting Policies |
| |
| Abaxis, Inc. (“the Company”) was incorporated in California in 1989 for the purpose of developing, manufacturing and marketing portable blood analysis systems for use in any veterinary or human patient-care setting to provide clinicians with rapid blood constituent measurements. |
| |
| Use of Estimates in Preparation of Financial Statements – The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such management estimates include allowance for doubtful accounts, sales and other allowances, warranty reserves, inventories, and a valuation allowance for net deferred tax assets. Actual results could differ from those estimates. |
| |
| Certain Significant Risks and Uncertainties – The Company operates in a dynamic industry, and accordingly, can be affected by a variety of factors. For example, management of the Company believes that changes in any of the following areas could have a negative effect on the Company in terms of its future financial position and results of operations: ability to obtain additional financing; continued Federal Drug Administration compliance or regulatory changes; uncertainty regarding health care reforms; fundamental changes in the technology underlying blood testing; the ability to develop new products that are accepted in the marketplace; competition, including, but not limited to pricing and products or product features and services; litigation or other claims against the Company; the adequate and timely sourcing of inventories; and the hiring, training and retention of key employees. |
| |
| Cash and Cash Equivalents – Cash and cash equivalents consist primarily of money market accounts and short-term financial instruments with original maturities of less than 90 days from the date of acquisition that are readily convertible into cash. |
| |
| Short-term Investments – The Company's short-term investments are classified as available-for-sale and are carried at their fair value at the balance sheet date. Interest and realized gains and losses from short-term investments are included in investment income, computed using the specific identification cost method. Unrealized gains and losses are reported as a separate component of shareholders’ equity. Investments with maturities of less than one year are classified as short-term investments. All other investments with maturity dates greater than 365 days are classified as non-current. |
| |
| Concentration of Credit Risk – Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, cash equivalents, short-term investments and trade receivables. Cash, cash equivalents and short-term investments are placed with high quality financial institutions and are regularly monitored by management. The Company sells it products primarily to organizations in Europe, Japan and the United States. The Company monitors the credit status of its customers on an ongoing basis and generally does not require its customers to provide collateral for purchases on credit. At March 31, 2006, two distributors accounted for 30% and 17%, respectively, of trade receivables. At March 31, 2005, two distributors accounted for 25% and 12%, respectively, of trade receivables. |
| |
| Allowance for Doubtful Accounts – The Company maintains an allowance for doubtful accounts based on management’s assessment of the collectibility of the amounts owed by its customers. The Company considers the customer’s payment history, the age of the receivables, the credit quality of its customers, the general financial condition of its customer base and other factors that may affect customers’ ability to pay to determine the level of allowance required. |
| |
| Inventories – Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories include material, labor and overhead. Provisions for excess, obsolete and unusable inventories are made after management’s evaluation of future demand and market conditions. |
| |
| Property and Equipment – Property and equipment are stated at cost. Depreciation and amortization are generally provided using the straight-line method over the estimated useful lives of the assets (two to five years). Leasehold improvements are amortized over the shorter of the estimated useful lives or the related lease term, including any lease term extensions that the Company has the right and intention to execute. Construction in progress consists of purchased material used in the development of production lines. No interest was capitalized on constructed assets during fiscal 2006 and 2005. |
47
| Valuation of Long-lived Assets – The carrying value of the Company’s long-lived assets is reviewed for impairment whenever events or changes in circumstances indicate that an asset may not be recoverable. The Company looks to current and future profitability, as well as current and future undiscounted cash flows, excluding financing costs, as primary indicators of recoverability. 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. The Company adopted Statement of Financial Accounting Standard (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which did not impact its results of operations or financial position. |
| |
| Intangible Assets – Intangible assets, consisting of patents, are amortized using the straight-line method over the estimated useful life of ten years. |
| |
| Fair Value of Financial Instruments – Financial instruments include cash, cash equivalents, short-term investments, customer receivables, accounts payable and certain other accrued liabilities. The carrying values of all financial instruments approximate fair value due to their short maturities. |
| |
| Revenue Recognition and Deferred Revenue – 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 and determinable and (iv) collection of the resulting receivable is reasonably assured. Rights of return are not provided. |
| |
| The Company periodically provides incentives in the form of free goods or extended maintenance agreements to customers in connection with the sale of its instruments. In addition, the Company periodically offers trade-in programs from time to time in which it will either provide incentives in the form of free goods to customers for purchasing its instruments or reduce the sales price of the instrument. Revenue from such sales is allocated separately to the instruments and free goods based on the relative fair value of each element. Revenue allocated to free goods is deferred until the goods are shipped to the customer, which is then recorded as an increase in revenues. |
| |
| Revenue associated with extended maintenance agreements are recognized ratably over the life of the contract. Amounts collected in advance of revenue recognition are recorded as a current or long-term liability based on the time from the balance sheet date to the future date of revenue recognition. |
| |
| The Company offers cash rebates to customers who purchase instruments during a promotional period. The cash rebate is recorded as a reduction to gross revenues. The Company also offers distributor pricing rebates to distributors upon meeting the sales volume requirements during the qualifying period. The distributor pricing rebate is recorded as a reduction to gross revenues during the qualifying period. |
| |
| Research and Development – Research and development costs, including internally generated software costs, are expensed as incurred and include expenses associated with new product research and regulatory activities. The Company’s products include certain software applications that are resident in the product. The costs to develop such software have not been capitalized as the Company believes its current software development processes are completed concurrent with the establishment of technological feasibility of the software. |
| |
| Advertising Expenses – Costs of advertising, which also includes promotional expenses, are expensed as incurred. Advertising expenses for fiscal 2006, 2005 and 2004 were $1,680,000, $1,122,000 and $1,062,000, respectively. |
| |
| Shipping and Handling – The cost of shipping products to customers is included in cost of goods sold. Amounts billed to a customer in a sale transaction related to shipping and handling are classified as revenue. |
| |
| Income Taxes – The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts to be recovered. Significant estimates are required in determining the provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. |
48
| Stock-Based Compensation – The Company accounts for stock-based awards to employees and directors using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25) and other related guidance. Stock-based awards to consultants and other non-employees are accounted for based upon estimated fair values in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123). |
| |
| The Company has adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure – an amendment of SFAS No. 123, “Accounting for Stock-Based Compensation (SFAS No. 123).” These disclosure provisions require the disclosure of pro forma net income and net income per share as if the Company had adopted the fair value method. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which affect the calculated values. |
| |
| The following table illustrates the effect on the Company’s net income and basic and diluted net income per share had the fair value recognition provisions of SFAS No. 123 been applied: |
| | Year Ended March 31, | |
| |
| |
| | | 2006 | | | 2005 | | | 2004 | |
| |
|
| |
|
| |
|
| |
Net income: | | | | | | | | | | |
As reported | | $ | 7,475,000 | | $ | 4,851,000 | | $ | 24,033,000 | |
Less: stock-based compensation expense determined under the fair value method for all awards, net of related tax effects | | | (2,534,000 | ) | | (2,671,000 | ) | | (1,538,000 | ) |
| |
|
| |
|
| |
|
| |
Pro forma net income | | $ | 4,941,000 | | $ | 2,180,000 | | $ | 22,495,000 | |
| |
|
| |
|
| |
|
| |
Basic and diluted net income per share: | | | | | | | | | | |
As reported - basic | | $ | 0.37 | | $ | 0.25 | | $ | 1.30 | |
Pro forma - basic | | $ | 0.25 | | $ | 0.11 | | $ | 1.24 | |
As reported - diluted | | $ | 0.35 | | $ | 0.22 | | $ | 1.16 | |
Pro forma - diluted | | $ | 0.23 | | $ | 0.10 | | $ | 1.10 | |
| The pro forma information presented above for fiscal 2006 includes $1,067,000 of stock-based employee compensation related to the accelerated vesting of certain options in December 2005. See Note 10. The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option pricing model, based on a multiple option valuation approach, and forfeitures were recognized as they occurred. The following are the weighted average assumptions: |
| | Year Ended March 31, | |
| |
| |
| | | 2006 | | | 2005 | | | 2004 | |
| |
|
| |
|
| |
|
| |
Expected life of option | | | 6 years | | | 6 years | | | 6 years | |
Risk-free interest rate | | | 3.76 | % | | 3.63-4.29 | % | | 2.78-3.53 | % |
Dividend yield | | | 0.00 | % | | 0.00 | % | | 0.00 | % |
Volatility | | | 53 | % | | 52-60 | % | | 58-61 | % |
| Net Income Per Share Information – 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. 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. See Note 11. |
| |
| Comprehensive Income – Comprehensive income consists of net income and other comprehensive income, which was comprised of unrealized gains on short-term investments. For fiscal 2006, 2005 and 2004, the components of comprehensive income consisted of the following: |
| | Year Ended March 31, | |
| |
| |
| | | 2006 | | | 2005 | | | 2004 | |
| |
|
| |
|
| |
|
| |
Net income | | $ | 7,475,000 | | $ | 4,851,000 | | $ | 24,033,000 | |
Other comprehensive income: | | | | | | | | | | |
Unrealized gain on short-term investments, net of tax | | | 4,000 | | | 71,000 | | | — | |
| |
|
| |
|
| |
|
| |
Comprehensive income | | $ | 7,479,000 | | $ | 4,922,000 | | $ | 24,033,000 | |
| |
|
| |
|
| |
|
| |
49
| New Accounting Pronouncements – On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R eliminates the alternative of applying the intrinsic value measurement provisions of Opinion 25 to stock compensation awards issued to employees. Rather, the new standard requires enterprises to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). SFAS 123R will be effective for the Company’s first quarter of fiscal 2007, which starts April 1, 2006. SFAS 123R is applied to new awards and to awards modified, repurchased, or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (such as unvested options) that are outstanding as of the date of adoption shall be recognized as the remaining requisite services are rendered. |
| |
| The Company has not yet quantified the effects of the adoption of SFAS 123R, but it is expected that the new standard may result in significant stock-based compensation expense. The pro forma effects on net income and earnings per share if the Company had applied the fair value recognition provisions of the original SFAS 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of Opinion 25) are disclosed above. Although such pro forma effects of applying the original SFAS 123 may be indicative of the effects of adopting SFAS 123R, the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123R will be dependent on numerous factors including, but not limited to, the valuation model chosen by the Company to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period; and the type of equity based incentives the Company grants. |
| |
| In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” — an amendment of Accounting Research Bulletin ARB No. 43, Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and requires that those items be recognized as current-period charges. SFAS No. 151 also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material impact on the Company’s financial statements. |
| |
| In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” — a replacement of APB Opinion No. 20, “Accounting Changes” and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle. Under previous guidance, changes in accounting principle were recognized as a cumulative affect in the net income of the period of the change. The new statement requires retrospective application of changes in accounting principle, limited to the direct effects of the change, to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. The statement also requires that correction of errors in previously issued financial statements should be termed a “restatement”. SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material impact on the Company’s financial statements. |
| |
| Reclassification – Certain amounts in the fiscal years ended March 31, 2005 and 2004 financial statements have been reclassified to conform to the fiscal year ended March 31, 2006 presentation. These reclassifications did not result in any change in previously reported net income, total assets or shareholders’ equity. |
| |
2. | Short-term Investments |
| |
| The following is a summary of the Company’s short-term investments: |
| | Amortized Cost | | Unrealized Gains | | Market Value | |
| |
|
| |
|
| |
|
| |
March 31, 2006 | | | | | | | | | | |
Corporate obligations | | $ | 11,146,000 | | $ | 126,000 | | $ | 11,272,000 | |
Auction rate securities | | | 9,100,000 | | | — | | | 9,100,000 | |
| |
|
| |
|
| |
|
| |
Total short-term investments | | $ | 20,246,000 | | $ | 126,000 | | $ | 20,372,000 | |
| |
|
| |
|
| |
|
| |
March 31, 2005 | | | | | | | | | | |
Corporate obligations | | $ | 4,500,000 | | $ | 60,000 | | $ | 4,560,000 | |
U.S. Treasury and Agency securities | | | 7,498,000 | | | 11,000 | | | 7,509,000 | |
Certificate of deposits | | | 4,789,000 | | | — | | | 4,789,000 | |
| |
|
| |
|
| |
|
| |
Total short-term investments | | $ | 16,787,000 | | $ | 71,000 | | $ | 16,858,000 | |
| |
|
| |
|
| |
|
| |
50
| As of March 31, 2006 and 2005, the short-term investments had contractual maturities of less than one year. |
| |
3. | Inventories |
| |
| Inventories, net, consist of the following: |
| | March 31, | |
| |
| |
| | | 2006 | | | 2005 | |
| |
|
| |
|
| |
Raw materials | | $ | 5,581,000 | | $ | 4,753,000 | |
Work-in-process | | | 2,904,000 | | | 1,677,000 | |
Finished goods | | | 1,911,000 | | | 1,925,000 | |
| |
|
| |
|
| |
| | $ | 10,396,000 | | $ | 8,355,000 | |
| |
|
| |
|
| |
4. | Property and Equipment |
| |
| Property and equipment, net, consist of the following: |
| | March 31, | |
| |
| |
| | | 2006 | | | 2005 | |
| |
|
| |
|
| |
Machinery and equipment | | $ | 13,673,000 | | $ | 11,450,000 | |
Furniture and fixtures | | | 1,254,000 | | | 1,147,000 | |
Computer equipment | | | 1,195,000 | | | 1,134,000 | |
Leasehold improvements | | | 5,274,000 | | | 5,357,000 | |
Construction in progress | | | 1,440,000 | | | 1,229,000 | |
| |
|
| |
|
| |
| | | 22,836,000 | | | 20,317,000 | |
Accumulated depreciation and amortization | | | (12,798,000 | ) | | (11,493,000 | ) |
| |
|
| |
|
| |
Property and equipment, net | | $ | 10,038,000 | | $ | 8,824,000 | |
| |
|
| |
|
| |
| Depreciation and amortization expense for property and equipment amounted to $2,061,000, $1,821,000 and $1,633,000 in fiscal 2006, 2005 and 2004, respectively. |
| |
5. | Intangible Assets |
| |
| Intangible assets, consisting of acquired patents, is summarized as follows: |
| | March 31, | |
| |
| |
| | | 2006 | | | 2005 | |
| |
|
| |
|
| |
Cost | | $ | 750,000 | | $ | 750,000 | |
Accumulated amortization | | | (225,000 | ) | | (150,000 | ) |
| |
|
| |
|
| |
Intangible assets, net | | $ | 525,000 | | $ | 600,000 | |
| |
|
| |
|
| |
| Amortization expense for intangible assets amounted to $75,000 in fiscal 2006, 2005 and 2004, respectively. The expected future annual amortization expense of intangible assets recorded on the Company’s balance sheet as of March 31, 2006 is as follows: |
| | Amortization
Expense | |
| | |
| |
Fiscal year ending March 31, | | | | |
2007 | | $ | 75,000 | |
2008 | | | 75,000 | |
2009 | | | 75,000 | |
2010 | | | 75,000 | |
2011 | | | 75,000 | |
Thereafter | | | 150,000 | |
| |
|
| |
Total expected future annual amortization | | $ | 525,000 | |
| |
|
| |
6. | Warranty Reserves |
| |
| The Company provides for the estimated future costs to be incurred under the Company's standard warranty obligations of one to two years. 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. |
51
| The warranty reserve activity is summarized as follows for fiscal 2006, 2005 and 2004: |
| | Year Ended March 31, | |
| |
| |
| | | 2006 | | | 2005 | | | 2004 | |
| |
|
| |
|
| |
|
| |
Balance at beginning of period | | $ | 245,000 | | $ | 181,000 | | $ | 123,000 | |
Provision for warranty expense | | | 374,000 | | | 227,000 | | | 229,000 | |
Warranty costs incurred | | | (147,000 | ) | | (163,000 | ) | | (171,000 | ) |
| |
|
| |
|
| |
|
| |
Balance at end of period | | $ | 472,000 | | $ | 245,000 | | $ | 181,000 | |
| |
|
| |
|
| |
|
| |
7. | 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. The line of credit terminates upon notification by either party and the outstanding balance is payable upon demand. The line of credit bears interest at the bank’s prime rate minus 0.25%, which totaled 7.50% at March 31, 2006, and is payable monthly. Of the $2,000,000 available, $410,000 was committed to secure a letter of credit for the Company’s facilities lease at March 31, 2006. At March 31, 2006, there was no amount outstanding under the Company's line of credit. The weighted average interest rate on the line of credit during fiscal 2006 and 2005 was 6.43% and 4.45%, 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 on preferred stock 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 ended September 30, 2005 and to have net income before preferred stock dividends and accretion on preferred stock of $1,150,000 for the fiscal year ended March 31, 2006. In addition, the Company is required to have a quick ratio, as defined, of not less than 2.00 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 March 31, 2006, 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 $71.0 million at March 31, 2006, including its intellectual property. |
8. | Commitments and Contingencies |
| |
| As of March 31, 2006, the Company’s contractual obligations for the next five years were as follows: |
| | Payments Due by Period | |
| |
| |
| | | | | Due in Fiscal | |
| | | | |
| |
| | Total | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating leases | | $ | 5,307,000 | | $ | 1,066,000 | | $ | 1,104,000 | | $ | 1,128,000 | | $ | 1,134,000 | | $ | 875,000 | |
Purchase commitments | | | 5,539,000 | | | 323,000 | | | 2,608,000 | | | 2,608,000 | | | — | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total contractual obligations | | $ | 10,846,000 | | $ | 1,389,000 | | $ | 3,712,000 | | $ | 3,736,000 | | $ | 1,134,000 | | $ | 875,000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Operating Leases – The Company leases its principal facility under a noncancelable operating lease agreement, which expires in fiscal 2011. The monthly rental payments on the facility lease increase based on a predetermined schedule. The Company recognizes rent expense on a straight-line basis over the life of the lease. Rent expense under operating leases were $1,057,000, $1,046,000 and $1,031,000 for fiscal 2006, 2005 and 2004, respectively. In connection with its facilities lease agreement, the Company established a letter of credit for $410,000, which is secured by its line of credit. See Note 7. |
| |
| The Company also leases certain office equipment under operating lease agreements, which expire on various dates through fiscal 2009. |
| |
| Purchase Commitments – 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 through fiscal 2009 from DIATRON once the product was qualified for sale, which occurred in May 2004. |
52
| Litigation– The Company is involved from time to time in various litigation matters in the normal course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, the Company believes that the ultimate resolution of these matters will not have a material effect on its financial position or results of operations. |
| |
9. | Retirement Plan |
| |
| |
| |
10. | Shareholders’ Equity |
| |
| Stock Purchase Rights – On April 22, 2003, the Board of Directors of the Company approved the adoption of a Shareholder Rights Plan. Under the terms of the plan, shareholders of record on May 8, 2003, received one preferred stock purchase right for each outstanding share of common stock held. Each right entitled the registered holder to purchase from the Company one one-thousandth of a share of the Company's Series RP Preferred Stock, $0.001 par value, at a price of $24.00 per share and becomes exercisable when a person or group acquires 15% or more of the Company's common stock without prior approval by the Board of Directors. |
| |
| Common Stock Warrants – As of March 31, 2006, there were warrants to purchase 210,885 shares of common stock at a weighted average exercise price of $7.00 per share expiring at various dates through May 2007. Warrants issued to purchase an aggregate of 113,385 shares of common stock were issued to service providers at a per share exercise price of $7.00 and warrants to purchase an aggregate of 97,500 shares of common stock were issued to purchasers of the Company’s Series E convertible preferred stock at a per share exercise price of $7.00. |
| |
| Stock Option Plans |
| |
| The Company’s stock-based compensation plans are described below. |
| |
| 2005 Equity Incentive Plan –The Company’s 2005 Equity Incentive Plan (the Equity Incentive Plan), restated and amended the 1998 Stock Option Plan. The Equity Incentive Plan allowed for the awards of stock options, stock appreciation rights, stock awards (stock purchase rights and stock bonuses), restricted stock units, performance shares, performance units, other stock-based awards and cash-based awards to employees, directors and consultants. |
| |
| 1992 Outside Directors’ Stock Option Plan –Under the Company’s 1992 Outside Directors’ Stock Option Plan (the Directors’ Plan), options to purchase shares of common stock were automatically granted, annually, to directors of Abaxis who are not employees. 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. The time period for granting options under the 1992 Directors’ Plan expired in accordance with the terms of the Directors’ Plan in June 2002. |
53
| Activity under the Company’s stock option plans is summarized as follows: |
| | Options Outstanding | |
| |
| |
| | Number of
Shares | | Weighted
Average
Exercise
Price
Per Share | |
| |
|
| |
|
| |
Balance at April 1, 2003 | | | 2,508,795 | | $ | 4.52 | |
Granted (weighted average fair value of $3.57 per share) | | | 573,750 | | | 5.91 | |
Exercised | | | (266,327 | ) | | 4.31 | |
Canceled | | | (151,994 | ) | | 3.71 | |
| |
|
| |
|
| |
Balance at March 31, 2004 (1,810,845 shares vested at a weighted average exercise price of $4.65 per share) | | | 2,664,224 | | $ | 4.88 | |
Granted (weighted average fair value of $9.89 per share) | | | 475,500 | | | 18.09 | |
Exercised | | | (185,086 | ) | | 4.38 | |
Canceled | | | (191,311 | ) | | 11.13 | |
| |
|
| |
|
| |
Balance at March 31, 2005 (2,087,629 shares vested at a weighted average exercise price of $4.82 per share) | | | 2,763,327 | | $ | 6.76 | |
Granted (weighted average fair value of $4.31 per share) | | | 60,000 | | | 7.89 | |
Exercised | | | (173,736 | ) | | 5.69 | |
Canceled | | | (117,738 | ) | | 8.71 | |
| |
|
| |
|
| |
Balance at March 31, 2006 | | | 2,531,853 | | $ | 6.77 | |
| |
|
| |
|
| |
| The following table summarizes information regarding stock options outstanding and exercisable at March 31, 2006: |
| | | Options Outstanding | | Options Exercisable | |
| | |
| |
| |
Range of Exercise Prices | | Number
of Shares
Outstanding | | Weighted
Average
Remaining
Contractual
Life (Years) | | Weighted
Average
Exercise
Price
Per Share | | Number
of Shares
Exercisable | | Weighted
Average
Exercise
Price
Per Share | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
$ 1.50 - $ 1.88 | | | 257,339 | | | 2.76 | | $ | 1.62 | | | 257,339 | | $ | 1.62 | |
$ 1.88 - $ 3.13 | | | 288,171 | | | 2.92 | | | 2.64 | | | 283,004 | | | 2.64 | |
$ 3.20 - $ 3.85 | | | 340,590 | | | 7.05 | | | 3.84 | | | 243,636 | | | 3.84 | |
$ 3.94 - $ 4.36 | | | 52,562 | | | 5.40 | | | 4.18 | | | 51,864 | | | 4.18 | |
$ 4.50 - $ 4.87 | | | 437,388 | | | 5.03 | | | 4.86 | | | 437,388 | | | 4.86 | |
$ 4.94 - $ 5.47 | | | 308,175 | | | 1.19 | | | 5.18 | | | 307,967 | | | 5.18 | |
$ 5.50 - $ 7.88 | | | 308,629 | | | 4.46 | | | 6.75 | | | 304,828 | | | 6.76 | |
$ 7.89 - $ 14.62 | | | 254,874 | | | 6.53 | | | 10.64 | | | 163,908 | | | 9.70 | |
$ 14.74 - $ 21.65 | | | 279,125 | | | 8.04 | | | 20.80 | | | 261,607 | | | 21.11 | |
$ 22.10 - $ 22.10 | | | 5,000 | | | 7.99 | | | 22.10 | | | 5,000 | | | 22.10 | |
| |
|
| |
|
| |
|
| �� |
|
| |
|
| |
$ 1.50 - $ 22.10 | | | 2,531,853 | | | 4.79 | | $ | 6.77 | | | 2,316,541 | | $ | 6.61 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| At March 31, 2006, 884,481 shares of common stock were available for future grants under the Company’s Equity Incentive Plan. |
| |
| Stock Option Acceleration – On December 5, 2005, the Board of Directors approved full acceleration of unvested stock options with an exercise price of $19.12 or greater previously granted under the Abaxis, Inc. 1998 Stock Option Plan held by Company officers and employees. The primary purpose of the acceleration of vesting was to minimize future compensation expense the Company would otherwise recognize in its financial statements with respect to these accelerated options as a result of SFAS 123R. The aggregate estimated compensation expense associated with these accelerated options that would have been recognized in its financial statements after adoption of SFAS 123R was approximately $1,067,000. Options to purchase 144,810 shares of the Company’s common stock, including 126,873 shares held by the Company’s executive officers, became immediately exercisable as of December 5, 2005. |
| |
| Stock-Based Compensation – During fiscal 2006, the Company recorded a reduction of $12,000 in stock-based compensation expense as an adjustment for an option granted prior to fiscal 2006. During fiscal 2005 and 2004, the Company recorded $40,000 and $24,000, respectively, of stock-based compensation expense for option grants. |
| |
11. | 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. 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. |
54
| The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net income per share: |
| | Year Ended March 31, | |
| |
| |
| | | 2006 | | | 2005 | | | 2004 | |
| |
|
| |
|
| |
|
| |
Numerator: | | | | | | | | | | |
Net income | | $ | 7,475,000 | | $ | 4,851,000 | | $ | 24,033,000 | |
Preferred dividends | | | — | | | — | | | (419,000 | ) |
| |
|
| |
|
| |
|
| |
Net income attributable to common shareholders | | $ | 7,475,000 | | $ | 4,851,000 | | $ | 23,614,000 | |
| |
|
| |
|
| |
|
| |
Denominator: | | | | | | | | | | |
Weighted average common shares outstanding - basic | | | 19,985,000 | | | 19,696,000 | | | 18,128,000 | |
Weighted average effect of dilutive securities: | | | | | | | | | | |
Stock options | | | 1,374,000 | | | 1,721,000 | | | 1,810,000 | |
Common stock warrants | | | 133,000 | | | 245,000 | | | 449,000 | |
| |
|
| |
|
| |
|
| |
Weighted average common shares outstanding - diluted | | | 21,492,000 | | | 21,662,000 | | | 20,387,000 | |
| |
|
| |
|
| |
|
| |
Net income per share: | | | | | | | | | | |
Basic net income per share | | $ | 0.37 | | $ | 0.25 | | $ | 1.30 | |
| |
|
| |
|
| |
|
| |
Diluted net income per share | | $ | 0.35 | | $ | 0.22 | | $ | 1.16 | |
| |
|
| |
|
| |
|
| |
| The Company excludes options and warrants from the computation of diluted weighted average shares outstanding if the exercise price of the options and warrants is greater than the average market price of the shares because the inclusion of these options and warrants would be antidilutive to earnings per share. Accordingly, options and warrants to purchase 291,000 shares, 318,000 shares and 26,000 shares, respectively, at weighted average exercise prices of $20.70, $20.69 and $16.31, respectively, were excluded from the computation of diluted weighted average shares outstanding during fiscal 2006, 2005 and 2004, respectively. |
12. | Income Tax Provision (Benefit) |
| |
| The components of the Company’s income tax provision (benefit) is summarized as follows: |
| | Year Ended March 31, | |
| |
| |
| | 2006 | | 2005 | | 2004 | |
| |
|
| |
|
| |
|
| |
Current: | | | | | | | | | | |
Federal | | $ | 169,000 | | $ | 68,000 | | $ | 118,000 | |
State | | | 110,000 | | | 210,000 | | | 124,000 | |
| |
|
| |
|
| |
|
| |
Total current | | | 279,000 | | | 278,000 | | | 242,000 | |
| |
|
| |
|
| |
|
| |
Deferred: | | | | | | | | | | |
Federal | | | 3,518,000 | | | 2,232,000 | | | (18,124,000 | ) |
State | | | 247,000 | | | 4,000 | | | (1,326,000 | ) |
| |
|
| |
|
| |
|
| |
Total deferred | | | 3,765,000 | | | 2,236,000 | | | (19,450,000 | ) |
| |
|
| |
|
| |
|
| |
Total provision (benefit) | | $ | 4,044,000 | | $ | 2,514,000 | | $ | (19,208,000 | ) |
| |
|
| |
|
| |
|
| |
| The Company’s amount of income tax provision recorded during fiscal 2006, 2005 and 2004 differs from the amount using the Federal statutory rate (35%) primarily due to the following: |
55
| | Year Ended March 31, | |
| |
| |
| | | 2006 | | | 2005 | | | 2004 | |
| |
|
| |
|
| |
|
| |
Taxes at federal income tax rate | | $ | 4,032,000 | | $ | 2,578,000 | | $ | 1,689,000 | |
State taxes, net of federal benefits | | | 476,000 | | | 152,000 | | | 285,000 | |
Credits | | | (174,000 | ) | | (215,000 | ) | | (31,000 | ) |
Valuation allowance | | | — | | | — | | | (21,296,000 | ) |
Extraterritorial income exclusion | | | (80,000 | ) | | (77,000 | ) | | — | |
Other | | | (210,000 | ) | | 76,000 | | | 145,000 | |
| |
|
| |
|
| |
|
| |
| | $ | 4,044,000 | | $ | 2,514,000 | | $ | (19,208,000 | ) |
| |
|
| |
|
| |
|
| |
| Significant components of the Company’s deferred tax assets are as follows: |
| | Year Ended March 31, | |
| |
| |
| | | 2006 | | | 2005 | | | 2004 | |
| |
|
| |
|
| |
|
| |
Deferred tax assets: | | | | | | | | | | |
Net operating loss carryforwards | | $ | 11,770,000 | | $ | 15,564,000 | | $ | 17,345,000 | |
Research and development tax credit carryforwards | | | 4,287,000 | | | 3,454,000 | | | 3,151,000 | |
Capitalized research and development | | | 105,000 | | | 219,000 | | | 345,000 | |
Deferred warranty | | | 625,000 | | | 612,000 | | | 301,000 | |
Accrued vacation | | | 320,000 | | | 195,000 | | | 225,000 | |
Other | | | 878,000 | | | 1,022,000 | | | 786,000 | |
Valuation allowance for deferred tax assets | | | (543,000 | ) | | (678,000 | ) | | (749,000 | ) |
| |
|
| |
|
| |
|
| |
Total deferred tax assets | | | 17,442,000 | | | 20,388,000 | | | 21,404,000 | |
| |
|
| |
|
| |
|
| |
Deferred tax liabilities: | | | | | | | | | | |
Depreciation | | $ | (935,000 | ) | $ | (615,000 | ) | $ | (107,000 | ) |
Other | | | (88,000 | ) | | (64,000 | ) | | (64,000 | ) |
| |
|
| |
|
| |
|
| |
Total deferred tax liabilities | | | (1,023,000 | ) | | (679,000 | ) | | (171,000 | ) |
| |
|
| |
|
| |
|
| |
Net deferred tax assets | | $ | 16,419,000 | | $ | 19,709,000 | | $ | 21,233,000 | |
| |
|
| |
|
| |
|
| |
| A valuation allowance against deferred tax assets is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. The Company established a 100% valuation allowance at March 31, 2003 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards, research and development credits and other deferred tax assets. At March 31, 2004, the Company eliminated the valuation allowance previously maintained against deferred tax assets to the extent that it is more likely than not that the deferred tax assets will be realized in the future. The valuation allowance of ($21,296,000) reflected in the reconciliation of the income tax provision to the Federal statutory rate for the fiscal year ended March 31, 2004 consisted of the ($22,024,000) change in the valuation allowance for the fiscal year ended March 31, 2004 and $728,000 attributable to deductions relating to stock options that are included in the net operating loss carryforward deferred tax asset. |
| |
| As of March 31, 2006, the valuation allowance is $543,000 and is attributable to federal research and development tax credits which expire in fiscal years 2007 through 2008. The change in valuation allowance for fiscal 2005 and 2006 is due to the expiration of federal research and development tax credits for which a valuation allowance had previously been established. As of March 31, 2006, the Company had federal net operating loss carryforwards of $33,627,000. There is no California net operating loss carryforward. The federal net operating loss carryforwards will expire at various dates from fiscal years 2009 through 2023, if not utilized. The Company also had federal and state research and development tax credit carryforwards of $2,684,000 and $1,140,000, respectively. The federal research and development tax credit carryforward will expire at various dates from fiscal years 2007 through 2026, if not utilized. The California research and development tax credit will carryforward indefinitely. |
| |
| Internal Revenue Code Section 382 places a limitation on the amount of taxable income which can be offset by net operating loss (“NOL”) carryforwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. The State of California has similar rules. Generally, after a change in control, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 limitation. Due to these “change in ownership” provisions, utilization of NOL and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods. |
56
13. | Product Category, Customer and Geographic Information |
| |
| The Company currently operates in one segment, which 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: |
| | Year Ended March 31, | |
| |
| |
| | | 2006 | | | 2005 | | | 2004 | |
| |
|
| |
|
| |
|
| |
Instruments | | $ | 21,864,000 | | $ | 17,203,000 | | $ | 16,194,000 | |
Reagent discs and kits | | | 41,606,000 | | | 32,921,000 | | | 28,144,000 | |
Other | | | 4,086,000 | | | 2,340,000 | | | 2,261,000 | |
| |
|
| |
|
| |
|
| |
Product sales, net | | | 67,556,000 | | | 52,464,000 | | | 46,599,000 | |
Development and licensing revenue | | | 1,372,000 | | | 294,000 | | | 275,000 | |
| |
|
| |
|
| |
|
| |
Total revenues | | $ | 68,928,000 | | $ | 52,758,000 | | $ | 46,874,000 | |
| |
|
| |
|
| |
|
| |
| The following is a summary of revenues by customer group: |
| | Year Ended March 31, | |
| |
| |
| | | 2006 | | | 2005 | | | 2004 | |
| |
|
| |
|
| |
|
| |
Medical Market | | $ | 10,888,000 | | $ | 8,095,000 | | $ | 7,119,000 | |
Veterinary Market | | | 53,841,000 | | | 42,806,000 | | | 37,875,000 | |
Other | | | 4,199,000 | | | 1,857,000 | | | 1,880,000 | |
| |
|
| |
|
| |
|
| |
Total revenues | | $ | 68,928,000 | | $ | 52,758,000 | | $ | 46,874,000 | |
| |
|
| |
|
| |
|
| |
| The following is a summary of revenues by geographic region based on customer location: |
| | Year Ended March 31, | |
| |
| |
| | | 2006 | | | 2005 | | | 2004 | |
| |
|
| |
|
| |
|
| |
United States | | $ | 58,747,000 | | $ | 45,059,000 | | $ | 40,232,000 | |
Europe | | | 7,354,000 | | | 5,915,000 | | | 4,773,000 | |
Asia and Latin America | | | 2,827,000 | | | 1,784,000 | | | 1,869,000 | |
| |
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Total revenues | | $ | 68,928,000 | | $ | 52,758,000 | | $ | 46,874,000 | |
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| Two distributors, Henry Schein and DVM Resources accounted for 17% and 13%, respectively, of total revenues for fiscal 2006. |
| |
| Two distributors, DVM Resources and Vedco, Inc. accounted for 17% and 14%, respectively, of total revenues for fiscal 2005, and 16% and 27%, respectively, of total revenues for fiscal 2004. |
| |
| Substantially all of the Company’s long-lived assets are located in the United States. |
| |
14. | Quarterly Results of Operations (Unaudited) |
| |
| The following is a summary of the unaudited quarterly results of operations for fiscal 2006 and 2005 (in thousands, except per share data): |
57
| | Quarter Ended | |
| |
| |
| | | June 30 | | | September 30 | | | December 31 | | | March 31 | |
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Fiscal Year Ended March 31, 2006: | | | | | | | | | | | | | |
Revenues | | $ | 14,273 | | $ | 17,413 | | $ | 17,444 | | $ | 19,798 | |
Gross profit | | $ | 7,827 | | $ | 10,092 | | $ | 9,839 | | $ | 11,095 | |
Net income | | $ | 1,001 | | $ | 2,298 | | $ | 1,851 | | $ | 2,325 | |
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Net income per share - basic | | $ | 0.05 | | $ | 0.12 | | $ | 0.09 | | $ | 0.12 | |
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Net income per share - diluted | | $ | 0.05 | | $ | 0.11 | | $ | 0.09 | | $ | 0.11 | |
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Fiscal Year Ended March 31, 2005: | | | | | | | | | | | | | |
Revenues | | $ | 13,242 | | $ | 13,635 | | $ | 12,063 | | $ | 13,818 | |
Gross profit | | $ | 7,168 | | $ | 7,367 | | $ | 6,069 | | $ | 7,343 | |
Net income | | $ | 1,434 | | $ | 1,341 | | $ | 770 | | $ | 1,306 | |
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|
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Net income per share - basic | | $ | 0.07 | | $ | 0.07 | | $ | 0.04 | | $ | 0.07 | |
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Net income per share - diluted | | $ | 0.07 | | $ | 0.06 | | $ | 0.04 | | $ | 0.06 | |
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On August 25, 2005, the Company’s Audit Committee approved the decision to change independent registered public accounting firms. The Company engaged Burr, Pilger & Mayer LLP as its independent registered public accounting firm to audit the Company’s financial statements and internal control over financial reporting for the fiscal year ended March 31, 2006 and dismissed Deloitte & Touche LLP as its independent registered public accounting firm. During the fiscal years ended March 31, 2005 and 2004 and through August 25, 2005, there were no disagreements with Deloitte & Touche LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte & Touche LLP, would have caused it to make reference to the subject matter of such disagreements in connection with its audit report. In addition, there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K, except that on June 13, 2005, Deloitte & Touche LLP advised the Company’s Audit Committee of a material weakness in internal control over financial reporting related to provision for income taxes as disclosed in the Company’s Form 10-K for the fiscal year ended March 31, 2005.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Based on our management’s evaluation, with the participation of our principal executive officer and principal financial officer, as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of March 31, 2006.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent registered public accounting firm has audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2006 as stated in their report which appears below.
58
Changes in Internal Control over Financial Reporting
As of March 31, 2005, management’s assessment of the effectiveness of the Company’s internal control over financial reporting identified a material weakness relating to the Company’s income tax provision process. During the quarter ended March 31, 2006, and in connection with the preparation of our financial statements for the year ended March 31, 2006, we implemented compensating controls and procedures relating to the income tax provision process to address the material weakness that had been identified in fiscal 2005. The compensating controls and procedures implemented during the fourth quarter ended March 31, 2006 consisted of the following:
| • | Documentation to the Company’s internal control over financial reporting the detailed review of our annual income tax provision and reporting prepared by our tax consultants. |
| | |
| • | Establish an annual training program for accounting personnel responsible for the income tax provision process to ensure that accounting personnel with the adequate experience, skills and knowledge are directly involved in the review and evaluation of tax accounting and reporting. |
As of March 31, 2006, the Company had remediated the controls that led to prior year’s material weakness, pertaining to a design deficiency relating to the provision of income tax provision.
Except as discussed above, there were no changes in the Company’s internal control over financial reporting during its most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect its internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders
of Abaxis, Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting included in Item 9A, that Abaxis, Inc. (the “Company”) maintained effective internal control over financial reporting as of March 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
59
In our opinion, management’s assessment that Abaxis, Inc. maintained effective internal control over financial reporting as of March 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Abaxis, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheet of Abaxis, Inc. as of March 31, 2006, and the related statements of operations, shareholders’ equity and comprehensive income, and cash flows for the year then ended, and the related financial statement schedule, as of and for the year ended March 31, 2006, and our report dated June 13, 2006 expressed an unqualified opinion on those financial statements.
/s/ Burr, Pilger & Mayer LLP | | |
| | |
Palo Alto, California
June 13, 2006 | | |
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information concerning our directors and executive officers:
Name | | Age | | Title |
| |
| |
|
Clinton H. Severson | | 58 | | Chairman of the Board, President and Chief Executive Officer |
| | | | |
Richard J. Bastiani, Ph.D. (1)(2) | | 63 | | Director |
| | | | |
Henk J. Evenhuis (1) | | 63 | | Director |
| | | | |
Brenton G. A. Hanlon (1) (2) | | 60 | | Director |
| | | | |
Prithipal Singh, Ph.D. (1) | | 67 | | Director |
| | | | |
Ernest S. Tucker, III, M.D. (1) | | 73 | | Director |
| | | | |
Alberto R. Santa Ines | | 59 | | Chief Financial Officer and Vice President of Finance |
| | | | |
Robert B. Milder | | 56 | | Chief Operations Officer |
| | | | |
Kenneth P. Aron, Ph.D. | | 53 | | Vice President of Research and Development |
| | | | |
Christopher M. Bernard | | 38 | | Vice President of Sales and Marketing for the Domestic Medical Market |
| | | | |
Vladimir E. Ostoich, Ph.D. | | 60 | | Vice President of Government Affairs and Vice President of Marketing for the Pacific Rim, Founder |
|
(1) | Member of the Audit Committee |
(2) | Member of the Compensation Committee |
Clinton H. Severson has served as our President, Chief Executive Officer and one of our directors since June 1996. He was appointed Chairman of the Board in May 1998. From February 1989 to May 1996, Mr. Severson served as President and Chief Executive Officer of MAST Immunosystems, Inc., a privately held medical diagnostic company.
60
Richard J. Bastiani, Ph.D. joined our Board of Directors in September 1995. Dr. Bastiani currently serves as Chairman of the Board of Directors of Response Biomedical Corporation. From 1998 to 2005, Dr. Bastiani served as Chairman of the Board of Directors of ID Biomedical Corporation (NASDAQ: IDBE), after he was appointed to the Board of Directors of ID Biomedical Corporation in October 1996. Dr. Bastiani was President of Dendreon (NASDAQ: DNDN), a biotechnology company from September 1995 to September 1998. From 1971 until 1995, Dr. Bastiani held a number of positions with Syva Company, a diagnostic company, including as President from 1991 until Syva was acquired by a subsidiary of Hoechst AG of Germany in 1995. Dr. Bastiani is also a member of the board of directors of two privately held companies.
Henk J. Evenhuis joined our Board of Directors in November 2002. Mr. Evenhuis currently serves on the Board of Directors of Credence Systems Corporation (NASDAQ: CMOS), a semiconductor equipment manufacturer. Mr. Evenhuis served as Chief Financial Officer of Fair Isaac Corporation (NYSE: FIC), a global provider of analytic software products to the financial services, insurance and health care industries from October 1999 to October 2002. From 1987 to 1998, he was Executive Vice President and Chief Financial Officer of Lam Research Corporation (NASDAQ: LRCX), a semiconductor equipment manufacturer.
Brenton G. A. Hanlon joined our Board of Directors in November 1996. Since January 2001, Mr. Hanlon has been President and Chief Executive Officer of Hitachi Chemical Diagnostics, a manufacturer of in vitro allergy diagnostic products. Concurrently, from December 1996 until the present, Mr. Hanlon has served as President and Chief Operating Officer of Tri-Continent Scientific, a subsidiary of Hitachi Chemical. From 1989 to December 1996, Mr. Hanlon was Vice President and General Manager of Tri-Continent Scientific. Mr. Hanlon serves on the board of directors of two privately held companies.
Prithipal Singh, Ph.D. joined our Board of Directors in June 1992. Dr. Singh has been the Founder, Chairman and Chief Executive Officer of ChemTrak Inc. (Pink Sheets: CMTR) from 1988 to 1998. Prior to this, Dr. Singh was an Executive Vice President of Idetec Corporation from 1985 to 1988 and a Vice President of Syva Corporation from 1977 to 1985.
Ernest S. Tucker, III, M.D. joined our Board of Directors in September 1995. Dr. Tucker currently serves as a self-employed healthcare consultant after having retired as Chief Compliance Officer for Scripps Health in San Diego in September 2000, a position which he assumed in April 1998. Dr. Tucker was Chairman of Pathology at Scripps Clinic and Research Foundation from 1992 to 1998 and Chair of Pathology at California Pacific Medical Center in San Francisco from 1989 to 1992.
Alberto R. Santa Ines has served as our Chief Financial Officer and Vice President of Finance since April 2002. Mr. Santa Ines joined us in February 2000 as Finance Manager. In April 2001, Mr. Santa Ines was promoted to Interim Chief Financial Officer and Director of Finance, and in April 2002 he was promoted to his current position. From March 1998 to January 2000, Mr. Santa Ines was a self-employed consultant to several companies. From August 1997 to March 1998, Mr. Santa Ines was the Controller of Unisil (Pink Sheets: USIL), a semiconductor company. From April 1994 to August 1997, he was a Senior Finance Manager at Lam Research Corporation (NASDAQ: LRCX), a semiconductor equipment manufacturer.
Robert B. Milder has served as our Chief Operations Officer since April 2000. Mr. Milder joined us in May 1998 as Vice President of Operations. From December 1996 to May 1998, Mr. Milder was the Vice President of Manufacturing for Nidek, Inc., a manufacturer of opthalmic and surgical lasers. From March 1992 to January 1996, Mr. Milder was Vice President of Operations for Heraeus Surgical, Inc., a surgical capital equipment manufacturer.
Kenneth P. Aron, Ph.D. joined us in February 2000 as Vice President of Research and Development. From April 1998 to November 1999, Dr. Aron was Vice President of Engineering and Technology of Incyte Pharmaceuticals (NASDAQ: INCY), a genomic information company. From April 1996 to April 1998, Dr. Aron was Vice President of Research, Development and Engineering for Cardiogenesis Corporation (NASDAQ: CGCP), a manufacturer of laser-based cardiology surgical products.
Christopher M. Bernard joined us in November 2005 as Vice President of Marketing and Sales for the Domestic Medical Market. From September 2000 to October 2005, Mr. Bernard served as Regional Business Director for Cytyc Corporation (NASDAQ: CYTC), a manufacturer of medical products primarily focused on women’s health. From December 1995 to August 2000, Mr. Bernard held various sales and sales management positions at Cytyc Corporation.
Vladimir E. Ostoich, Ph.D., one of our co-founders, is currently our Vice President of Government Affairs and Vice President of Marketing for the Pacific Rim. Dr. Ostoich has served as Vice President in various capacities at Abaxis since our inception, including as Vice President of Research and Development, Senior Vice President of Research and Development, Vice President of Engineering and Instrument Manufacturing and Vice President of Marketing and Sales for the United States and Canada.
All directors hold office until the next annual meeting of shareholders of Abaxis and until their successors have been elected and qualified. Our Bylaws authorize the Board of Directors to fix the number of directors at not less than four or more than seven. The number of directors of the Company is currently six.
61
Each officer serves at the discretion of the Board of Directors. There are no family relationships among any of our directors or officers.
Identification of Audit Committee and Financial Expert
The Audit Committee of the Board of Directors oversees Abaxis’ corporate accounting and financial reporting process. The outside directors comprise the Audit Committee: Messrs. Bastiani, Evenhuis, Hanlon, Singh and Tucker. Mr. Evenhuis serves as Chairman of the Audit Committee.
The Board of Directors annually reviews the Nasdaq National Market listing standards definition of independence for Audit Committee members and has determined that all members of the Abaxis Audit Committee are independent (as independence is currently defined in Rule 4350(d)(2)(A)(i) and (ii) of the Nasdaq National Market listing standards). Securities and Exchange Commission, or SEC, regulations require Abaxis to disclose whether a director qualifying as an “audit committee financial expert” serves on the Audit Committee. The Board of Directors has determined that Mr. Evenhuis qualifies as an “audit committee financial expert,” as defined in applicable SEC rules. The Board of Directors made a qualitative assessment of Mr. Evenhuis’s level of knowledge and experience based on a number of factors, including his formal education and experience as a chief financial officer for public reporting companies.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers, directors and persons who beneficially own more than 10% of our common stock to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms filed by such persons.
Based solely on our review of the copies of Forms 3, 4 and 5 and amendments thereto received by us, we believe that during the period from April 1, 2005 through March 31, 2006, our officers and directors complied with all applicable filing requirements except with respect to one late filing by Mr. Vladimir Ostoich, an Executive Officer.
Code of Business Conduct and Ethics
Abaxis has adopted a Code of Business Conduct and Ethics that applies to all our executive officers, directors and employees. The Code of Business Conduct and Ethics is available on our website at www.abaxis.com. If we make any amendments to the Code of Business Conduct and Ethics or grant any waiver from a provision of the code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website.
Employment Agreements
In August 2005, we entered into an employment agreement with Clinton H. Severson, our President, Chief Executive Officer, and Chairman of our Board of Directors, which provides Mr. Severson with two years of salary, bonus and benefits if his employment with us is terminated for other than cause. Mr. Severson’s employment agreement provides for an annual salary of $312,000 and a bonus base of $385,000. The bonus base is adjusted accordingly upon meeting certain performance criteria. The salary and bonus payments are subject to applicable withholding, in accordance with Abaxis’ normal payroll procedures and are also subject to periodic review and adjustment in accordance with Abaxis’ salary review policies/practices then in effect for its senior management. Mr. Severson’s employment agreement was filed with the SEC as an exhibit to our Form 10-Q for the period ended June 30, 2005.
Item 11. Executive Compensation
The following table sets forth information concerning the compensation during fiscal 2006, 2005 and 2004 of our Chief Executive Officer and our four other most highly compensated executive officers whose total salary and bonus for our fiscal 2006 exceeded $100,000, for services in all capacities to us, during our fiscal 2006.
62
Summary Compensation Table
| | | | | Annual Compensation ($) | | Long-Term
Compensation
Awards | |
| | | | |
| |
| |
Name and Principal Position | | Fiscal
Year | | Salary | | Bonus (1) | | Securities
Underlying
Options (#) | |
| |
| |
| |
| |
| |
Clinton H. Severson | | | 2006 | | $ | 311,000 | | $ | 556,000 | | | — | |
President, Chief Executive Officer and | | | 2005 | | | 300,000 | | | 245,000 | | | 50,000 | |
Chairman of the Board | | | 2004 | | | 285,000 | | | 461,000 | | | 50,000 | |
Alberto R. Santa Ines | | | 2006 | | $ | 166,000 | | $ | 318,000 | | | — | |
Chief Financial Officer and Vice President of | | | 2005 | | | 160,000 | | | 158,000 | | | 40,000 | |
Finance | | | 2004 | | | 150,000 | | | 406,000 | (2) | | 40,000 | |
Robert B. Milder | | | 2006 | | $ | 192,000 | | $ | 376,000 | | | — | |
Chief Operations Officer | | | 2005 | | | 185,000 | | | 189,000 | | | 40,000 | |
| | | 2004 | | | 175,000 | | | 360,000 | | | 40,000 | |
Kenneth P. Aron, Ph.D. | | | 2006 | | $ | 176,000 | | $ | 318,000 | | | — | |
Vice President of Research and Development | | | 2005 | | | 170,000 | | | 158,000 | | | 40,000 | |
| | | 2004 | | | 160,000 | | | 302,000 | | | 40,000 | |
Vladimir E. Ostoich, Ph.D. | | | 2006 | | $ | 186,000 | | $ | 318,000 | | | — | |
Vice President of Government Affairs and Vice | | | 2005 | | | 180,000 | | | 158,000 | | | 40,000 | |
President of Marketing for the Pacific Rim | | | 2004 | | | 170,000 | | | 302,000 | | | 40,000 | |
|
(1) | Represents bonuses earned during the fiscal year. |
(2) | Includes $113,000 in connection with an Employee Retention Incentive Agreement. |
Stock Option Grants
There were no stock options granted to the persons named in the Summary Compensation Table during fiscal 2006.
Stock Option Exercises
The following table shows stock option exercises and the number and value of unexercised stock options held by the persons named in the Summary Compensation Table during the fiscal year ended March 31, 2006.
Option Exercises in Fiscal 2006 and Option Values at March 31, 2006
| | Shares
Acquired
on Exercise
(#) | | Value
Realized
($) (1) | | Number of Unexercised Options
at March 31, 2006 (#) (2) | | Value of Unexercised
In-the-Money Options
at March 31, 2006 ($) (3) | |
| | | |
| |
| |
Name | | | | Exercisable | | Unexercisable | | Exercisable | | Unexercisable | |
| |
| |
| |
| |
| |
| |
| |
Clinton H. Severson | | | — | | | — | | | 750,458 | | | 13,542 | | $ | 13,240,000 | | $ | 255,000 | |
Alberto R. Santa Ines | | | — | | | — | | | 154,000 | | | 15,000 | | $ | 2,126,000 | | $ | 286,000 | |
Robert B. Milder | | | — | | | — | | | 258,167 | | | 10,833 | | $ | 3,991,000 | | $ | 204,000 | |
Kenneth P. Aron, Ph.D. | | | — | | | — | | | 233,667 | | | 10,833 | | $ | 3,284,000 | | $ | 204,000 | |
Vladimir E. Ostoich, Ph.D. | | | 30,000 | | $ | 339,000 | | | 238,667 | | | 10,833 | | $ | 3,605,000 | | $ | 204,000 | |
|
(1) | Amounts shown under the column “Value Realized” are based on the fair market value of our common stock on the exercise date as reported on the Nasdaq National Market less the aggregate exercise price. |
| |
(2) | Options to purchase our common stock generally vest as to one-fourth of the option grant on the first anniversary of the date of grant and 1/48 per month thereafter for each full month of the optionee’s continuous employment with Abaxis. All options are exercisable only to the extent vested. |
| |
(3) | The value of the unexercised in-the-money options is based on the reported closing price of our common stock ($22.68 per share) on the Nasdaq National Market on March 31, 2006, the last trading day of our fiscal year ended March 31, 2006, and is net of the exercise price of such options. |
63
Compensation of Directors
In fiscal 2006, non-employee directors received an annual retainer of $12,000; the Chairman of the Audit Committee received an annual supplement of $5,000; and the Chairman of the Compensation Committee received an annual supplement of $2,000 for their service in such capacities.
In fiscal 2006, all non-employee directors received $1,250 for attendance at each meeting of the Board of Directors. In addition, members of the Audit Committee and Compensation Committee received $1,000 for their attendance at the committee meetings. Non-employee directors also received reimbursement of reasonable travel expenses incurred.
Change of Control Arrangements
Our 1992 Outside Directors Stock Option Plan provide that, in the event of a transfer of control of Abaxis, the surviving, continuing, successor or purchasing corporation or a parent corporation thereof, as the case may be, which is referred to as the acquiring corporation, shall either assume our rights and obligations under stock option agreements outstanding under our option plans or substitute options for the acquiring corporation’s stock for such outstanding options. In the event the acquiring corporation elects not to assume or substitute for such outstanding options in connection with a merger constituting a transfer of control, our Board shall provide that any unexercisable and/or unvested portion of the outstanding options shall be immediately exercisable and vested as of a date prior to the transfer of control, as our Board so determines. Any options which are neither assumed by the acquiring corporation, nor exercised as of the date of the transfer of control, shall terminate effective as of the date of the transfer of control. Options which are assumed by the acquiring corporation shall become exercisable and vested as provided under the relevant stock option agreements under the option plans, unless the acquiring corporation terminates the option holder under certain circumstances defined in the option plans. Under such circumstances, the holder’s options shall become immediately exercisable and vested as of the date of termination.
Under our 2005 Equity Incentive Plan, in the event of a “change in control,” as such term is defined by the Equity Incentive Plan, the surviving, continuing, successor or purchasing entity or its parent may, without the consent of any participant, either assume or continue in effect any or all outstanding options and stock appreciation rights or substitute substantially equivalent options or rights for its stock. Any options or stock appreciation rights which are not assumed or continued in connection with a change in control or exercised prior to the change in control will terminate effective as of the time of the change in control. The Compensation Committee may provide for the acceleration of vesting of any or all outstanding options or stock appreciation rights upon such terms and to such extent as it determines. The Equity Incentive Plan also authorizes the Compensation Committee, in its discretion and without the consent of any participant, to cancel each or any outstanding option or stock appreciation right upon a change in control in exchange for a payment to the participant with respect to each vested share (and each unvested share if so determined by the Compensation Committee) subject to the cancelled award of an amount equal to the excess of the consideration to be paid per share of common stock in the change in control transaction over the exercise price per share under the award. 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 any stock award, restricted stock unit award, performance share or performance unit, cash-based award or other stock-based award held by a participant upon such conditions and to such extent as determined by the Compensation Committee. It is currently anticipated 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 accelerate in full upon a change in control.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
To our knowledge, the following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 31, 2006 by (i) the persons named in the Summary Compensation Table, (ii) each of our directors, (iii) all of our executive officers and directors as a group and (iv) each person who is known by Abaxis to beneficially own more than 5% of Abaxis’ common stock. The persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and to the information contained in the footnotes to this table.
64
Name and Address of Beneficial Owner | | Shares
Beneficially
Owned | | Percent of Abaxis
Common Stock
Outstanding (1) | |
| |
| |
| |
Wasatch Advisors, Inc. (3) | | | 2,164,792 | | | 10.8 | % |
AXA (as a group) (4) | | | 1,237,071 | | | 6.1 | % |
Executive Officers: (2) | | | | | | | |
Clinton H. Severson (5) | | | 922,541 | | | 4.6 | % |
Vladimir E. Ostoich, Ph.D. (6) | | | 502,411 | | | 2.5 | % |
Robert B. Milder (7) | | | 311,699 | | | 1.5 | % |
Kenneth P. Aron, Ph.D. (8) | | | 244,583 | | | 1.2 | % |
Alberto R. Santa Ines (9) | | | 175,680 | | | | * |
Outside Directors: (2) | | | | | | | |
Richard J. Bastiani, Ph.D. (10) | | | 70,000 | | | | * |
Henk J. Evenhuis (11) | | | 18,000 | | | | * |
Brenton G. A. Hanlon (12) | | | 37,000 | | | | * |
Prithipal Singh, Ph.D. (13) | | | 36,000 | | | | * |
Ernest S. Tucker, III, M.D. (14) | | | 27,000 | | | | * |
Executive officers and directors as a group (10 persons) (15) | | | 2,344,914 | | | 11.6 | % |
|
* Less than 1% |
| |
(1) | The percentages shown in this column are calculated from the 20,135,337 shares of common stock outstanding on March 31, 2006. |
| |
(2) | The business address of the beneficial owner listed is c/o Abaxis, Inc., 3240 Whipple Road, Union City, CA 94587. |
| |
(3) | Based on information set forth in a Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2006 by Wasatch Advisors, Inc., reporting sole power to vote and dispose of 2,164,792 shares. The business address for Wasatch Advisors, Inc. is 150 Social Hall Avenue, Salt Lake City, UT 84111. |
| |
(4) | Based on information set forth in a Schedule 13G filed with the Securities and Exchange Commission on February 14, 2006 by AXA Financial, Inc., AXA Assurances I.A.R.D Mutuelle, AXA Assurances Vie Mutuelle, AXA Courtage Assurance Mutuelle, and AXA. As a group, reporting sole power to vote and dispose 1,102,361 and 1,237,071 shares, respectively. |
| The business address for AXA Financial, Inc is 1290 Avenue of the Americas, New York, New York 10104; for AXA Assurances I.A.R.D Mutuelle, AXA Assurances Vie Mutuelle, AXA Courtage Assurance Mutuelle is 26, rue Drouot, 75009 Paris, France; and for AXA is 25, avenue Matignon, 75008 Paris, France. |
(5) | Includes: |
| | • | 169,999 shares; and |
| | • | 752,542 shares subject to stock options exercisable by Mr. Severson within sixty days of March 31, 2006. |
| | | |
(6) | Includes: |
| | • | 83,750 shares; |
| | • | 31,500 shares held by Dr. Ostoich’s IRA; |
| | • | 29,500 shares held by Mrs. Ostoich’s IRA; |
| | • | 117,328 shares held by the Vladimir Ostoich and Liliana Ostoich Trust Fund, for the benefit of Dr. Ostoich and his wife; and |
| | • | 240,333 shares subject to stock options exercisable by Dr. Ostoich within sixty days of March 31, 2006. |
| | | |
(7) | Includes: |
| | • | 51,866 shares; and |
| | • | 259,833 shares subject to stock options exercisable by Mr. Milder within sixty days of March 31, 2006. |
65
(8) | Includes: |
| | • | 9,250 shares; and |
| | • | 235,333 shares subject to stock options exercisable by Dr. Aron within sixty days of March 31, 2006. |
| | | |
(9) | Includes: |
| | • | 17,930 shares; and |
| | • | 157,750 shares subject to stock options exercisable by Mr. Santa Ines within sixty days of March 31, 2006. |
| | | |
(10) | Includes: |
| | • | 42,000 shares; and |
| | • | 28,000 shares subject to stock options exercisable by Dr. Bastiani within sixty days of March 31, 2006. |
| | | |
(11) | Includes |
| | • | 18,000 shares subject to stock options exercisable by Mr. Evenhuis within sixty days of March 31, 2006. |
| | | |
(12) | Includes: |
| | • | 9,000 shares; and |
| | • | 28,000 shares subject to stock options exercisable by Mr. Hanlon within sixty days of March 31, 2006. |
| | | |
(13) | Includes: |
| | • | 10,000 shares; and |
| | • | 26,000 shares subject to stock options exercisable by Dr. Singh within sixty days of March 31, 2006. |
| | | |
(14) | Includes: |
| | • | 27,000 shares subject to stock options exercisable by Dr. Tucker within sixty days of March 31, 2006. |
| | | |
(15) | Includes: |
| | • | 572,123 shares; and |
| | • | 1,772,791 shares subject to stock options exercisable within sixty days of March 31, 2006. |
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Principal Accountant Fees and Services
For the fiscal year ended March 31, 2006 and 2005, our independent registered public accounting firms, Burr, Pilger & Mayer LLP and Deloitte & Touche LLP billed the approximate fees set forth below.
| | Year Ended March 31, | |
| |
| |
| | 2006 | | 2005 | |
| |
| |
| |
Audit Fees (1) | | $ | 797,000 | | $ | 740,000 | |
Audit-Related Fees | | | — | | | — | |
Tax Fees (2) | | | — | | | 11,000 | |
All Other Fees (3) | | | 67,000 | | | 1,000 | |
| |
|
| |
|
| |
Total All Fees | | $ | 864,000 | | $ | 752,000 | |
| |
|
| |
|
| |
|
(1) | Audit fees represent fees for professional services provided in connection with the audit of our financial statements and review of our quarterly financial statements, including attestation services related to Section 404 of the Sarbanes-Oxley Act of 2002. For the fiscal year ended March 31, 2006 and 2005, professional services provided by Deloitte & Touche LLP were $270,000 and $740,000, respectively. For the fiscal year ended March 31, 2006 and 2005, professional services provided by Burr, Pilger & Mayer LLP were $527,000 and $0, respectively. |
| |
(2) | Tax fees consist of fees billed for professional services rendered for tax compliance and tax advice. For the fiscal year ended March 31, 2005, professional services provided by Deloitte & Touche LLP were $11,000. |
| |
(3) | All other fees consist of fees for products and services other than the services reported above. For the fiscal year ended March 31, 2006, this category consisted of $67,000 for professional services provided by Deloitte & Touche LLP, primarily related to the preparation of tax returns and various other services after their dismissal in August 2005. For the fiscal year ended March 31, 2005, this category consisted of a subscription to accounting and financial disclosure literature paid to Deloitte & Touche LLP. |
66
The Audit Committee has adopted a policy for the pre-approval of all audit and non-audit services to be performed for the Company by the independent registered public accounting firm. The Audit Committee has considered the role of Burr, Pilger & Mayer LLP in providing audit and audit-related services to Abaxis and has concluded that such services are compatible with Burr, Pilger & Mayer LLP’s role as Abaxis’ independent registered public accounting firm.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following financial statements, schedules and exhibits are filed as part of this report:
1. | Financial Statements - The Financial Statements required by this item are listed on the Index to Financial Statements in Part II, Item 8 of this report. |
| | |
2. | Financial Statement Schedules - |
| | |
| • | Schedule II – Valuation and Qualifying Accounts and Reserves |
| | |
| • | Other financial statement schedules are not included because they are not required or the information is otherwise shown in the financial statements or notes thereto. |
| | |
3. | Exhibits - The exhibits listed on the accompanying Exhibit Index are filed as part of, or are incorporated by reference into, this report. |
Abaxis, Inc.
Schedule II
Valuation and Qualifying Accounts and Reserves
Description | | Balance at
Beginning of
Year | | Additions
Charged to
Expenses | | Deductions from
Reserves | | Balance at End
of Year | |
| |
| |
| |
| |
| |
Year ended March 31, 2006: | | | | | | | | | | | | | |
Reserve for Doubtful Accounts | | $ | 204,000 | | $ | 83,000 | | $ | 178,000 | | $ | 109,000 | |
Reserve for Sales Allowances | | | 278,000 | | | 549,000 | | | 593,000 | | | 234,000 | |
| |
|
| |
|
| |
|
| |
|
| |
Total Reserve for Doubtful Accounts & Sales Allowances | | $ | 482,000 | | $ | 632,000 | | $ | 771,000 | | $ | 343,000 | |
| |
|
| |
|
| |
|
| |
|
| |
Year ended March 31, 2005: | | | | | | | | | | | | | |
Reserve for Doubtful Accounts | | $ | 175,000 | | $ | 39,000 | | $ | 10,000 | | $ | 204,000 | |
Reserve for Sales Allowances | | | 82,000 | | | 578,000 | | | 382,000 | | | 278,000 | |
| |
|
| |
|
| |
|
| |
|
| |
Total Reserve for Doubtful Accounts & Sales Allowances | | $ | 257,000 | | $ | 617,000 | | $ | 392,000 | | $ | 482,000 | |
| |
|
| |
|
| |
|
| |
|
| |
Year ended March 31, 2004: | | | | | | | | | | | | | |
Reserve for Doubtful Accounts | | $ | 141,000 | | $ | 73,000 | | $ | 39,000 | | $ | 175,000 | |
Reserve for Sales Allowances | | | 126,000 | | | 513,000 | | | 557,000 | | | 82,000 | |
| |
|
| |
|
| |
|
| |
|
| |
Total Reserve for Doubtful Accounts & Sales Allowances | | $ | 267,000 | | $ | 586,000 | | $ | 596,000 | | $ | 257,000 | |
| |
|
| |
|
| |
|
| |
|
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67
Exhibit Index
Exhibit No. | | Description of Document |
| |
|
3.1 | | Restated Articles of Incorporation (4) |
| | |
3.2 | | By-laws (2) |
| | |
4.2 | | Form of Warrant Agreement issued to purchasers of Series D Convertible Preferred Stock(6) |
| | |
4.4 | | Registration Rights Agreement dated as of March 29, 2002 (8) |
| | |
4.5 | | Form of Warrant Agreement issued to purchasers of Series E Convertible Preferred Stock(8) |
| | |
10.5 | | 1989 Stock Option Plan, as amended and restated as the 1998 Stock Option Plan (3) |
| | |
10.6 | | 1992 Outside Directors Stock Option Plan and forms of agreement (4) |
| | |
10.7 | | 401(k) Defined Contribution Plan (2) |
| | |
10.8 | | Licensing agreement between the Company and Pharmacia Biotech, Inc. dated October 1, 1994 (1)(5) |
| | |
10.9 | | Lease Agreement with Principal Development Investors, LLC, dated June 21, 2000 (7) |
| | |
10.10 | | Loan and Security Agreement with Comerica Bank - California dated March 13, 2002 (9) |
| | |
10.11 | | First and Second Modification to Loan and Security Agreement with Comerica Bank - California dated March 29, 2002 (9) |
| | |
10.12 | | Loan Revision/Extension Agreement with Comerica Bank - California dated March 29, 2002 (9) |
| | |
10.13 | | Loan Revision/Extension Agreement with Comerica Bank - California dated September 23, 2002 (10) |
| | |
10.14 | | Letter Setting Forth Additional Terms of Relationship Between Abaxis and Pharmacia Biotech dated as of June 9,
1997 (1) (10) |
| | |
10.15 | | Manufacturing and Supply Agreement by and between Diatron Messtechnik GmbH and Abaxis, dated November 13,
2003 (1) (14) |
| | |
10.16 | | Distribution Agreement by and between Scil Animal Care Company GmbH and Abaxis, Inc., dated September 1, 2001 (12) |
| | |
10.17 | | Loan and Security Agreement by and between Abaxis and Comerica Bank-California dated as of September 8, 2003 (11) |
| | |
10.18 | | First Modification to Business Loan Agreement with Comerica Bank - California dated September 15, 2004 (13) |
| | |
10.19 | | Distribution Agreement by and between the Veterinary Division of Henry Schein and Abaxis, Inc., dated April 4, 2004 (15) + |
| | |
10.20 | | Employment Agreement with Mr. Clinton H. Severson dated July 11, 2005 (15) |
| | |
10.21 | | 2005 Equity Incentive Plan, including related agreements and forms |
| | |
21.1 | | Subsidiaries of Registrant |
| | |
23.1 | | Consent of Burr, Pilger & Mayer LLP, Independent Registered Public Accounting Firm |
| | |
23.2 | | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm |
| | |
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 |
68
|
(1) | Confidential treatment of certain portions of these agreements has been granted by the Securities and Exchange Commission. |
| |
(2) | Incorporated by reference from Registration Statement No. 33-44326 filed December 11, 1991. |
| |
(3) | Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the quarter ended December 31, 2004. |
| |
(4) | Incorporated by reference to the exhibit filed with our Annual Report on Form 10-K for the fiscal year ended March 31, 1993. |
| |
(5) | Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. |
| |
(6) | Incorporated by reference to the exhibit filed with our Current Report on Form 8-K on October 19, 2000. |
| |
(7) | Incorporated by reference to the exhibit filed with our Registration Statement on Form S-3 on January 10, 2001. |
| |
(8) | Incorporated by reference to the exhibit filed with our Current Report on Form 8-K on May 13, 2002. |
| |
(9) | Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. |
| |
(10) | Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. |
| |
(11) | Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. |
| |
(12) | Incorporated by reference to the exhibit filed with Amendment Number One to our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2002, as filed with the Security and Exchange Commission on December 24, 2002. |
| |
(13) | Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. |
| |
(14) | Incorporated by reference to the exhibit filed with our Annual Report on Form 10-K for the fiscal year ended March 31, 2004. |
| |
(15) | Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. |
| |
+ Confidential treatment of certain portions of this agreement has been requested from the Securities and Exchange Commission. |
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on June 14, 2006.
| ABAXIS, INC. |
| | |
| | |
| By | /s/ Clinton H. Severson |
| |
|
| | Clinton H. Severson |
| | Chairman of the Board, President and
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | | Title | | Date |
| |
| |
|
/s/ Clinton H. Severson | | President, Chief Executive Officer and Director | | June 14, 2006 |
| | (Principal Executive Officer) | | |
Clinton H. Severson | | | | |
| | | | |
/s/ Alberto R. Santa Ines | | Chief Financial Officer and Vice President of Finance | | June 14, 2006 |
| | (Principal Financial and Accounting Officer) | | |
Alberto R. Santa Ines | | | | |
| | | | |
/s/ Richard J. Bastiani, Ph.D. | | Director | | June 14, 2006 |
| | | | |
Richard J. Bastiani | | | | |
| | | | |
/s/ Henk J. Evenhuis | | Director | | June 14, 2006 |
| | | | |
Henk J. Evenhuis | | | | |
| | | | |
/s/ Brenton G. A. Hanlon | | Director | | June 14, 2006 |
| | | | |
Brenton G. A. Hanlon | | | | |
| | | | |
/s/ Prithipal Singh, Ph.D. | | Director | | June 14, 2006 |
| | | | |
Prithipal Singh, Ph.D. | | | | |
| | | | |
/s/ Ernest S. Tucker III | | Director | | June 14, 2006 |
| | | | |
Ernest S. Tucker III | | | | |
70
