UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from _______ to _______
Commission file number 000-19720
ABAXIS, INC.
(Exact name of registrant as specified in its charter)
California 77-0213001
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization ) Identification No.)
1320 Chesapeake Terrace
Sunnyvale, California 94089
(Address of principal executive offices)
Telephone: (408) 734-0200
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or
15(d) Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports),
Yes [X] No
and
(2) has been subject to such filing requirements for the
90 days. Yes [X] No
At October 8, 1999 13,975,643 shares of common stock, no par value, were
outstanding.
TABLE OF CONTENTS
ITEM
Facing Sheet
Table of Contents
Part I. Financial Information
Item 1. Financial Statements:
Condensed Statements of Operations - Three and
Six Months Ended Seprember 30, 1999 and 1998
Condensed Balance Sheets - June 30, 1999 and March 31, 1999
Condensed Statements of Cash Flows -
Six Months Ended September 30, 1999 and 1998
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART 1-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ABAXIS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues:
Product sales, net......... $5,000,000 $3,368,000 $9,418,000 $6,612,000
Development and licensing
revenue.................. 53,000 115,000 70,000 150,000
------------ ------------ ------------ ------------
Total revenues 5,053,000 3,483,000 9,488,000 6,762,000
------------ ------------ ------------ ------------
Costs and operating expenses:
Cost of product sales...... 2,773,000 2,431,000 5,366,000 5,029,000
Research and development... 909,000 712,000 1,803,000 1,233,000
Selling, general, and
administrative........... 1,876,000 1,363,000 3,485,000 2,616,000
------------ ------------ ------------ ------------
Total costs and operating
expenses................. 5,558,000 4,506,000 10,654,000 8,878,000
------------ ------------ ------------ ------------
Loss from operations.......... (505,000) (1,023,000) (1,166,000) (2,116,000)
Interest income (3,000) (6,000) 42,000 31,000
Other income (expense)........ 0 -- 0 0
------------ ------------ ------------ ------------
Net loss...................... ($508,000) ($1,029,000) ($1,124,000) ($2,085,000)
============ ============ ============ ============
Basic and diluted loss
per share (a)................ ($0.04) ($0.07) ($0.09) ($0.15)
============ ============ ============ ============
Shares used in calculating
loss per share - basic and
diluted....................... 13,968,000 13,883,000 13,965,000 13,699,000
============ ============ ============ ============
(a) Net loss attributable to common shareholders used in computation
of basic and diluted loss per share for the three and six months ended
September 30, 1999 and 1998 was $(568,000) , $(1,244,000),
$(1,029,000) and $(2,096,000) respectively. See Note 3 of Notes to
Condensed Financial Statements.
See Note 3 of Notes to condensed financial statements.
See notes to condensed financial statements.
ABAXIS, INC.
CONDENSED BALANCE SHEETS
September 30, March 31,
1999 1999
------------ ------------
(unaudited) (Note 1)
Current assets:
Cash and cash equivalents ....................... $3,235,000 $5,426,000
Trade and other receivables (net of allowance
for doubtful accounts of $231,000 at Sept. 30,
1999 and $174,000 at March 31, 1999).......... 3,928,000 2,731,000
Interest receivable ............................. -- --
Inventories ..................................... 2,191,000 1,933,000
Prepaid expenses ................................ 222,000 233,000
------------ ------------
Total current assets ................... 9,576,000 10,323,000
Property and equipment - net ...................... 3,405,000 2,518,000
Deposits and other assets ......................... 75,000 73,000
------------ ------------
Total assets ...................................... $13,056,000 $12,914,000
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Borrowings under line of credit.................. $721,000 $683,000
Accounts payable ................................ 1,568,000 1,087,000
Dividends payable ............................... 208,000 88,000
Accrued payroll and related expenses ............ 1,262,000 573,000
Other accrued liabilities ....................... 444,000 410,000
Warranty reserve ................................ 739,000 737,000
Deferred rent ................................... 38,000 53,000
Deferred revenue ................................ 518,000 258,000
Current portion of long-term debt ............... 606,000 606,000
------------ ------------
Total current liabilities .............. 6,104,000 4,495,000
------------ ------------
Long-term debt .................................... 597,000 889,000
------------ ------------
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, no par value:
authorized shares - 5,000,000; issued and
outstanding shares - 4,000 on June 30,1999
and 4,000 on March 31, 1999 ................... 3,581,000 3,581,000
Common stock, no par value: authorized shares -
35,000,000; issued and outstanding shares -
13,966,980 on June 30, 1999 and
12,957,580 on March 31, 1999 .................. 64,055,000 63,944,000
Deferred compensation ........................... (69,000) (28,000)
Accumulated deficit ............................. (61,212,000) (59,967,000)
------------ ------------
Total shareholders' equity ............. 6,355,000 7,530,000
------------ ------------
Total liabilities and shareholders' equity ........ $13,056,000 $12,914,000
============ ============
See notes to condensed financial statements.
Note 1 - Amounts are derived from audited financial statements.
ABAXIS, INC
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
September 30,
-------------------------
1999 1998
------------ ------------
Operating activities:
Net loss...............................................($1,124,000) ($2,085,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........................ 138,000 346,000
Amortization of deferred compensation................ (41,000) --
Common stock issued for services..................... -- --
Changes in assets and liabilities:
Trade and other receivables....................... (1,197,000) (148,000)
Interest receivable............................... -- 120,000
Inventories....................................... (258,000) (543,000)
Prepaid expenses.................................. 11,000 (28,000)
Deposits and other assets......................... (2,000) (112,000)
Accounts payable.................................. 481,000 (787,000)
Accrued payroll and related expenses.............. 689,000 (39,000)
Other accrued liabilities......................... 34,000 (139,000)
Warranty reserve.................................. 2,000 7,000
Deferred revenue and other........................ 245,000 (11,000)
------------ ------------
Net cash used in operating activities.................. (1,022,000) (3,419,000)
------------ ------------
Investing activities:
Purchase of available-for-sale securities.............. -- (2,474,000)
Maturities of available-for-sale securities............ -- 5,171,000
Purchase of property and equipment..................... (1,157,000) (691,000)
------------ ------------
Net cash provided by (used in) investing activities.... (1,157,000) 2,006,000
------------ ------------
Financing activities:
Proceeds from issuance of common stock................. 111,000 37,000
Proceeds from issuance of preferred stock.............. -- --
Net proceeds from equipment financing.................. -- 1,457,000
Repayment of equipment financing....................... (292,000) (83,000)
------------ ------------
Net cash used in financing activities.................. (181,000) 1,411,000
------------ ------------
Increase (decrease) in cash and cash equivalents....... (2,360,000) (2,000)
Cash and cash equivalents at beginning of period....... 5,426,000 1,701,000
------------ ------------
Cash and cash equivalents at end of period............. $3,066,000 $1,699,000
============ ============
Supplemental disclosures of cash flow information:
Interest paid....................................... $69,000 $60,000
============ ============
Noncash financing activities:
Accrued dividends on preferred stock................ $120,000 --
============ ============
Conversion of preferred stock into common stock..... -- $2,440,000
============ ============
Accretion of preferred stock........................ -- $11,000
============ ============
See notes to condensed financial statements.
ABAXIS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. These condensed financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1999. The unaudited condensed financial
statements included herein reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management,
necessary to state fairly the results of and for the periods presented.
Certain amounts as presented in the March 31, 1999 financial statements
have been reclassified to conform to the fiscal year 2000 financial
statement presentation. The results for the periods presented are not
necessarily indicative of the results to be expected for the entire
fiscal year ending March 31, 2000 or for any future period.
2. Significant Accounting Policies
Revenue Recognition - Revenues are recognized upon shipment. Rights of
return are generally not provided and a provision for the estimated
future cost of warranty is made at the time revenue is recognized.
Revenues under extended warranty arrangements are recognized ratably over
the related warranty period. Instrument revenues under cross
distribution agreements (where the Company and another party purchase
each other's products for sale) are recognized upon sale of the products
to the end user.
New Accounting Pronouncement - In September 1998, the Financial
Accounting Standards Board issued Statement of Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities",
(SFAS 133) which establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires
that entities recognize all derivatives as either assets or liabilities
and measure those instruments at fair value. Adoption of this statement
is not expected to have a material impact on the Company's financial
position, results of operations or cash flows. The Company is currently
required to adopt SFAS 133 in its financial statements in the first
quarter of the fiscal year ending March 31, 2002.
3. PER SHARE INFORMATION
Basic loss per share is computed based upon the weighted average number
of shares of common stock outstanding and the net loss attributable to
common shareholders. Diluted loss per share is computed by dividing net
income (loss) by the weighted average number of common shares that would
have been outstanding during the period assuming the issuance of common
shares for all dilutive potential common shares outstanding. As a result
of operating losses, there is no difference between the basic and diluted
calculations of loss per share. Shares used in the calculation of
diluted loss per share for the three and six months ended September 30,
1999 and 1998 exclude 2,309,000, 218,000, 1,938,000, 214,000,
respectively, common equivalent shares related to options, warrants and
preferred stock. Loss attributable to common shareholders includes
accrued dividends and the accretion relating to the calculated imbedded
yield representing the discount on the assumed potential conversion of
the preferred stock issued by the Company.
The reconciliation of net loss to net loss attributable to common
shareholders is as follows:
Three Months Ended Six Months Ended
September 30, 1999 September 30, 1999
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net loss...................... ($508,000) ($1,029,000) ($1,124,000) ($2,085,000)
Cumulative preferred
stock dividends............. (60,000) -- (120,000) --
Value assigned to accretion
of preferred stock.......... -- -- -- (11,000)
------------ ------------ ------------ ------------
Net loss attributable to
common shareholders......... ($568,000) ($1,029,000) ($1,244,000) ($2,096,000)
============ ============ ============ ============
4. INVENTORY
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
September 30, March 31,
1999 1999
------------ ------------
Raw materials................ $612,000 $910,000
Work-in-process.............. 856,000 574,000
Finished goods............... 723,000 449,000
------------ ------------
$2,191,000 $1,933,000
============ ============
5. CUSTOMER AND GEOGRAPHIC INFORMATION
The Company currently operates in one segment. The following is a
summary of revenues from external customers for each group of products
and services provided by the Company:
Quarters Ended Sept. 30, Six Mos. Ended Sept. 30
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Blood chemistry analyzers.... $2,215,000 $1,488,000 $3,877,000 $2,851,000
Reagent discs................ 2,294,000 1,708,000 5,025,000 3,403,000
Other........................ 491,000 172,000 516,000 358,000
------------ ------------ ------------ ------------
Product sales, net......... 5,000,000 3,368,000 9,418,000 6,612,000
Development and licensing
revenue.................... 53,000 115,000 70,000 150,000
------------ ------------ ------------ ------------
Total revenues............... $5,053,000 $3,483,000 $9,488,000 $6,762,000
============ ============ ============ ============
The following is a summary of revenues by geographic region based on
customer location:
Quarters Ended Sept. 30, Six Mos. Ended Sept. 30
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
United States ............... $4,077,000 $3,022,000 $7,644,000 $5,594,000
Europe ...................... 704,000 318,000 1,304,000 553,000
Asia and Latin America....... 272,000 143,000 540,000 615,000
------------ ------------ ------------ ------------
Total ....................... $5,053,000 $3,483,000 $9,488,000 $6,762,000
============ ============ ============ ============
The Company's long-lived assets are located in the United States.
5. Co-promotion Agreement
On September 30, 1999 the Company announced a co-promotion agreement with
Abbott Laboratories ("ABBOTT"). The agreement is for two years with an
option, exercisable by ABBOTT for three additional years. Under this
agreement, the Abbott animal health sales force will co-promote Abaxis'
VetScan chemistry analyzer in the United States and Canada. Abbott will
receive a commission on analyzers placed above a predetermined baseline
number per quarter payable over an approximate eight year period. In
addition, Abbott will provide up to $5 million in financing to support
the Company's expansion of manufacturing capacity. Such borrowings will
bear interest at 1.6% below prime, with interest payable quarterly and
principal repayment no later than December 31, 2007. In addition, ABBOTT
agreed to provide additional financing at 1.6% below prime to support
additional sales programs contemplated by the Company.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements
which reflect the Company's current views with respect to future events
and financial performance. In this report, the words "anticipates",
"believes", "expects", "future", "intends", "plans", and similar
expressions identify forward-looking statements. These forward-looking
statements are subject to certain risks and uncertainties, including but
not limited to those discussed below, that could cause actual results to
differ materially from historical results or those anticipated. Such
risks and uncertainties include market acceptance of the Company's
products and continuing development of its products, including obtaining
required Food and Drug Administration ("FDA") clearance and other
government approvals, risks associated with manufacturing and
distributing products on a commercial scale, including complying with
Federal and state food and drug regulations, and general market
conditions and competition. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the
date hereof.
Abaxis, Inc. (the "Company") develops, manufactures and markets
portable blood analysis systems for use in any patient-care setting to
provide clinicians with rapid blood constituent measurements. The
Company's products consist of a compact 6.9 kilogram analyzer and a
series of single-use plastic disks called reagent discs that contain all
the chemicals required to perform a panel of up to 12 tests. The system
can be operated with minimal training and performs multiple routine tests
on whole blood, serum or plasma using either venous or fingerstick
samples. The system provides test results in less than 15 minutes with
the precision and accuracy equivalent to a clinical laboratory. The
Company currently markets this system for veterinary use under the name
VetScan and in the human medical market under the name Piccolo.
In the three months ended September 30, 1999, the Company's US revenues
accounted for 81% of its total revenues versus 87% in the three months
ended September 30, 1998. In the six months ended September 30, 1999,
the Company's US revenues accounted for 81% of its total revenues versus
83% in the six months ended September 30, 1998. European revenues
accounted for 14% versus 9% in the three-months ended September 30, 1998.
In the six months ended September 30, 1999, the Company's European
revenues accounted for 14% of its total revenues versus 8% in the six
months ended September 30, 1998. Asian and Latin American revenues
accounted for 5% versus 4% in the three months ended September 30, 1998.
In the six months ended September 30, 1999, the Company's Asian and Latin
American revenues accounted for 6% of its total revenues versus 9% in the
six months ended September 30, 1998. During the six month period ended
September 30, 1999 the Asian and Latin American revenues declined due to
adverse currency and economic conditions. However, the Asian and Latin
American market increased during the three months ended September 30,
1999 due to increased rotor shipments to Japan. The Company does not
expect the Asian and Latin American markets to recover to previous levels
in the near future.
During the three months ended September 30, 1999, the Company placed 227
point-of-care blood chemistry analyzers worldwide, a 5% increase from 216
instruments shipped in the three months ended September 30, 1998. During
the three-months ended September 30, 1999, the Company shipped 72 point-
of-care blood hematology analyzers (the VetScan HMT). The VetScan HMT
is a new product offered for the first time in September 1999.
Therefore, total instruments shipped during the three months ended
September 30, 1999 were 298. During the six months ended September 30,
1999, the Company placed 414 point-of-care blood chemistry analyzers
worldwide, a 2% increase from 408 instruments shipped in the six months
ended September 30, 1998. During the six months ended September 30, 1999,
the Company shipped 119 point-of-care blood hematology analyzers (the
VetScan HMT). Therefore, total instruments shipped during the six months
ended September 30, 1999 were 527.
Reagent discs shipped during the three months ended September 30, 1999
were approximately 273,000, an increase of 50% compared to shipments of
approximately 182,000 reagent discs during the three months ended
September 30, 1998. Reagent discs shipped during the six months ended
September 30, 1999 were approximately 524,000, an increase of 46%
compared to shipments of approximately 360,000 reagent discs during the
six months ended September 30, 1998. The increase in reagent disc
shipments is consistent with the Company's belief that there will be
recurring reagent disc revenue as the Company's product lines mature.
This growth is mostly attributable to the expanded installed base of
VetScan and Piccolo systems and higher consumption rates of institutional
users. There can be no assurance growth in revenues or unit sales will
continue or that the Company will be able to increase production to meet
increased product demand.
Sales for any future periods are not predictable with a significant
degree of certainty. The Company generally operates with limited order
backlog because its products typically are shipped shortly after orders
are received. As a result, product sales in any quarter are generally
dependent on orders booked and shipped in that quarter. The Company's
expense levels, which are to a large extent fixed, are based in part on
its expectations as to future revenues. Accordingly the Company may be
unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. As a result, any such shortfall would have
an immediate materially adverse impact on operating results and financial
condition. Until sales volume of the Company's products, particularly
its reagent discs, increases significantly so as to offset associated
fixed costs and to realize certain manufacturing economies of scale,
sales of the Company's products will result in further losses and
adversely affect the Company's results of operations and financial
condition. The Company believes that it needs to complete the
development and obtain approval for its four electrolyte disc in order to
make a significant impact in the human medical market. The Company
recently received marketing clearance from the FDA for three of the
electrolytes, potassium, CO2 and sodium. The fourth electrolyte,
chloride, is in research and development. There is no assurance that
chloride or any other product in development will be successfully
developed or that the FDA will approve the marketing application. The
Company believes that period to period comparisons of its results of
operations are not necessarily meaningful.
The Company's periodic operating results have in the past varied and in
the future may vary significantly depending on, but not limited to, a
number of factors, including the level of competition, the size and
timing of sales orders; market acceptance of current and new products,
new product announcements by the Company or its competitors, changes in
pricing by the Company or its competitors; the ability of the Company to
develop, introduce and market new products on a timely basis, component
costs and supply constraints, manufacturing capacities and ability to
scale up production, the mix of product sales between the analyzers and
the reagent discs, mix in sales channels, levels of expenditure on
research and development, changes in Company strategy, personnel changes,
regulatory changes, and general economic trends.
The Company continues to explore the application of its proprietary
technology used to produce the dry reagents used in the reagent discs,
called the Orbos Discrete Lyophilization Process, to other companies'
products. This process allows the production of an accurate, precise
amount of active chemical ingredients in the form of a soluble bead. The
Company believes that the Orbos process has broad applications in
products where delivery of active ingredients in a stable, pre-metered
format is desired. The Company has contracts with Becton Dickinson
Immunocytometry Systems and Pharmacia Biotech, Inc. to either supply
products or license Orbos technology. The Company is currently working
with other companies to determine potential suitability of the Orbos
technology to these companies' products. As resources permit, the
Company will pursue other development, licensing or manufacturing
agreement opportunities for its Orbos technology with other companies.
There can be no assurances, however, that other applications will be
identified or that additional agreements with the Company will result.
Results of Operations
Revenue
During the three months ended September 30, 1999, the Company reported
total revenues of approximately $5,053,000, a $1,570,000 or 45% increase
from total revenues of approximately $3,483,000 for the three months
ended September 30, 1998. During the six months ended September 30, 1999,
the Company reported total revenues of approximately $9,488,000, a
$2,726,000 or 40% increase from total revenues of approximately
$6,762,000 for the six months ended September 30, 1998. Revenue
increases were due to increased analyzer and reagent disc sales in
Europe and the US.
Total revenue in the US for the three months ended September 30, 1999 was
approximately $4,078,000, a $1,056,000 or 35% increase from revenue of
approximately $3,022,000 for the three months ended September 30, 1998.
Total revenue in the US for the six months ended September 30, 1999 was
approximately $7,644,000, a $2,050,000 or 37% increase from revenue of
approximately $5,594,000 for the six months ended September 30, 1998
Total revenue in Europe for the three months ended September 30, 1999 was
approximately $704,000, a $386,000 or 121% increase from revenue of
approximately $318,000 for the three months ended September 30, 1998.
Total revenue in Europe for the six months ended September 30, 1999 was
approximately $1,304,000, a $750,000 or 136% increase from revenue of
approximately $750,000 for the six months ended September 30, 1998.
Total revenue in Asia and Latin America was approximately $271,000, a
$128,000 or 89% increase from revenue of approximately $143,000 for the
six months ended September 30, 1998. Total revenue in Asia and Latin
America was approximately $540,000, a $75,000 or 12% decrease from
revenue of approximately $615,000 for the six months ended September 30,
1998.
The increase in revenue in the US reflects an increase in reagent disc
sales and the launch of the VetScan HMT instrument. The increase in
revenue in Europe was due to an increase in instrument placements, the
launch of the VetScan HMT and an increase in reagent disc sales. The
increase in Asia and Latin America was due to increased rotor shipments
to Japan.
Cost of Product Sales
Cost of product sales during the three months ended September 30, 1999
was approximately $2,773,000 or 55% of total revenues, as compared to
approximately $2,431,000 or 70% of total revenues in the three months
ended September 30, 1998. Cost of product sales during the six months
ended September 30, 1999 was approximately $5,366,000 or 57% of total
revenues, as compared to approximately $5,029,000 or 74% of total
revenues in the six months ended September 30, 1998.
The decrease in cost of product sales as a percent of revenue for the
three and six months ended September 30, 1999 as compared to the same
periods last year was primarily a function of the increase in sales
volume of reagent discs and lower unit costs resulting from improved
manufacturing processes.
Research and Development Expense
The Company incurred research and development expenses of approximately
$909,000 in the three months ended September 30, 1999 compared with
$712,000 in the three months ended September 30, 1998 an increase of
$197,000 or 28%. The Company incurred research and development expenses
of approximately $1,803,000 in the six months ended September 30, 1999
compared with $1,233,000 in the six months ended September 30, 1998 an
increase of $570,000 or 46%. The increase in research and development
expenses is the result of increased spending in the development of new
test methods and process development research for automating production.
Research and development activities accounted for 18% of total revenues
during the three months ended September 30, 1999 as compared to 20% of
total revenues during the three months ended September 30, 1998. The
Company expects the dollar amount of research and development expenses to
increase in fiscal 2000 as compared to fiscal 1999 as the Company
completes development and clinical trials of new test methods to expand
its test menus as well as research in automation projects. There can be
no assurance, however, that the Company will undertake such research and
development activities in future periods or, if it does, that such
activities will be successful.
Selling, General and Administrative Expense
Selling, general and administrative expenses were approximately
$1,876,000 or 37% of total revenues in the three months ended September
30, 1999 compared to $1,363,000 or 39% of total revenues in the three
months ended September 30, 1998. Selling, general and administrative
expenses were approximately $3,485,000 or 37% of total revenues in the
six months ended September 30, 1999 compared to $2,616,000 or 39% of
total revenues in the three months ended September 30, 1998. The
increase in selling, general and administrative expenses is primarily the
result of the launch of new products and an increase in headcount. The
Company expects the dollar amount of selling, general and administrative
expense to increase in fiscal 2000 from fiscal year 1999 as a result of
increased staffing and support demands associated with increased sales.
Net Interest and Other Income (Expense)
Other expense totaled approximately $4,000 in the three months ended
September 30, 1999 compared to $6,000 for the three months ended
September 30, 1998. The Company incurred interest expense of
approximately $64,000 on its capital equipment loan and its line of
credit during the three months ended September 30, 1999, net of
capitalized interest of approximately $61,000 on the purchase and
installation of the new automated disk production line. The Company
expects interest expense to increase in fiscal 2000 as additional bank
financing is used to meet working capital requirements associated with an
increase in sales.
Liquidity and Capital Resources
As of March 31, 1999, the Company had approximately $3,235,000 in cash
and cash equivalents. The Company expects to incur substantial
additional costs to support its future operations, including further
commercialization of its products and development of new test methods
that will allow the Company to further penetrate the human diagnostic
market; acquisition of capital equipment for the Company's manufacturing
facilities, which includes the ongoing costs related to continuing
development of its current and future products; development and
implementation of an automated manufacturing line to provide capacity for
commercial volumes; and additional pre-clinical testing and clinical
trials for its current and future products.
Net cash used in operating activities during the six months ended
September 30, 1999 was $890,000 compared to $3,407,000 in the six months
ended September 30, 1998. The decrease in net cash used in operating
activities was due primarily to a decrease in the net loss, an increase
in accounts payable, accrued payroll, deferred revenue and other expenses
offset by an increase in trade receivables.
Net cash used in investing activities for the six months ended September
30, 1999 was $1,157,000 as compared to net cash provided of $2,006,000
for the six months ended September 30, 1998. The change from net cash
used in 1999 versus cash provided in 1998 was due primarily to the
purchase of property and equipment in 1999 and net maturities of
available-for-sale securities in 1998.
Net cash used in financing activities for the six months ended September
30, 1999 was $143,000 as compared to net cash provided of $2,745,000 for
the six months ended September 30, 1998. Cash used in financing
activities for 1999 is primarily the result of an increase in
repayments on the equipment financing loan and the line of credit.
The Company currently has $1,779,000 available under the line of credit.
This line of credit expires in November 1999 and there can be no
assurance that the Company will be able to extend the line of credit for
another year.
On September 30, 1999 the Company announced a co-promotion agreement with
Abbott Laboratories ("ABBOTT"). The agreement is for two years with an
option, exercisable by ABBOTT for three additional years. Under this
agreement, the Abbott animal health sales force will co-promote Abaxis'
VetScan chemistry analyzer in the United States and Canada. Abbott will
receive a commission on analyzers placed above a predetermined baseline
number per quarter payable over an approximate eight year period. In
addition, Abbott will provide up to $5 million in financing to support
the Company's expansion of manufacturing capacity. Such borrowings will
bear interest at 1.6% below prime, with interest payable quarterly and
principal repayment no later than December 31, 2007. In addition, ABBOTT
agreed to provide additional financing at 1.6% below prime to support
additional sales programs contemplated by the Company.
The Company anticipates that its existing capital resources, debt
financing, financing available from ABBOTT and anticipated revenue from
the sales of its products will be adequate to satisfy its currently
planned operating and financial requirements through the next twelve
months. The Company's future capital requirements will largely depend
upon the increased market acceptance of its point-of-care blood chemistry
analyzer products. However, the Company's sales are not predictable due
to its limited market experience with its products. In the event the
sales are significantly below the anticipated level, the Company may need
to obtain additional equity or debt financing. There can be no assurance
that any such financing will be available on terms acceptable to the
Company, if at all, and any additional equity financing may be dilutive
to shareholders, while debt financing may involve restrictive covenants.
Year 2000 Preparedness
The Year 2000 issue is the result of computer programs which were written
with two digits rather than four to signify a year (i.e., the year 1999
is denoted as "99" and not "1999"). Computer programs written using
only two digits may recognize the year 2000 as the year 1900. This could
result in a system failure or miscalculations causing disruption of
operations.
Readiness
The Company has identified the following areas where efforts are underway
to resolve year 2000 issues: (i) internal information technology (IT)
systems, (ii) the Piccolo and VetScan instruments the Company markets,
(iii) test equipment used in research and development, and (iv) third
party vendors and distributors who do business with the Company.
The Company has upgraded the internal IT systems to the vendor's
specifications for year 2000 compliance. The IT systems will be tested
during the second and third quarters of fiscal 2000 to determine that the
IT systems are working within the specifications. The Company's Piccolo
and VetScan systems were designed for year 2000 compliance. Tests have
been completed on the systems that confirm year 2000 compliance. The
Company intends to address year 2000 issues regarding its test equipment
used in research and development and third party vendors who do business
with the Company in the third quarter of fiscal 2000.
Costs
Aggregate costs for year 2000 efforts in the three months ended September
30, 1999 and fiscal year 2000 currently are anticipated to be less than
$250,000, including approximately $69,000 expensed in the three months
ended September 30, 1999 and for the year 2000 preparedness since
inception for software and consulting services. The remaining estimated
costs for year 2000 issues are expected to be for consulting services,
which will be expensed in the period they occur.
Risks
The Company is presently unable to assess the likelihood that the Company
will experience significant operational problems due to unresolved year
2000 problems of third parties that do business with the Company. There
can be no assurance that other entities will achieve timely year 2000
compliance; if they do not, year 2000 problems could have a material
adverse impact on the Company's operations.
Contingency Plans
The Company presently believes that the most reasonably likely worst-case
scenario that the Company might confront with respect to year 2000 issues
has to do with failure at one or more of the Company's distributors over
which the Company has no control. For example, if one or more of the
Company's distributors were unable to ship product to the end-user, the
Company would have to take orders and ship direct to the end-user
customers. There are policies and procedures in place for direct
shipments to the end-user as the Company currently ships product directly
to some national accounts. Should this worst-case scenario occur, the
Company would have to increase headcount in a number of operating areas,
such as customer service, shipping and accounting. There can be no
assurance that the Company can increase the operating capacity in a
timely manner and there can be no assurance that these additional
operating expenses would not have a material adverse financial impact on
the Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks with respect to interest
rates on the Company's accounts receivable line of credit and short-term
investments. The Company does not use derivative financial instruments
for speculative or trading purposes.
The accounts receivable line of credit monthly interest expense is based
on 2.5% over the prime rate. An increase in the prime rate would expose
the Company to higher interest expenses. The balance on the line of
credit was $721,000 as of September 30, 1999. For each 1% increase in
the prime rate the Company would pay approximately $1,800 of additional
interest expense each quarter.
The long-term debt monthly interest expense is based on an interest rate
of 16%. An increase in interest rates would have exposed the Company to
higher interest expenses. The balance on long-term debt was
approximately $1,203,000 as of September 30, 1999. For each 1% increase
in interest rates, the Company would have paid approximately $3,000 of
additional interest expense each quarter.
The Company at times has investments in marketable debt securities that
are subject to interest rate risks. These investments are classified as
"available for sale" securities. The Company does not attempt to
reduce or eliminate its market exposure on these investments. Although
changes in interest rates may affect the fair market value of "available
for sale" securities and cause unrealized gains or losses, such gains or
losses would not be realized unless the investments were sold.
PART II-OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits included herein (numbered in accordance with Item 601 of
Regulation S-K)
Exhibit Number Description
-------------- -----------
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABAXIS, INC.
November 15, 1999 by: /s/ Clinton H. Severson
Date Clinton H. Severson
President and Chief Executive
Officer
(Principal Executive Officer)
November 15, 1999 by: /s/ Donald J. Stewart
Date Donald J. Stewart
Vice President of Finance &
Administration and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27.0 Financial Data Schedule