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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-19720
ABAXIS, INC.
(Exact name of registrant as specified in its charter)
California 77-0213001
(State or other jurisdiction 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 November 11, 1998, 13,882,980 shares of common stock, no par value, were
outstanding.
This Report on Form 10-Q consists of 14 pages. The exhibit index is on page
13.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ITEM
Facing Sheet ........................................................................ 1
Table of Contents ................................................................... 2
Part I. Financial Information
Item 1. Financial Statements:
Condensed Statements of Operations -
Three Months and Six Months Ended September 30, 1998 and 1997 3
Condensed Balance Sheets -September 30, 1998 and March 31, 1998 4
Condensed Statements of Cash Flows -
Six Months Ended September 30, 1998 and 1997 ............... 5
Notes to Condensed Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 8
Part II. Other Information
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 12
Item 6. Exhibits and Reports on Form 8-K ............................... 13
Signatures ..................................................... 14
</TABLE>
2
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PART 1-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ABAXIS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net $ 3,382,000 $ 3,205,000 $ 6,629,000 $ 5,885,000
Development and licensing revenue 101,000 83,000 133,000 156,000
------------ ------------ ------------ ------------
Total revenues 3,483,000 3,288,000 6,762,000 6,041,000
------------ ------------ ------------ ------------
Costs and operating expenses:
Cost of product sales 2,431,000 2,866,000 5,029,000 5,461,000
Research and development 712,000 368,000 1,233,000 743,000
Selling, general, and administrative 1,363,000 1,172,000 2,616,000 2,388,000
------------ ------------ ------------ ------------
Total costs and operating expenses 4,506,000 4,406,000 8,878,000 8,592,000
------------ ------------ ------------ ------------
Loss from operations (1,023,000) (1,118,000) (2,116,000) (2,551,000)
Interest income (expense), net (6,000) 85,000 31,000 143,000
Other income (expense) -- -- -- (1,000)
------------ ------------ ------------ ------------
Net loss $ (1,029,000) $ (1,033,000) $ (2,085,000) $ (2,409,000)
============ ============ ============ ============
Basic and diluted loss per share (a) $ (0.07) $ (0.15) $ (0.15) $ (0.27)
------------ ------------ ------------ ------------
Shares used in calculating loss per share -
basic and diluted 13,883,000 11,886,987 13,669,000 11,886,570
============ ============ ============ ============
</TABLE>
(a) Loss attributable to common shareholders used in computation of loss per
share for the six months ended September 30, 1998 was $(2,096,000). Loss
attributable to common shareholders used in computation of loss per share
for the three and six months ended September 30, 1997 was $(1,783,000) and
$(3,159,000), respectively. See Note 3 of Notes to Condensed Financial
Statements.
See notes to condensed financial statements.
3
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ABAXIS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 March 31, 1998
(unaudited) (Note 1)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,745,000 $ 1,701,000
Short-term investments 1,499,000 4,196,000
Trade and other receivables 2,078,000 1,930,000
Interest receivable 10,000 130,000
Inventories 2,074,000 1,531,000
Prepaid expenses 178,000 150,000
------------ ------------
Total current assets 8,584,000 9,638,000
Property and equipment - net 2,642,000 2,309,000
Deposits and other assets 197,000 85,000
------------ ------------
Total assets 11,423,000 12,032,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 723,000 $ 1,510,000
Accrued payroll and related expenses 730,000 769,000
Other accrued liabilities 253,000 392,000
Warranty reserve 714,000 707,000
Deferred rent 64,000 68,000
Current portion of note payable 593,000 174,000
Short-term debt 1,034,000
Deferred revenue 259,000 266,000
------------ ------------
Total current liabilities 4,370,000 3,886,000
Note payable 1,218,000 263,000
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, no par value: authorized shares - -- 2,429,000
5,000,000; issued and outstanding shares - none on September
30, 1998 and 2,623 on March 31, 1998
Common stock, no par value: 35,000,000 authorized; issued and 63,578,000 61,112,000
outstanding shares - 13,882,980 on September 30, 1998 and
12,187,620 on March 31, 1998
Accumulated deficit (57,743,000) (55,658,000)
------------ ------------
Total shareholders' equity 5,835,000 7,883,000
Total liabilities and shareholders' equity $ 11,423,000 $ 12,032,000
============ ============
</TABLE>
See notes to condensed financial statements.
Note 1 - Amounts are derived from audited financial statements.
4
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ABAXIS, INC
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended September 30,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(2,085,000) $(2,409,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 346,000 370,000
Write-down of capital equipment 12,000 50,000
Changes in assets and liabilities:
Trade and other receivables (148,000) 111,000
Interest receivable 120,000 (16,000)
Inventories (543,000) 885,000
Prepaid expenses (28,000) (35,000)
Deposits and other assets (112,000) (8,000)
Accounts payable (787,000) 642,000
Accrued payroll and related expenses (39,000) 173,000
Other accrued liabilities (139,000) 291,000
Warranty reserve 7,000 197,000
Deferred revenue and other (11,000) 15,000
----------- -----------
Net cash provided by (used in) operating activities (3,407,000) 266,000
Investing activities:
Purchase of available-for-sale securities (2,474,000) (8,920,000)
Maturities of available-for-sale securities 5,171,000 5,200,000
Purchase of property and equipment (691,000) (290,000)
Net cash provided by (used in) investing activities 2,006,000 (4,010,000)
Financing activities:
Proceeds from issuance of common stock 37,000 2,000
Proceeds from issuance of preferred stock -- 2,732,000
Net proceeds from equipment financing 1,457,000 513,000
Repayment of equipment financing (83,000) --
Net proceeds from note payable 1,034,000 --
----------- -----------
Net cash provided by financing activities 2,445,000 3,247,000
Increase (decrease) in cash and cash equivalents 1,044,000 (497,000)
Cash and cash equivalents at beginning of period 1,701,000 1,436,000
----------- -----------
Cash and cash equivalents at end of period $ 2,745,000 $ 939,000
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ 60,000 $ 32,000
Noncash financing activities:
Conversion of preferred stock into common stock $ 2,440,000 --
Accretion of preferred stock $ 11,000 --
</TABLE>
See notes to condensed financial statements
5
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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 to Shareholders for the fiscal year ended March 31,
1998. 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 for the periods
presented. Certain amounts as presented in the March 31, 1998 financial
statements have been reclassified to conform to the fiscal year 1999 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, 1999 or for any future period.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
The Company has not yet determined its reporting segments. Adoption of this
statement will not impact the Company's financial position, results of
operations or cash flows, and any effect will be limited to the form and content
of its disclosures. The Company will adopt this statement in its financial
statements for the year ending March 31, 1999.
In June 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 will adopt SFAS 133 in its financial
statements in the first quarter of the fiscal year ending March 31, 2000.
3. PER SHARE INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128) in the third quarter of fiscal 1998 and has
restated earnings per share (EPS) data for prior periods to conform with current
presentation.
SFAS 128 requires a dual presentation of basic and diluted EPS. Basic EPS
excludes dilution and is computed by dividing net income (loss) attributable to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution from securities
and other contracts, which are exercisable or convertible into common shares. As
a result of operating losses, there is no difference between the basic and
diluted calculations of EPS. Loss attributable to common shareholders includes
the accretion relating to the calculated imbedded yield representing the
discount on the assumed potential conversion of the preferred stock issued by
the Company.
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The reconciliation of net loss to net loss attributable to common shareholders
is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(1,029,000) $(1,033,000) $(2,085,000) $(2,409,000)
Value assigned to accretion of preferred stock -- (750,000) (11,000) ( 750,000)
----------- ----------- ----------- -----------
Loss attributable to common shareholders $(1,029,000) $(1,783,000) $(2,096,000) $(3,159,000)
=========== =========== =========== ===========
</TABLE>
4. INVENTORY
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 MARCH 31, 1998
------------------ --------------
<S> <C> <C>
Raw materials $1,057,000 $ 909,000
Work-in-process 461,000 261,000
Finished goods 556,000 361,000
---------- ----------
$2,074,000 $1,531,000
========== ==========
</TABLE>
5. EQUITY FINANCING
On July 18, 1997, RGC International Investors LDC and Advantage Fund Ltd., each
of which is an accredited investor as defined in Regulation D pursuant to the
Securities Act of 1933, as amended (the "Securities Act") to the best knowledge
of the Company, purchased from the Company 3,000 shares of Series B Convertible
Preferred Stock at a price per share of $1,000, with net proceeds to the Company
of approximately $2,732,000. The shares which were sold in this private offering
transaction under Rule 506 and/or Section 4(2) of the Securities Act have not
been registered with the Securities and Exchange Commission and carry a
restrictive legend. The Series B Preferred Stock is convertible to the Company's
common stock. The Company filed a registration statement on Form S-3 on
September 29, 1997 to register the resale of the common stock issuable upon
conversion of the preferred stock. The registration was declared effective on
October 30, 1997. As of June 30, 1998, all shares of Series B Preferred Stock
were converted into a total of 1,903,502 shares of common stock.
6. COMPREHENSIVE INCOME
In the first quarter of fiscal year 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which
requires an enterprise to report, by major components and as a single total, the
change in net assets during the period from non-owner sources. For the six
months ended September 30, 1998 and 1997, comprehensive income was the same as
net income attributable to common shareholders.
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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 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 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(R) and in the human market under the
name Piccolo(R).
During the quarter ended September 30, 1998, the Company shipped 216
point-of-care blood chemistry analyzers and approximately 182,000 reagent discs
compared to 281 analyzers and 112,000 reagent discs during the quarter ended
September 30, 1997. Through September 30, 1998, the Company has placed a total
of 2,600 units of the point-of-care blood chemistry analyzer worldwide. Reagent
disc shipments have increased each quarter consistent with the Company's belief
that there will be recurring reagent disc revenue as the Company's product lines
mature. This growth is mostly attributable to the expanded installed base of
VetScan systems and higher consumption rates of institutional users. There can
be no assurance this growth will continue. Eighty-six percent (86%) of reagent
disc shipments in the second quarter of fiscal 1999 were for veterinary
applications. Product sales in North America accounted for 78%, international
sales accounted for 13% and Orbos contract revenue accounted for 6% of total
revenues for the second quarter of fiscal 1999.
Internationally (outside of North America), sales to Asia (primarily Japan)
constituted 31% and sales to Europe constituted 69% of the total international
sales during the quarter. The Company believes that economic conditions and
currency rates in Asia have resulted in a decreased demand for point-of-care
blood chemistry.
The Company continues to develop new products that the Company believes will
provide further opportunities for market penetration. The Company is working on
the development of four-electrolyte test methods: total carbon dioxide,
chloride, potassium and sodium. Clinical trials of these test methods have begun
and are expected to be completed during the fourth quarter of fiscal 1999. The
chloride test's performance in the clinic was below the expectations of the
Company. Additional development work will have to be completed prior to
completing additional clinical studies. Additional future test methods
development for other disc products will be targeted at specific applications
based on fulfilling clinical needs. The Company's current focus of test methods
development is in clinical chemistry. In addition to clinical chemistry, the
Company has demonstrated its ability to perform immunoassay tests in its blood
analysis system by successfully developing its Thyroxine (T4) test for the
veterinary market. The Company believes other homogeneous immunoassay methods
can be performed in its discs to measure a wide assortment of low concentration
blood analytes, such as therapeutic drugs and drugs of abuse. The Company is not
currently developing additional immunoassay methods. There can be no assurance
that Abaxis will be able to develop any of these potential products. While the
Company believes that its technology will allow it to develop reagent disc
products in the future to provide a variety of additional blood tests, there can
be no
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assurance that such future products will be developed, that such products will
receive required regulatory clearance, or that the Company will be able to
manufacture or market such products successfully.
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. 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.
The Company's periodic operating results have in the past varied and in the
future may vary significantly depending on a number of factors including, but
not limited to, 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; the 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
believes that period to period comparisons of its results of operations are not
necessarily meaningful.
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
REVENUES
During the three-month period ended September 30, 1998, the Company reported
total revenues of approximately $3,483,000 ($3,382,000 in product revenue and
$101,000 in Orbos contract and licensing revenue), a $195,000 or 6% increase as
compared to total revenues of approximately $3,288,000 ($3,205,000 in product
revenue and $83,000 in Orbos contract revenue) for the same period in fiscal
1998. The increase in revenue for the quarter ended September 30, 1998 compared
to the quarter ended September 30, 1997 primarily was due to total sales in the
domestic veterinary market, which increased 100%, and the European market, which
increased 125%. These increases were offset by declines in the Asian market of
80% and sales to the U.S. military of 97%. The decline in the Asian market was
due primarily to economic conditions in that market and unfavorable currency
rates. The Company believes that revenues in the Asian market will not recover
to previous levels until economic conditions and currency rates improve. The
decline in the U.S. military revenues was due to significant instrument sales
during the quarter ended September 30, 1997 that fulfilled the Company's current
contract obligations to the U.S. Navy. The Company does not expect significant
new purchases by the U.S. military until the Company completes development and
obtains regulatory approval for the new electrolyte tests.
During the six-month period ended September 30, 1998, the Company reported total
revenues of approximately $6,762,000 ($6,629,000 in product revenue and $133,000
in Orbos contract and licensing revenue), a $721,000 or 12% increase as compared
to total revenues of approximately $6,041,000 ($5,885,000 in product revenue and
$156,000 in Orbos contract revenue) for the same period in fiscal 1998. The
increase in revenue for the six months ended September 30, 1998 compared to the
quarter ended September 30, 1997 primarily was due to total sales in the
domestic veterinary market, which increased 72% and the European market which
increased 57%. These increases were offset by declines in the Asian market of
49% and sales to the U.S. military of 90%.
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COST OF PRODUCT SALES
Cost of product sales during the quarter ended September 30, 1998, was
approximately $2,431,000, or 70% of total revenues, as compared to approximately
$2,866,000, or 87% of total revenues, for the quarter ended September 30, 1997.
Cost of product sales during the six months ended September 30, 1998, was
approximately $5,029,000, or 74% of total revenues, as compared to approximately
$5,461,000, or 90% of total revenues for the six months ended September 30,
1997. The decrease in cost of product sales as a percentage of total revenues is
due to lower unit costs resulting from better standardized manufacturing
processes and economies of scale related to increased manufacturing volume. The
gross margin on the Company's consumable reagent disc sales continued to
increase during the quarter ended September 30, 1998 to 20% of net rotor sales
compared to a negative 31% gross margin in the quarter ended September 30, 1997.
There can be no assurance that the Company will continue to maintain or improve
gross margin in future quarters.
RESEARCH AND DEVELOPMENT
Research and development expenses during the second quarter of fiscal 1999 were
approximately $712,000, or 20% of total revenues. Second quarter fiscal 1999
research and development expenses increased $344,000 or 93% from research and
development expenses of approximately $368,000, or 11% of total revenues, for
the same period in fiscal 1998. Research and development expenses during the six
months ended September 30, 1998 were approximately $1,233,000, or 18% of total
revenues. During the six months ended September 30, 1998 research and
development expenses increased $490,000 or 66% from research and development
expenses of approximately $743,000, or 12% of total revenues, for the same
period in fiscal 1998. The increase is the result of the Company's development
of new test methods to expand its test menus, as well as other development
projects and increased expenses to support regulatory and quality assurance
projects. The Company expects research and development expenses to increase at a
slower rate during the third quarter of fiscal 1999 as compared to the second
quarter of fiscal 1999, particularly those expenses associated with clinical
trials of new test methods.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses totaled approximately $1,363,000 or
39% of total revenues for the three-month period ended September 30, 1998,
representing a $191,000 or 16% increase from selling, general and administrative
expenses of approximately $1,172,000 or 36% of total revenues for the
three-month period ending September 30, 1997. Selling, general and
administrative expenses totaled approximately $2,616,000 or 39% of total
revenues for the six-month period ended September 30, 1998, representing a
$228,000 or 10% increase from selling, general and administrative expenses of
approximately $2,388,000 or 40% of total revenues for the six-month period
ending September 30, 1997. This increase is the result of additional expenses
associated with staffing, travel and advertising to support sales and marketing
activities. During the remaining quarters of fiscal 1999, the Company expects
total selling, general and administrative expenses to increase as compared to
total selling, general and administrative expenses for the first and second
quarters of fiscal 1999 due to an increase in selling expenses related to
increasing the number of territories in the United States.
NET INTEREST INCOME (EXPENSE)
Net interest income (expense) totaled approximately ($6,000) for the quarter
ended September 30, 1998, compared to $85,000 in the comparable quarter of
fiscal 1998. Net interest (expense) income totaled approximately ($31,000) for
the six months ended September 30, 1998, compared to $143,000 in the comparable
period of fiscal 1998. The decrease in interest income was primarily the result
of decreased investment levels and higher interest expense due to higher loan
balances outstanding.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had approximately $4,244,000 in cash, cash
equivalents and short-term investments. The Company expects to incur substantial
additional costs to support its future operations, including further
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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 construction and implementation of an automated manufacturing line
to provide capacity for commercial volumes; costs related to continuing
development of its current and future products; and additional pre-clinical
testing and clinical trials for its current and future products. The Company's
new automated disc assembly line was delivered and installed during July 1998.
The Company estimates the final cost of this new assembly line will be
approximately $1,500,000 of which approximately $1,457,000 was paid through
September 30, 1998. In April 1997, in anticipation of taking delivery of the
automated assembly line, the Company arranged for an equipment financing loan of
up to $2,000,000, with 36 monthly payments, and a final balloon payment equal to
10% of the original principal amount. The equipment-financing loan is
collateralized by the Company's equipment and bears interest at approximately
16%. In April 1997, the Company borrowed $600,000 against this loan and in
August 1998, the Company borrowed the remaining $1,400,000. Additional
manufacturing equipment will also need to be added during fiscal 1999 to provide
additional production capabilities. In July 1998, the Company signed a
commitment letter for an additional $1,000,000 financing loan for equipment to
be purchased during fiscal 1999. The terms of the equipment financing are 36
monthly payments with a final balloon payment equal to 10% of the original
principal amount. The equipment-financing loan is collateralized by the
Company's equipment and bears interest at approximately 16%. Additionally,
inventories and receivables related to the commercialization of the VetScan and
Piccolo systems could increase significantly in future periods, which would
require significant capital resources. In August 1998 the Company signed an
accounts receivable line of credit of $2,500,000. This line is secured by the
Company's accounts receivable, the term is for one year and the interest is 2.5%
over the prime rate. As of September 30, 1998, $1,034,000 has been borrowed
against the credit line.
Net cash used in operating activities during the six months ended September 30,
1998 was approximately $3,407,000 compared to net cash provided by operating
activities of approximately $266,000 for the same period ended September 30,
1997. The increase in net cash used in operating activities was due to increases
in receivables and inventories and decreases in accounts payable, accrued
payroll, other accrued liabilities and deferred revenue, offset by a decrease in
net loss.
Net cash provided by investing activities during the six months ended September
30, 1998 was approximately $2,006,000, compared to approximately $4,010,000 used
in investing activities during the six months ended September 30, 1997. The
change from net cash used in investing activities in the six months ended
September 30, 1997 to net cash used by investing activities in the six months
ended September 30, 1998 was primarily the result of an increase in maturities
of short-term investments, offset by an increase in property and equipment
primarily related to the new automated assembly line.
Net cash provided by financing activities for the six month period ended
September 30, 1998 was approximately $2,445,000 compared to approximately
$3,247,000 net cash provided by financing activities for the same period in
fiscal 1998. Net cash provided by financing activities in fiscal 1998 was due to
the net proceeds received from the issuance of preferred stock. Net cash
provided by financing activities during fiscal 1999 resulted from proceeds from
the equipment and accounts receivable debt financing offset by repayment on the
equipment loan.
The Company anticipates that its existing capital resources, debt financing and
anticipated revenue from the sales of its products will be adequate to satisfy
its currently planned operating and financial requirements through fiscal 1999.
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 or there are other unexpected adverse developments affecting
cash flow, the Company will need to obtain additional equity or debt financing
if it is to sustain its currently planned level of operating expenses during
fiscal 1999 and beyond. In the event that the Company is unsuccessful in raising
sufficient funding, the Company will have to significantly reduce its operating
expenses and curtail operations. There can be no assurance that any such
financing will be available, and any additional equity financing may be dilutive
to shareholders, while debt financing may involve restrictive covenants.
11
<PAGE> 12
YEAR 2000 PREPAREDNESS
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 who do business
with the Company.
The Company has upgraded the internal IT systems to the vendors' specifications
for year 2000 compliance. The IT systems will be tested over the next two
quarters 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 fourth quarter of fiscal 1999 and the first
quarter of fiscal 2000.
Costs
Aggregate costs for year 2000 efforts in fiscal 1999 and 2000 currently are
anticipated to be less than $1.0 million, including approximately $50,000
expensed in the six months ended September 30, 1998 for software and consulting
services. The remaining estimated costs for year 2000 issues are expected to be
consulting services which will be expensed in the period they occur.
Risks
The Company is presently unable to assess the likelihood that the Company will
experience significant operational problems due to unresolved year 2000 problems
of third parties that do business with the Company. There can be no assurance
that other entities will achieve timely year 2000 compliance; if they do not,
year 2000 problems could have a material adverse impact on the Company's
operations.
Contingency Plans
The Company presently believes that the most reasonably likely worst-case
scenario that the Company might confront with respect to year 2000 issues has to
do with failure at one or more of the Company's distributors over which the
Company has no control. For example, if one or more of the Company's
distributors were unable to ship product to the end-user, the Company would have
to take orders and ship direct to the end-user customers. There are policies and
procedures in place for direct shipment 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.
PART II-OTHER INFORMATION
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 $1,034,000 as of
September 30, 1998. For each 1% increase in the prime rate the Company would pay
approximately $3,500 of additional interest expense each quarter.
The Company 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. As of September 30, 1998, the amount of short-term investments was
$1,499,000. Any change in interest rates would cause an immaterial gain or loss.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits included herein (numbered in accordance with Item 601 of Regulation
S-K)
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
12
<PAGE> 13
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 14, 1998 by: /s/Clinton H. Severson
Date Clinton H. Severson
President and Chief Executive
Officer
(Principal Executive Officer)
November 14, 1998 by: /s/ Donald J. Stewart
Date Donald J. Stewart
Vice President of Finance &
Administration and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
13
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,745,000
<SECURITIES> 1,499,000
<RECEIVABLES> 2,088,000
<ALLOWANCES> 0
<INVENTORY> 2,074,000
<CURRENT-ASSETS> 8,584,000
<PP&E> 2,642,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,423,000
<CURRENT-LIABILITIES> 4,370,000
<BONDS> 0
0
0
<COMMON> 63,578,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,423,000
<SALES> 3,382,000
<TOTAL-REVENUES> 3,483,000
<CGS> 2,431,000
<TOTAL-COSTS> 4,506,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,000
<INCOME-PRETAX> (1,029,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,029,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,029,000)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
