<PAGE> 1
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 December 31, 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 February 11, 1999, 13,957,980 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>
ITEM PAGE
<S> <C> <C>
Facing Sheet ......................................................................................1
Table of Contents .................................................................................2
Part I. Financial Information
Item 1. Financial Statements:
Condensed Statements of Operations -
Three Months and Nine-Months Ended December 31, 1998 and 1997................3
Condensed Balance Sheets -December 31, 1998 and March 31, 1998 .................4
Condensed Statements of Cash Flows -
Nine-Months Ended December 31, 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................12
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders............................13
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 Nine months ended
December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net ................. $ 3,085,000 $ 2,998,000 $ 9,714,000 $ 8,957,000
Development and licensing revenue .. 18,000 32,000 151,000 114,000
------------ ------------ ------------ ------------
Total revenues ........................ 3,103,000 3,030,000 9,865,000 9,071,000
------------ ------------ ------------ ------------
Costs and operating expenses:
Cost of product sales .............. 2,144,000 2,600,000 7,173,000 8,061,000
Research and development ........... 755,000 428,000 1,988,000 1,171,000
Selling, general, and administrative 1,367,000 1,089,000 3,983,000 3,477,000
------------ ------------ ------------ ------------
Total costs and operating expenses .... 4,266,000 4,117,000 13,144,000 12,709,000
Loss from operations .................. (1,163,000) (1,087,000) (3,279,000) (3,638,000)
Interest income (expense), net ........ (53,000) 82,000 (22,000) 225,000
Other income (expense) ................ (26,000) 9,000 (26,000) 8,000
------------ ------------ ------------ ------------
Net loss .............................. $ (1,242,000) $ (996,000) $ (3,327,000) $ (3,405,000)
============ ============ ============ ============
Basic and diluted loss per share (a) .. $ (0.09) $ (0.09) $ (0.24) $ (0.36)
Shares used in calculating
loss per share - basic and diluted .... 13,885,426 11,917,208 13,740,931 11,904,691
</TABLE>
(a) Loss attributable to common shareholders used in computation of loss per
share for the nine months ended December 31, 1998 was $11,000. Loss
attributable to common shareholders used in computation of loss per share
for the three and nine months ended December 31, 1997 was $1,080,000 and
$4,239,000, 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>
December 31, March 31,
1998 1998
------------ ------------
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,364,000 $ 1,701,000
Short-term investments 800,000 4,196,000
Trade and other receivables 2,286,000 1,930,000
Interest receivable 3,000 130,000
Inventories 2,222,000 1,531,000
Prepaid expenses 236,000 150,000
------------ ------------
Total current assets 10,911,000 9,638,000
Property and equipment - net 2,573,000 2,309,000
Deposits and other assets 74,000 85,000
------------ ------------
Total assets $ 13,558,000 $ 12,032,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 881,000 $ 1,510,000
Accrued payroll and related expenses 788,000 769,000
Other accrued liabilities 370,000 392,000
Warranty reserve 724,000 707,000
Deferred rent 66,000 68,000
Current portion of note payable 562,000 174,000
Short-term debt 519,000 --
Deferred revenue 216,000 266,000
------------ ------------
Total current liabilities 4,126,000 3,886,000
Note payable 1,072,000 263,000
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, no par value: authorized shares -
5,000,000; issued and outstanding shares - 4,000 on December
31, 1998 and 2,623 on March 31, 1998 . 3,580,000 2,429,000
Common stock, no par value: 35,000,000 authorized; issued and
outstanding shares - 13,957,980 on December 31, 1998 and
12,187,620 on March 31, 1998 63,777,000 61,112,000
(58,997,000) (55,658,000)
Total shareholders' equity 8,360,000 7,883,000
------------ ------------
Total liabilities and shareholders' equity $ 13,558,000 $ 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>
Nine months ended December 31,
1998 1997
------------ ------------
<S> <C> <C>
Operating activities:
Net loss $ (3,327,000) $ (3,405,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 525,000 533,000
Write-down of capital equipment 12,000 50,000
Common stock issued for services -- 69,000
Changes in assets and liabilities:
Trade and other receivables (356,000) (225,000)
Interest receivable 127,000 (50,000)
Inventories (691,000) 749,000
Prepaid expenses (86,000) (67,000)
Deposits and other assets 11,000 (5,000)
Accounts payable (629,000) 855,000
Accrued payroll and related expenses 19,000 145,000
Other accrued liabilities (22,000) 169,000
Warranty reserve 17,000 255,000
Deferred revenue and other (52,000) 7,000
------------ ------------
Net cash used in operating activities (4,452,000) (920,000)
------------ ------------
Investing activities:
Purchase of available-for-sale securities (4,874,000) (10,141,000)
Maturities of available-for-sale securities 8,270,000 7,600,000
Sales of available-for-sale securities -- 491,000
Purchase of property and equipment (801,000) (453,000)
------------ ------------
Net cash provided by (used in) investing activities 2,595,000 (2,503,000)
------------ ------------
Financing activities:
Proceeds from issuance of common stock 236,000 2,000
Proceeds from issuance of preferred stock 3,568,000 2,732,000
Net proceeds from equipment financing 1,974,000 475,000
Repayment of equipment financing (777,000) --
Net proceeds from note payable 519,000 --
------------ ------------
Net cash provided by financing activities 5,520,000 3,209,000
------------ ------------
Increase (decrease) in cash and cash equivalents 3,663,000 (214,000)
Cash and cash equivalents at beginning of period 1,701,000 1,436,000
------------ ------------
Cash and cash equivalents at end of period $ 5,364,000 $ 1,222,000
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 160,000 $ 54,000
Noncash financing activities:
Conversion of preferred stock into common stock $ 2,440,000 $ 51,000
Accretion of preferred stock $ 11,000 $ 834,000
See notes to condensed financial statements
</TABLE>
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 the Company's 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.
6
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The reconciliation of net loss to net loss attributable to common shareholders
is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(1,242,000) $ (996,000) $(3,328,000) $(3,405,000)
Value assigned to accretion of -- (84,000) (11,000) (834,000)
----------- ----------- ----------- -----------
preferred stock
Loss attributable to common shareholders $(1,242,000) $(1,080,000) $(3,339,000) $(4,239,000)
=========== =========== =========== ===========
</TABLE>
4. INVENTORY
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
Raw materials $867,000 $909,000
Work-in-process 600,000 261,000
Finished goods 755,000 361,000
------- -------
$2,222,000 $1,531,000
========== ==========
</TABLE>
5. EQUITY FINANCING
In November 1998 the Company sold 4,000 shares of non-voting Series C
Convertible Preferred Stock to certain non-U.S. purchasers at a price per share
of $1,000, with net proceeds to the Company of approximately $3,581,000. Each
share of Series C Preferred Stock shall be entitled to receive a dividend of $60
per share per annum, payable in cash or stock at the option of the Company. The
4,000 shares of Series C Preferred Stock are convertible into 1,600,000 shares
of the Company's common stock. The number of converted shares is determined by
dividing $1,000, the original price per share of Series C Preferred Stock, by
$2.50, the original conversion price for the Series C Preferred Stock. The
conversion price may be adjusted to reflect any stock dividends, stock splits,
stock combinations, recapitalizations or similar events. The Series C Preferred
Stock will automatically convert into common stock no later than October 31,
2002. The Company has registered the resale of the common stock issuable upon
conversion of the Series C Preferred 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 nine
months ended December 31, 1998 and 1997, comprehensive income was the same as
net income attributable to common shareholders.
7
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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 December 31, 1998, the Company shipped 192
point-of-care blood chemistry analyzers and approximately 171,000 reagent discs
compared to 282 analyzers and 124,000 reagent discs during the quarter ended
December 31, 1997. Through December 31, 1998, the Company has placed a total of
2,792 point-of-care blood chemistry analyzers worldwide. Eighty-three percent
(83%) of reagent disc shipments in the third quarter of fiscal 1999 were for
veterinary applications. Product sales in North America accounted for 74%,
international sales accounted for 20% and Orbos contract revenue accounted for
6% of total revenues for the third quarter of fiscal 1999.
Sales to Asia (primarily Japan) constituted 37% and sales to Europe constituted
63% of the total international sales (sales outside of North America) during the
third quarter of fiscal 1999. 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 first half of fiscal 2000. The
chloride test's performance in clinical trials was below the expectations of the
Company, and 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 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.
8
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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 December 31, 1998, the Company reported
total revenues of approximately $3,103,000 ($3,085,000 in product revenue and
$18,000 in development and licensing revenue), a $73,000 or 2% increase as
compared to total revenues of approximately $3,030,000 ($2,998,000 in product
revenue and $32,000 in development and licensing revenue) for the same period in
fiscal 1998. The increase in revenue for the quarter ended December 31, 1998
compared to the quarter ended December 31, 1997 was primarily due to the
increase in Orbos contract and licensing revenue. The increase in product
revenue was primarily due to a decline in the Company's sales in the Asian and
Latin American markets, which declined 76%, and the Company's shipments to the
U.S. military, which declined 81% from the same period last year. Growing sales
in the domestic veterinary market, which increased 33%, and the European market,
which increased 62%, offset these declines. The decline in the Asian and Latin
America sales was due primarily to economic conditions in those markets and
unfavorable currency rates. The Company believes that revenues from the Asian
and Latin American markets will not recover to previous levels until economic
conditions and currency rates improve. The decline in the U.S. military revenues
was due to instrument and rotor sales during the quarter ended December 31, 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 nine-month period ended December 31, 1998, the Company reported total
revenues of approximately $9,865,000 ($9,714,000 in product revenue and $151,000
in development and licensing revenue), a $794,000 or 9% increase as compared to
total revenues of approximately $9,071,000 ($8,957,000 in product revenue and
$114,000 in development and licensing revenue) for the same period in fiscal
1998. The increase in revenue for the nine months ended December 31, 1998
compared to the nine-months ended December 31, 1997 primarily was due to growing
sales in the domestic veterinary market, which increased 58%, and the European
market, which increased 59%. These increases were offset by declines in revenues
from the Asian and Latin American market of 61% and sales to the U.S. military
of 89%.
9
<PAGE> 10
COST OF PRODUCT SALES
Cost of product sales during the quarter ended December 31, 1998, was
approximately $2,144,000, or 69% of total revenues, as compared to approximately
$2,600,000, or 86% of total revenues, for the quarter ended December 31, 1997.
Cost of product sales during the nine-months ended December 31, 1998, was
approximately $7,173,000, or 73% of total revenues, as compared to approximately
$8,061,000, or 89% of total revenues for the nine-months ended December 31,
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 December 31, 1998 to 26% of net rotor sales
compared to a negative 9% gross margin in the quarter ended December 31, 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 third quarter of fiscal 1999 were
approximately $755,000, or 24% of total revenues. Third quarter fiscal 1999
research and development expenses increased $327,000 or 76% from research and
development expenses of approximately $428,000, or 14% of total revenues, for
the same period in fiscal 1998. Research and development expenses during the
nine months ended December 31, 1998 were approximately $1,988,000, or 20% of
total revenues. During the nine months ended December 31, 1998 research and
development expenses increased $817,000 or 70% from research and development
expenses of approximately $1,171,000, or 13% 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 fourth quarter of fiscal 1999 as compared to the third
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 $1,367,000 or
44% of total revenues for the three-month period ended December 31, 1998,
representing a $278,000 or 26% increase from selling, general and administrative
expenses of approximately $1,089,000 or 36% of total revenues for the
three-month period ending December 31, 1997. Selling, general and administrative
expenses totaled approximately $3,983,000 or 40% of total revenues for the
nine-month period ended December 31, 1998, representing a $506,000 or 15%
increase from selling, general and administrative expenses of approximately
$3,477,000 or 38% of total revenues for the nine-month period ending December
31, 1997. This increase is the result of additional expenses associated with
staffing, travel and advertising to support sales and marketing activities.
During the fourth quarter of fiscal 1999, the Company expects total selling,
general and administrative expenses to increase as compared to total selling,
general and administrative expenses for each of the first, second and third
quarters of fiscal 1999 due to an increase in selling expenses related to
increasing the number of territories, and therefore the Company's headcount, in
the United States.
NET INTEREST INCOME (EXPENSE)
Net interest income (expense) totaled approximately ($53,000) for the quarter
ended December 31, 1998, compared to $82,000 in the comparable quarter of fiscal
1998. Net interest income (expense) totaled approximately ($23,000) for the
nine-months ended December 31, 1998, compared to $225,000 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. Interest expense is expected to decline in the fourth
quarter of fiscal year 1999 due to reducing the amount of short-term debt to
$519,000 at December 31, 1998 from $1,034,000 at September 30, 1998.
10
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LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had approximately $6,164,000 in cash, cash
equivalents and short-term investments. 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 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 $1,800,000 of which approximately $1,691,000 was paid through
December 31, 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 Company has not drawn down any funds from
this $1,000,000 equipment financing. 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 (which was 10.25% at December 31, 1998). The Company
borrowed $1,034,000 against this accounts receivable credit line. As of December
31, 1998, the balance outstanding was $519,000.
Net cash used in operating activities during the nine-months ended December 31,
1998 was approximately $4,452,000 compared to net cash used by operating
activities of approximately $920,000 for the same period ended December 31,
1997. The increase in net cash used in operating activities was due to increases
in receivables and inventories and decreases in accounts payable, and other
accrued liabilities, offset by a decrease in net loss.
Net cash provided by investing activities during the nine months ended December
31, 1998 was approximately $2,595,000, compared to approximately $2,503,000 used
in investing activities during the nine months ended December 31, 1997. The
change from net cash used in investing activities in the nine months ended
December 31, 1998 to net cash used by investing activities in the nine months
ended December 31, 1998 was primarily the result of an increase in maturities
and a decline in the purchase of available-for-sale securities, offset by an
increase in property and equipment primarily related to the new automated
assembly line.
Net cash provided by financing activities for the nine-month period ended
December 31, 1998 was approximately $5,520,000 compared to approximately
$1,222,000 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 the proceeds
from the issuance of preferred stock, 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 at least through
fiscal 2000. 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
11
<PAGE> 12
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.
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 vendor's 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 nine-months ended December 31, 1998 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 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 $519,000 as of
12
<PAGE> 13
December 31, 1998. For each 1% increase in the prime rate the Company would pay
approximately $1,300 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 December 31, 1998, the amount of short-term investments was
$800,000 with maturity in early January 1999. Any change in interest rates would
cause an immaterial gain or loss.
PART II-OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on October 26, 1998.
The following individuals were elected as directors to serve for the ensuing
year. The following table indicates the number of votes in favor and votes
against:
<TABLE>
<CAPTION>
Director Votes in Favor Votes Against
<S> <C> <C>
Clinton H Severson 10,202,426 122,217
Richard Bastiani, Ph.D. 10,204,446 117,947
Brenton G.A. Hanlon 10,204,446 120,197
Prithipal Singh, Ph.D. 10,205,696 118,947
Ernest S. Tucker, III, M.D. 10,204,896 119,747
</TABLE>
In addition to the election of directors, the following matter was voted upon at
the meeting and received the number of affirmative votes, negative votes,
abstentions and non-votes indicated:
Amend and restate the Abaxis, Inc. 1989 Stock Option Plan as the Abaxis, Inc.
1998 Stock Option Plan.
<TABLE>
<CAPTION>
For Against Abstain Non-Vote
<S> <C> <C> <C>
3,431,101 958,309 69,023 5,866,210
</TABLE>
Ratify the appointment of Deloitte & Touche LLP as the Company's independent
auditors for fiscal year ended March 31, 1999.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
10,261,6910 41,023 22,010
</TABLE>
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
13
<PAGE> 14
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.
February 12, 1999 by: /s/Clinton H. Severson
- ------------------- --------------------------------------------
Date Clinton H. Severson
President and Chief Executive Officer
(Principal Executive Officer)
February 12, 1999 by: /s/ Donald J. Stewart
- ------------------- --------------------------------------------
Date Donald J. Stewart
Vice President of Finance & Administration
and Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- ------------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,364,000
<SECURITIES> 800,000
<RECEIVABLES> 2,286,000
<ALLOWANCES> 0
<INVENTORY> 2,222,000
<CURRENT-ASSETS> 10,911,000
<PP&E> 7,994,000
<DEPRECIATION> 5,421,000
<TOTAL-ASSETS> 13,558,000
<CURRENT-LIABILITIES> 4,126,000
<BONDS> 0
0
3,580,000
<COMMON> 63,777,000
<OTHER-SE> (58,997,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,360,000
<SALES> 3,082,000
<TOTAL-REVENUES> 3,103,000
<CGS> 2,144,000
<TOTAL-COSTS> 4,266,000
<OTHER-EXPENSES> 26,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,000
<INCOME-PRETAX> (1,242,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,242,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,242,000)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
