FORWARD-LOOKING
STATEMENTS
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements, which reflect
Abaxis’ current views with respect to future events and financial performance.
In this report, the words “anticipates,” “believes,” “continue,” “could,”
“estimates,” “expects,” “future,” “intends,” “may,” “might,” “plans,”
“projects,” “will,” and similar expressions identify forward-looking statements.
These forward-looking statements are subject to certain risks and uncertainties,
including but not limited to those discussed below, in Part II, Item 1A of
this
report and in our most recent Annual Report on Form 10-K filed with the
Securities and Exchange Commission, that could cause actual results to differ
materially from historical results or those anticipated. Such risks and
uncertainties include, but are not limited to, the market acceptance of our
products and the continuing development of our products, required United States
Food and Drug Administration (“FDA”) clearance and other government approvals,
risks associated with manufacturing and distributing our products on a
commercial scale, free of defects, risks related to the introduction of new
instruments manufactured by third parties, risks associated with entering the
human diagnostic market on a larger scale, risks related to the protection
of
Abaxis’ intellectual property or claims of infringement of intellectual property
asserted by third parties, risks involved in carrying of inventory, risks
associated with the ability to attract, train and retain competent sales
personnel, general market conditions and competition. Readers are cautioned
not
to place undue reliance on these forward-looking statements, which speak only
as
of the date hereof. Abaxis assumes no obligation to update any forward-looking
statements as circumstances change.
BUSINESS
OVERVIEW
Abaxis,
Inc. (“Abaxis,” “us” or “we”) was incorporated in California in 1989. Our
principal offices are located at 3240 Whipple Road, Union City, California
94587. Our telephone number is (510) 675-6500 and our Internet address is
www.abaxis.com. We make available free of charge on or through our Internet
website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or furnished to
the
Securities and Exchange Commission. Our common stock trades on the
NASDAQ
Global
Market under the symbol “ABAX.”
We
develop, manufacture, market and sell portable blood analysis systems for use
in
the human or veterinary patient-care setting to provide clinicians with rapid
blood constituent measurements. Our primary product is a blood analysis system,
consisting of a compact portable analyzer and a series of single-use plastic
discs, called reagent discs, containing all the chemicals required to perform
a
panel of up to 14 tests on human patients and 13 tests on veterinary patients.
We manufacture the system in our manufacturing facilities in Union City,
California and we market our blood chemistry analyzers in both the medical
market and in the veterinary market, as described below.
·
|
Medical
Market: We currently market the blood analysis system in the medical
market under the name Piccolo xpress
™
.
Through October 2006, we marketed the blood analysis system in the
medical
market as the Piccolo
®
,
now referred to as the Piccolo Classic. We continue to support and
service
our current population of Piccolo xpress and Piccolo Classic chemistry
analyzers.
|
·
|
Veterinary
Market: We currently market the blood analysis system in the veterinary
market under the name VetScan VS2
®
.
Through March 2006, we marketed the blood analysis system in the
veterinary market as the VetScan
®
,
now referred to as the VetScan Classic. We continue to support and
service
our current population of VetScan VS2 and VetScan Classic chemistry
analyzers.
|
In
September 2007, we introduced a veterinary hematology instrument under the
name
VetScan HM5. The VetScan HM5 offers a 22-parameter complete blood count (CBC)
analysis, including a five-part cell counter specifically designed for
veterinary applications. In May 2004, we introduced a veterinary hematology
instrument that offers an 18-parameter CBC analysis, including a three-part
white blood cell differential, marketed originally as the VetScan HMII, and
is
now referred to as the VetScan HM2
™
.
We
currently purchase the hematology instruments from Diatron MI Kft. of Budapest,
Hungary. Through April 2004, we marketed a veterinary hematology instrument
under the name VetScan HMT. We continue to support and service our current
population of VetScan HM5, VetScan HM2, VetScan HMII and VetScan HMT hematology
instruments.
Our
sales
for any future periods are not predictable with a significant degree of
certainty. We generally operate with a limited order backlog because our
products are typically shipped shortly after orders are received. As a result,
product sales in any quarter are generally dependent on orders booked and
shipped in that quarter. Our expense levels, which are to a large extent fixed,
are based in part on our expectations of future revenues. Accordingly, we may
be
unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. As a result, any such shortfall would negatively affect
our
operating results and financial condition. In addition, our sales may be
adversely impacted by pricing pressure from competitors. Our ability to be
consistently profitable will depend, in part, on our ability to increase the
sales volumes of our Piccolo and VetScan products and to successfully compete
with other competitors. We believe that period to period comparisons of our
results of operations are not necessarily meaningful indicators of future
results.
CRITICAL
ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and assumptions that affect
the
reported amounts of assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. On an on-going
basis, we evaluate our estimates and the sensitivity of these estimates to
deviations in the assumptions used in making them. We base our estimates on
historical experience and on various other assumptions that are believed to
be
reasonable under the circumstances. However, there can be no assurance that
our
actual results will not differ from these estimates.
We
have
identified the policies below as critical because they are not only important
to
understanding our financial condition and results of operations, but also
because application and interpretation of these policies requires both judgment
and estimates of matters that are inherently uncertain and unknown. Accordingly,
actual results may differ materially from our estimates. The impact and any
associated risks related to these policies on our business operations are
discussed below. A more detailed discussion on the application of these and
other accounting policies are included in our Annual Report on Form 10-K for
the
fiscal year ended March 31, 2007.
Revenue
Recognition and Deferred Revenue.
Our
primary customers are distributors and direct customers in both the medical
and
veterinary markets. Revenues from product sales, net of estimated sales
allowances and rebates, are recognized when (i) evidence of an arrangement
exists, (ii) upon shipment of the products to the customer, (iii) the sales
price is fixed or determinable and (iv) collection of the resulting receivable
is reasonably assured. Rights of return are not provided.
We
recognize revenue associated with extended maintenance agreements ratably over
the life of the contract. Amounts collected in advance of revenue recognition
are recorded as a current or non-current liability based on the time from the
balance sheet date to the future date of revenue recognition.
We
provide incentives in the form of free goods or extended maintenance agreements
to customers in connection with the sale of our instruments. Revenue from such
sales is allocated separately to the instruments and incentives based on the
relative fair value of each element. Revenue allocated to incentives is deferred
until the goods are shipped to the customer or is recognized ratably over the
life of the maintenance contract.
We
periodically offer trade-in programs to customers for trading in an existing
instrument to purchase a new instrument and we will either provide incentives
in
the form of free goods or reduce the sales price of the instrument. These
incentives in the form of free goods are recorded according to the policies
described above.
Distributor
and Customer Rebates.
We
offer
distributor pricing rebates and customer incentives from time to time. The
distributor pricing rebates are offered to distributors upon meeting the sales
volume requirements during a qualifying period. The distributor pricing rebates
are recorded as a reduction to gross revenue during the qualifying period.
Cash
rebates are offered to customers who purchase specific instruments during a
promotional period. The cash rebate is recorded as a reduction to gross revenue.
Sales
and Other Allowances.
We
estimate a provision for defective reagent discs as part of sales allowances
when we issue credits to customers for defective reagent discs. We also
establish, upon shipment of our products to distributors, a provision for
potentially defective reagent discs, based on historical experience. The
provision for potentially defective reagent discs is recorded in sales
allowances, using internal data available to estimate the level of inventory
in
the distribution channel, the lag time for customers to report defective reagent
discs and the historical experience of defective reagent discs. Starting on
July
1, 2007, the provision for defective reagent discs is recorded as part of
warranty reserves, instead of sales allowances, since we replace defective
reagent discs rather than issue a credit to customers. Changes in our estimates
for accruals related to provisions for defective reagent discs have not been
material to our financial position or results of operations. In the future,
the
actual defective reagent discs may exceed our estimates, which could aversely
affect our financial results.
Allowance
for Doubtful Accounts.
We
maintain an allowance for doubtful accounts based on our assessment of the
collectibility of the amounts owed to us by our customers. In determining the
amount of the allowance, we make judgments about the creditworthiness of
customers which is mostly determined by the customer’s payment history and the
outstanding period of accounts. We specifically identify amounts that we believe
to be uncollectible and the allowance for doubtful accounts is adjusted
accordingly. An additional allowance is recorded based on certain percentages
of
our aged receivables, using historical experience to estimate the potential
uncollectible and our assessment of the general financial condition of our
customer base. If our actual collections experience changes, revisions to our
allowances may be required, which could adversely affect our operating
income.
Warranty
Reserves.
We
provide for the estimated future costs to be incurred under our standard
warranty obligation on our instruments. Since the beginning of fiscal 2006,
our
standard warranty obligation on instruments is two years. The estimated
contractual warranty obligation is recorded when the related revenue is
recognized and any additional amount is recorded when such cost is probable
and
can be reasonably estimated. W
hile
we
engage in product quality programs and processes, including monitoring and
evaluating the quality of our suppliers, our
estimated
accrual for warranty exposure is based on historical experience, estimated
product
failure rates, material usage and freight incurred in repairing the instrument
after failure
and
known
design changes
.
Starting
on July 1, 2007, we provide for estimated future costs to be incurred on our
reagent discs as part of warranty reserves, which includes the replacement
costs
and freight of a defective reagent disc. A provision for defective reagent
discs
is recorded when related sales are recognized and any additional amounts are
recorded when such costs are probable and can be reasonably estimated, at which
time they are included in cost of revenues. Prior to July 1, 2007, we primarily
issued a credit to customers for defective reagent discs and, therefore, the
provision for defective reagent discs were recorded as part of sales and other
allowances. Starting on July 1, 2007,
the
provision for defective reagent discs is recorded as part of warranty reserves,
since we replace defective reagent discs rather than issue a credit to
customers.
We
analyze the adequacy of the ending accrual balance of warranty reserves each
quarter. The determination of warranty reserves requires us to make estimates
of
the expected costs to repair or replace the instruments and to replace defective
reagent discs under warranty. If actual repair or replacement costs of
instruments or replacement costs of reagent discs differ significantly from
our
estimates, adjustments to cost of revenues may be required.
Inventories.
We
state
inventories at the lower of cost or market, cost being determined using standard
costs which approximates the first-in, first-out (FIFO) method. Inventories
include material, labor and overhead. We establish provisions for excess,
obsolete and unusable inventories after evaluation of future demand and market
conditions. If future demand or actual market conditions are less favorable
than
those estimated by management or if a significant amount of the material were
to
become unusable, additional inventory write-downs may be required, which would
have a negative effect on our operating income.
Long-Lived
Assets.
The
carrying value of our long-lived assets is reviewed for impairment, in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” whenever
events or changes in circumstances indicate that the carrying amount of an
asset
may not be recoverable. We look to current and future profitability, as well
as
current and future undiscounted cash flows, excluding financing costs, as
primary indicators of recoverability. An impairment loss would be recognized
when the sum of the undiscounted future net cash flows expected to result from
the use of the asset and its eventual disposal is less than the carrying amount.
If impairment is determined to exist, any related impairment loss is calculated
based on fair value.
Income
Taxes.
We
account for income taxes under the provisions of SFAS No. 109, “Accounting for
Income Taxes” (“SFAS 109”). Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the
amounts to be recovered.
Effective
April 1, 2007 we adopted the provisions of Financial Accounting Standards Board
(“FASB”) Interpretation 48, “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in the financial
statements in accordance with SFAS 109 and prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return.
FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. As a result
of implementing FIN 48, we did not change the amount of unrecognized tax
benefits related to tax positions taken in prior periods. We did not have any
unrecognized tax benefits as of April 1, 2007, the date of adoption, or as
of
September 30, 2007. Upon adoption of FIN 48, our policy to include interest
and
penalties related to gross unrecognized tax benefits within our provision for
income taxes did not change. For the three and six months ended September 30,
2007, we did not recognize any interest and penalties related to unrecognized
tax benefits. We file income tax returns in the United States federal
jurisdiction and various states. We are not under examination for any of these
jurisdictions.
Share-Based
Compensation Expense.
On
April
1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS
No. 123(R)”)
using
the modified prospective method and therefore have not restated prior periods’
results. Under the fair value provisions of
SFAS
No.
123(R), we recognize share-based compensation expense, net of an estimated
forfeiture rate, for those shares expected to vest over the requisite service
period of the award to employees and directors. Prior to April 1, 2006, we
accounted for share-based awards to employees and directors using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” and other related guidance and
therefore, no employee compensation cost had been recognized for share-based
awards in financial statements prior to fiscal 2007 because we issued stock
options with an exercise price equal to the market value at the date of grant.
We
use
the Black-Scholes option pricing model to determine the fair value of stock
options granted prior to March 31, 2006. Determining the appropriate fair value
model and calculating the fair value of share-based awards requires highly
subjective assumptions, as described below.
·
|
Risk-free
interest rate: The risk-free interest rate is based on U.S. Treasury
yields in effect at the time of grant for the expected term of the
option.
|
·
|
Expected
stock price volatility: We estimate the volatility of our common
stock at
the date of grant based on the historical volatility of our common
stock
over a term of one year.
|
·
|
Expected
term: We estimate the expected term of stock options granted based
on
historical exercise patterns, which we believe are representative
of
future behavior.
|
·
|
Expected
dividends: We have not paid cash dividends on our common stock and
we do
not anticipate paying cash dividends in the foreseeable future;
consequently, we use an expected dividend yield of
zero.
|
For
restricted stock units, the assumptions to calculate compensation expense is
based on the fair value of the Company’s stock at the grant date.
As
a
result, if factors change and we use different assumptions, our share-based
compensation expense could be materially different in the future.
As
required by SFAS No. 123(R), employee share-based compensation expense
recognized is calculated based on the awards expected to vest and reduced for
estimated forfeitures. The forfeiture rate is estimated based on historical
data
of our share-based awards that are granted, exercised and cancelled and upon
historical experience of employee turnover, and compensation expense is adjusted
for actual results. Changes in estimated forfeiture rates and differences
between estimated forfeiture rates and actual experience may result in
significant, unanticipated increases or decreases in share-based compensation
expense from period to period. To the extent we revise our estimate of the
forfeiture rate in the future, our share-based compensation expense could be
materially impacted in the quarter of revision, as well as in following
quarters.
RESULTS
OF OPERATIONS
Abaxis
develops, manufactures, markets and sells portable blood analysis systems for
use in the human or veterinary patient-care setting to provide clinicians with
rapid blood constituent measurement requirements. We operate in two segments:
(i) the medical market and (ii) the veterinary market. See “Segment Results” in
this section for a detailed discussion.
Total
Revenues
Revenues
by Geographic Region and by Product Category.
Revenues
by geographic region based on customer location and revenues by product category
during the three and six months ended
September
30,
2007
and 2006 were as follows:
|
|
|
Three
Months Ended
September
30,
|
|
|
Change
|
|
|
|
Six
Months Ended
September
30,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
Revenues
by Geographic Region
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
North
America
|
|
$
|
21,071,000
|
|
$
|
17,668,000
|
|
$
|
|
|
|
19
|
%
|
|
$
|
40,240,000
|
|
$
|
34,431,000
|
|
$
|
5,809,000
|
|
|
17
|
%
|
Percentage
of total revenues
|
|
|
84
|
%
|
|
84
|
%
|
|
|
|
|
|
|
|
|
84
|
%
|
|
83
|
%
|
|
|
|
|
|
|
Europe
|
|
|
3,175,000
|
|
|
2,319,000
|
|
|
856,000
|
|
|
37
|
%
|
|
|
6,232,000
|
|
|
4,762,000
|
|
|
1,470,000
|
|
|
31
|
%
|
Percentage
of total revenues
|
|
|
13
|
%
|
|
11
|
%
|
|
|
|
|
|
|
|
|
13
|
%
|
|
12
|
%
|
|
|
|
|
|
|
Asia
Pacific and rest of the world
|
|
|
946,000
|
|
|
1,050,000
|
|
|
(104,000
|
)
|
|
(10
|
%)
|
|
|
1,651,000
|
|
|
2,202,000
|
|
|
(551,000
|
)
|
|
(25
|
%)
|
Percentage
of total revenues
|
|
|
3
|
%
|
|
5
|
%
|
|
|
|
|
|
|
|
|
3
|
%
|
|
5
|
%
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
25,192,000
|
|
$
|
21,037,000
|
|
$
|
4,155,000
|
|
|
20
|
%
|
|
$
|
48,123,000
|
|
$
|
41,395,000
|
|
$
|
6,728,000
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
September
30,
|
|
Change
|
|
|
|
Six
Months Ended
September
30,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
Revenues
by Product Category
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
Instruments
|
|
$
|
7,462,000
|
|
$
|
6,568,000
|
|
$
|
894,000
|
|
|
14
|
%
|
|
$
|
13,926,000
|
|
$
|
13,298,000
|
|
$
|
628,000
|
|
|
5
|
%
|
Percentage
of total revenues
|
|
|
30
|
%
|
|
31
|
%
|
|
|
|
|
|
|
|
|
29
|
%
|
|
32
|
%
|
|
|
|
|
|
|
Reagent
discs and kits
|
|
|
15,680,000
|
|
|
12,280,000
|
|
|
3,400,000
|
|
|
28
|
%
|
|
|
29,939,000
|
|
|
24,390,000
|
|
|
5,549,000
|
|
|
23
|
%
|
Percentage
of total revenues
|
|
|
62
|
%
|
|
59
|
%
|
|
|
|
|
|
|
|
|
62
|
%
|
|
59
|
%
|
|
|
|
|
|
|
Other
products
|
|
|
1,598,000
|
|
|
1,688,000
|
|
|
(90,000
|
)
|
|
(5
|
%)
|
|
|
3,335,000
|
|
|
2,764,000
|
|
|
571,000
|
|
|
21
|
%
|
Percentage
of total revenues
|
|
|
6
|
%
|
|
8
|
%
|
|
|
|
|
|
|
|
|
7
|
%
|
|
7
|
%
|
|
|
|
|
|
|
Product
sales, net
|
|
|
24,740,000
|
|
|
20,536,000
|
|
|
4,204,000
|
|
|
20
|
%
|
|
|
47,200,000
|
|
|
40,452,000
|
|
|
6,748,000
|
|
|
17
|
%
|
Percentage
of total revenues
|
|
|
98
|
%
|
|
98
|
%
|
|
|
|
|
|
|
|
|
98
|
%
|
|
98
|
%
|
|
|
|
|
|
|
Development
and licensing revenues
|
|
|
452,000
|
|
|
501,000
|
|
|
(49,000
|
)
|
|
(10
|
%)
|
|
|
923,000
|
|
|
943,000
|
|
|
(20,000
|
)
|
|
(2
|
%)
|
Percentage
of total revenues
|
|
|
2
|
%
|
|
2
|
%
|
|
|
|
|
|
|
|
|
2
|
%
|
|
2
|
%
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
25,192,000
|
|
$
|
21,037,000
|
|
$
|
4,155,000
|
|
|
20
|
%
|
|
$
|
48,123,000
|
|
$
|
41,395,000
|
|
$
|
6,728,000
|
|
|
16
|
%
|
Three
Months Ended September 30, 2007 Compared to Three Months Ended September 30,
2006
North
America
.
During
the three months ended September 30, 2007, total revenues in North America
increased 19%, or $3,403,000,
as
compared to the three months ended
September
30
,
2006.
Components of the change in North America were as follows:
Instruments.
During
the
three
months ended
September
30
,
200
7
,
total
revenues from instruments sold in North America increased 9%, or $543,000,
as
compared to the three months ended
September
30
,
2006.
The primary factors of the change were as follows:
(i)
Sales
of our Piccolo chemistry analyzers in North America (excluding the U.S.
government) increased 20%, or $257,000, primarily due to increased distributor
sales. Sales of our Piccolo chemistry analyzers to the U.S. government decreased
10%, or $36,000.
(ii)
Sales of our VetScan
chemistry
analyzers
in North
America decreased 20%, or $406,000, primarily due to manufacturing issues on
our
new chemistry analyzer resulting from a limited supply of quality products.
Sales of our hematology instruments in North America increased 36%, or $728,000,
primarily due to the release of the VetScan HM5 in September 2007.
Reagent
discs and kits.
During
the
three
months ended
September
30, 2007
,
total
revenues from reagent discs and kits sold in North America increased 31%, or
$2,990,000, as compared to the three months ended
September
30
,
2006.
The primary factors of the change were as follows:
(i)
Medical reagent discs sales in North America (excluding the U.S.
government
)
increased 63%, or $862,000, primarily due to the expanded installed base of
our
Piccolo chemistry analyzers. Medical reagent discs sold to the U.S. government
increased 4%, or $25,000.
(ii)
Veterinary reagent discs sales in North America increased 29%, or $2,030,000,
primarily due to the expanded installed base of our VetScan chemistry
analyzers
.
Sales of
hematology reagent kits in North America increased 10%, or $73,000.
Other
products.
During
the
three
months ended
September
30
,
2007,
total revenues from other products sold in North America decreased 5%, or
$81,000, as compared to the three months ended
September 30
,
2006.
Development
and licensing.
During
the
three
months ended
September
30
,
2007,
total revenues from development and licensing in North America decreased 10%,
or
$49,000, as compared to the three months ended
September
30
,
2006.
Significant
concentration.
One
distributor in the United States, DVM Resources, accounted for 13% and 16%
of
total worldwide revenues for the three months ended
September
30
,
2007
and 2006, respectively.
Europe
.
During
the three months ended September 30, 2007, total revenues in Europe increased
37%, or $856,000,
as
compared to the three months ended
September
30
,
2006.
Components of the change in Europe were as follows:
Instruments.
During
the
three
months ended
September
30
,
2007,
total revenues from instruments sold in Europe increased 113%, or $431,000,
as
compared to the three months ended
September
30
,
2006.
The primary factors of the change were as follows:
(i)
Sales
of our Piccolo chemistry analyzers in
Europe
increased
288%, or $222,000, primarily due to increased distributor sales.
(ii)
Sales of our VetScan chemistry analyzers in
Europe
increased 107%, or $219,000, primarily due to increased distributor sales.
Sales
of our hematology instruments in
Europe
decreased 10%, or $10,000.
Reagent
discs and kits.
During
the
three
months ended
September
30
,
2007,
total revenues from reagent discs and kits sold in Europe increased 22%, or
$426,000, as compared to the three months ended
September
30,
2006.
The primary factors of the change were as follows:
(i)
Medical reagent discs sales in Europe increased 40%, or $88,000.
(ii)
Veterinary reagent discs sales in Europe increased 20% or $334,000, primarily
due to the expanded installed base of our VetScan chemistry analyzers. Sales
of
hematology reagent kits in Europe increased 8%, or $4,000.
Other
products.
During
the
three
months ended
September
30
,
2007,
total revenues from other products sold in Europe decreased 8%, or $1,000,
as
compared to the three months ended
September
30
,
2006.
Asia
Pacific and rest of the world
.
During
the three months ended September 30, 2007, total revenues in
Asia
Pacific and rest of the world
decreased 10%, or $104,000,
as
compared to the three months ended
September
30
,
2006.
Components of the change in Asia Pacific and rest of the world were as
follows:
Instruments.
During
the
three
months ended
September
30
,
2007,
total revenues from instruments sold in Asia Pacific and rest of the world
decreased 18%, or $80,000, as compared to the three months ended
September
30
,
2006.
The primary factors of the change were as follows:
(i)
Sales
of our Piccolo chemistry analyzers in Asia Pacific and rest of the world
increased 520%, or $26,000.
(ii)
Sales of our VetScan chemistry analyzers in Asia Pacific and rest of the world
decreased 45%, or $156,000, primarily in Japan due to the termination of a
distribution arrangement during the first quarter of fiscal 2008. Sales of
our
hematology instruments in Asia Pacific and rest of the world increased 57%,
or
$50,000.
Reagent
discs and kits.
During
the
three
months ended
September
30
,
2007,
total revenues from reagent discs and kits sold in Asia Pacific and rest of
the
world decreased 3%, or $16,000, as compared to the three months ended
September
30
,
2006.
The primary factors of the change were as follows:
(i)
Medical reagent discs sales in Asia Pacific and rest of the world increased
27%,
or $9,000.
(ii)
Veterinary reagent discs sales in Asia Pacific and rest of the world decreased
2%, or $12,000. Sales of hematology reagent kits in Asia Pacific and rest of
the
world decreased 27%, or $13,000.
Other
products.
During
the
three
months ended
September
30
,
2007,
total revenues from other products sold in Asia Pacific and rest of the world
decreased 67%, or $8,000, as compared to the three months ended
September
30
,
2006.
Six
Months Ended September 30, 2007 Compared to Six Months Ended September 30,
2006
North
America
.
During
the
six
months
ended September 30, 2007, total revenues in North America increased 17%, or
$5,809,000,
as
compared to the six months ended
September
30
,
2006.
Components of the change in North America were as follows:
Instruments.
During
the
six
months ended
September
30
,
200
7
,
total
revenues from instruments sold in North America increased 6%, or $597,000,
as
compared to the six months ended
September
30
,
2006.
The primary factors of the change were as follows:
(i)
Sales
of our Piccolo chemistry analyzers in North America (excluding the U.S.
government) increased 30%, or $751,000, primarily due to increased distributor
sales. Sales of our Piccolo chemistry analyzers to the U.S. government decreased
30%, or $159,000, primarily due to a decrease in the U.S. Military’s needs for
our products, which were not predictable.
(ii)
Sales of our VetScan chemistry analyzers in North America decreased 20%, or
$832,000, primarily due to manufacturing issues on our new chemistry analyzer
resulting from a limited supply of quality products. Sales of our hematology
instruments in North America increased 24%, or $837,000, primarily due to the
release of the VetScan HM5 in September 2007.
Reagent
discs and kits.
During
the
six
months ended
September
30, 2007
,
total
revenues from reagent discs and kits sold in North America increased 23%, or
$4,693,000, as compared to the six months ended
September
30
,
2006.
The primary factors of the change were as follows:
(i)
Medical reagent discs sales in North America (excluding the U.S. government)
increased 47%, or $1,273,000, primarily due to the expanded installed base
of
our Piccolo chemistry analyzers. Medical reagent discs sold to the U.S.
government decreased 2%, or $26,000.
(ii)
Veterinary reagent discs sales in North America increased 23%, or $3,433,000,
primarily due to the expanded installed base of our VetScan chemistry analyzers.
Sales of hematology reagent kits in North America increased 1%, or $13,000.
Other
products.
During
the
six
months ended
September
30
,
2007,
total revenues from other products sold in North America increased 20%, or
$539,000, as compared to the six months ended
September 30
,
2006.
The net increase in other products was primarily due to an increase in demand
from Becton, Dickinson and Company for products using the Orbos Discrete
Lyophilization Process, which is based on seasonal demands.
Development
and licensing.
During
the
six
months ended
September
30
,
2007,
total revenues from development and licensing in North America decreased 2%,
or
$20,000, as compared to the six months ended
September
30
,
2006.
Significant
concentration.
One
distributor in the United States, DVM Resources, accounted for 14% and 16%
of
total worldwide revenues for the six months ended
September
30
,
2007
and 2006, respectively.
Europe
.
During
the
six
months
ended September 30, 2007, total revenues in Europe increased 31%, or $1,470,000,
as
compared to the six months ended
September
30
,
2006.
Components of the change in Europe were as follows:
Instruments.
During
the
six
months ended
September
30
,
2007,
total revenues from instruments sold in Europe increased 43%, or $640,000,
as
compared to the six months ended
September
30
,
2006.
The primary factors of the change were as follows:
(i)
Sales
of our Piccolo chemistry analyzers in
Europe
increased
160%, or $340,000, primarily due to increased distributor sales.
(ii)
Sales of our VetScan chemistry analyzers in
Europe
increased 31%, or $323,000, primarily due to increased distributor sales. Sales
of our hematology instruments in
Europe
decreased 11%, or $23,000.
Reagent
discs and kits.
During
the
six
months ended
September
30
,
2007,
total revenues from reagent discs and kits sold in Europe increased 24%, or
$796,000, as compared to the six months ended
September
30,
2006.
The primary factors of the change were as follows:
(i)
Medical reagent discs sales in Europe increased 47%, or $168,000, primarily
due
to the expanded installed base of our Piccolo chemistry analyzers.
(ii)
Veterinary reagent discs sales in Europe increased 22%, or $624,000, primarily
due to the expanded installed base of our VetScan chemistry analyzers. Sales
of
hematology reagent kits in
Europe
increased 4%, or $4,000.
Other
products.
During
the
six
months ended
September
30
,
2007,
total revenues from other products sold in Europe increased 136%, or $34,000,
as
compared to the six months ended
September
30
,
2006.
Asia
Pacific and rest of the world
.
During
the
six
months
ended September 30, 2007, total revenues in
Asia
Pacific and rest of the world
decreased 25%, or $551,000,
as
compared to the six months ended
September
30
,
2006.
Components of the change in Asia Pacific and rest of the world were as
follows:
Instruments.
During
the
six
months ended
September
30
,
2007,
total revenues from instruments sold in Asia Pacific and rest of the world
decreased 53%, or $609,000, as compared to the six months ended
September
30
,
2006.
The primary factors of the change were as follows:
(i)
Sales
of our Piccolo chemistry analyzers in Asia Pacific and rest of the world
increased 1400%, or $70,000.
(ii)
Sales of our VetScan chemistry analyzers in Asia Pacific and rest of the world
decreased 60%, or $409,000. Sales of our hematology instruments in Asia Pacific
and rest of the world decreased 57%, or $270,000. The decrease in veterinary
instruments was primarily in Japan due to the termination of a distribution
arrangement during the first quarter of fiscal 2008.
Reagent
discs and kits.
During
the
six
months ended
September
30
,
2007,
total revenues from reagent discs and kits sold in Asia Pacific and rest of
the
world increased 6%, or $60,000, as compared to the six months ended
September
30
,
2006.
The primary factors of the change were as follows:
(i)
Medical reagent discs sales in Asia Pacific and rest of the world increased
96%,
or $46,000.
(ii)
Veterinary reagent discs sales in Asia Pacific and rest of the world increased
6%, or $49,000. Sales of hematology reagent kits in Asia Pacific and rest of
the
world decreased 36%, or $35,000.
Other
products.
During
the
six
months
ended
September
30
,
2007,
total revenues from other products sold in Asia Pacific and rest of the world
decreased 15%, or $2,000, as compared to the six months ended
September
30
,
2006.
Segment
Results
Three
Months Ended September 30, 2007 Compared to Three Months Ended September 30,
2006
The
following table presents revenues, cost of revenues, gross profit and percentage
of revenues by operating segments for the three months ended September 30,
2007
and 2006:
|
|
|
Three
Months Ended
September
30,
|
|
|
|
Change
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
2006
|
|
|
Percent
of
Revenues
(1)
|
|
|
|
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Market
|
|
$
|
5,643,000
|
|
|
100
|
%
|
|
$
|
4,120,000
|
|
|
100
|
%
|
|
$
|
1,523,000
|
|
|
37
|
%
|
Percentage
of total revenues
|
|
|
22
|
%
|
|
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
Veterinary
Market
|
|
|
17,989,000
|
|
|
100
|
%
|
|
|
15,160,000
|
|
|
100
|
%
|
|
|
2,829,000
|
|
|
19
|
%
|
Percentage
of total revenues
|
|
|
72
|
%
|
|
|
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
Unallocated
amounts
|
|
|
1,560,000
|
|
|
|
|
|
|
1,757,000
|
|
|
|
|
|
|
(197,000
|
)
|
|
(11
|
%)
|
Percentage
of total revenues
|
|
|
6
|
%
|
|
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
25,192,000
|
|
|
|
|
|
|
21,037,000
|
|
|
|
|
|
|
4,155,000
|
|
|
20
|
%
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Market
|
|
|
2,805,000
|
|
|
50
|
%
|
|
|
2,045,000
|
|
|
50
|
%
|
|
|
760,000
|
|
|
37
|
%
|
Veterinary
Market
|
|
|
7,889,000
|
|
|
44
|
%
|
|
|
7,044,000
|
|
|
46
|
%
|
|
|
845,000
|
|
|
12
|
%
|
Unallocated
amounts
|
|
|
641,000
|
|
|
|
|
|
|
390,000
|
|
|
|
|
|
|
251,000
|
|
|
64
|
%
|
Total
cost of revenues
|
|
|
11,335,000
|
|
|
|
|
|
|
9,479,000
|
|
|
|
|
|
|
1,856,000
|
|
|
20
|
%
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Market
|
|
|
2,838,000
|
|
|
50
|
%
|
|
|
2,075,000
|
|
|
50
|
%
|
|
|
763,000
|
|
|
37
|
%
|
Veterinary
Market
|
|
|
10,100,000
|
|
|
56
|
%
|
|
|
8,116,000
|
|
|
54
|
%
|
|
|
1,984,000
|
|
|
24
|
%
|
Unallocated
amounts
|
|
|
919,000
|
|
|
|
|
|
|
1,367,000
|
|
|
|
|
|
|
(448,000
|
)
|
|
(33
|
%)
|
Gross
profit
|
|
$
|
13,857,000
|
|
|
|
|
|
$
|
11,558,000
|
|
|
|
|
|
$
|
2,299,000
|
|
|
20
|
%
|
(1)
The
percentage reported is based on revenues by operating segment.
Medical
Market
Revenues
for
Medical Market Segment
During
the
three
months ended September 30, 2007, total revenues in the medical market increased
37%, or $1,523,000, as compared to the three months ended
September
3
0,
2006.
Components of the change were as follows:
Instruments.
Total
revenues from our Piccolo chemistry analyzers increased 27%, or $469,000, during
the three months ended September 30, 2007, as compared to the three months
ended
September 30, 2006. We sold a total of 178 Piccolo chemistry analyzers during
the three months ended September 30, 2007, as compared to 173 Piccolo chemistry
analyzers sold during the three months ended September 30, 2006. The changes
in
revenues were attributed to (a) an increase in revenues in North America
(excluding the U.S. government) of 20%, or $257,000, primarily due to increased
distributor sales; (b) an increase in revenues in
Europe
of
288%,
or
$222,000, primarily due to increased distributor sales; and (c) an increase
in
revenues in Asia Pacific and rest of the world of 520%, or $26,000. The increase
in revenues was partially offset by a decrease in Piccolo chemistry analyzers
sold to the U.S. government of 10%, or $36,000.
Reagent
discs.
Total
revenues from reagent discs sold in the medical market increased 45%, or
$984,000,
during
the three months ended September 30, 2007, as compared to the three months
ended
September 30, 2006. We sold 338,000 medical reagent discs during the three
months ended September 30, 2007, as compared to 237,000 medical reagent discs
sold during the three months ended September 30, 2006. The total increase in
revenues from medical reagent discs was primarily attributed to the expanded
installed base of our Piccolo chemistry analyzers and was comprised of (a)
an
increase in revenues in North America (excluding the U.S. government) of 63%,
or
$862,000; (b) an increase in medical reagent discs sold to the U.S. government
of 4%, or $25,000; (c) an increase in revenues in Europe of 40%, or $88,000;
and
(d) an increase in revenues in Asia Pacific and rest of the world of 27%, or
$9,000.
Gross
Profit for Medical Market Segment
Gross
profit for the medical market segment increased 37%, or $763,000, during the
three months ended September 30, 2007, as compared to the three months ended
September 30, 2006. Gross profit percentages for the medical market segment
during each of the three months ended September 30, 2007 and 2006 was 50%.
In
absolute dollars, the increase in gross profit for the medical market segment
was due to (a) an increase in medical reagent discs sold during the three months
ended September 30, 2007 and (b) higher average selling prices of Piccolo
chemistry analyzers and medical reagent discs during the three months ended
September 30, 2007.
Veterinary
Market
Revenues
for
Veterinary Market Segment
During
the
three
months ended September 30, 2007, total revenues in the veterinary market
increased 19%, or $2,829,000, as compared to the three months ended September
30, 2006. Components of the change were as follows:
Instruments.
We sold
a total of
593
VetScan chemistry analyzers and hematology instruments
during
the three months ended September 30, 2007, as compared to 543 veterinary
instruments sold during the three months ended September 30, 2006. The primary
factors of the change were as follows:
(i)
Sales
of our VetScan chemistry analyzers decreased 13%, or $343,000, comprised of
(a)
a decrease in North America of 20%, or $406,000, primarily due to manufacturing
issues on our new chemistry analyzer resulting from a limited supply of quality
products, and (b) a decrease in Asia Pacific and rest of the world of 45%,
or
$156,000, primarily in Japan due to the termination of a distribution
arrangement during the first quarter of fiscal 2008. The decrease in revenues
was partially offset by an increase in Europe of 107%, or $219,000, primarily
due to increased distributor sales.
(ii)
Sales of our hematology instruments increased 34%, or $768,000, comprised of
(a)
an increase in North America of 36%, or $728,000, primarily due to the release
of the VetScan HM5 in September 2007, (b) an increase in Asia Pacific and rest
of the world of 57%, or $50,000, partially offset by (c) a decrease in Europe
of
10%, or $10,000.
Reagent
discs and kits.
Total
revenues from reagent discs and kits sold in the veterinary market increased
24%, or $2,416,000, during the three months ended September 30, 2007, as
compared to the three months ended September 30, 2006. The primary factors
of
the change were as follows:
(i)
Total
revenues from reagent discs sold in the veterinary market increased 25%, or
$2,352,000, during the three months ended September 30, 2007, as compared to
the
three months ended September 30, 2006. We sold 906,000 veterinary reagent discs
during the three months ended September 30, 2007, as compared to 770,000
veterinary reagent discs sold during the three months ended September 30, 2006.
The increase in revenues from veterinary reagent discs was primarily attributed
to the expanded installed base of our VetScan chemistry analyzers and was
comprised of (a) an increase in revenues in North America of 29%, or $2,030,000,
(b) an increase in revenues in Europe of 20%, or $334,000,
partially
offset by (c) a decrease in revenues in Asia Pacific and rest of the world
of
2%, or $12,000.
(ii)
Total revenues from hematology reagent kits sold in the veterinary market
increased 8%, or $64,000, during the three months ended September 30, 2007,
as
compared to the three months ended September 30, 2006. The increase in revenues
from hematology reagent kits was attributed to (a) an increase in revenues
in
North America of 10%, or $73,000, (b) an increase in revenues in Europe of
8%,
or $4,000, partially offset by (c) a decrease in revenues in Asia Pacific and
rest of the world of 27%, or $13,000.
Gross
Profit for Veterinary Market Segment
Gross
profit for the veterinary market segment increased 24%, or $1,984,000, during
the three months ended September 30, 2007, as compared to the three months
ended
September 30, 2006. Gross profit percentages for the veterinary market segment
during the three months ended September 30, 2007 and 2006 were 56% and 54%,
respectively. In absolute dollars, the increase in gross profit for the
veterinary market segment was due to an increase in veterinary reagent discs
sold during the three months ended September 30, 2007.
Six
Months Ended September 30, 2007 Compared to Six Months Ended September 30,
2006
The
following table presents revenues, cost of revenues, gross profit and percentage
of revenues by operating segments for the six months ended September 30, 2007
and 2006:
|
|
|
Six
Months Ended
September
30,
|
|
|
|
Change
|
|
|
|
2007
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Market
|
|
$
|
10,450,000
|
|
|
100
|
%
|
|
$
|
7,850,000
|
|
|
100
|
%
|
|
$
|
2,600,000
|
|
|
33
|
%
|
Percentage
of total revenues
|
|
|
22
|
%
|
|
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
Veterinary
Market
|
|
|
34,425,000
|
|
|
100
|
%
|
|
|
30,701,000
|
|
|
100
|
%
|
|
|
3,724,000
|
|
|
12
|
%
|
Percentage
of total revenues
|
|
|
72
|
%
|
|
|
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
|
|
Unallocated
amounts
|
|
|
3,248,000
|
|
|
|
|
|
|
2,844,000
|
|
|
|
|
|
|
404,000
|
|
|
14
|
%
|
Percentage
of total revenues
|
|
|
6
|
%
|
|
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
48,123,000
|
|
|
|
|
|
|
41,395,000
|
|
|
|
|
|
|
6,728,000
|
|
|
16
|
%
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Market
|
|
|
5,248,000
|
|
|
50
|
%
|
|
|
3,808,000
|
|
|
49
|
%
|
|
|
1,440,000
|
|
|
38
|
%
|
Veterinary
Market
|
|
|
14,848,000
|
|
|
43
|
%
|
|
|
13,687,000
|
|
|
45
|
%
|
|
|
1,161,000
|
|
|
8
|
%
|
Unallocated
amounts
|
|
|
1,154,000
|
|
|
|
|
|
|
905,000
|
|
|
|
|
|
|
249,000
|
|
|
28
|
%
|
Total
cost of revenues
|
|
|
21,250,000
|
|
|
|
|
|
|
18,400,000
|
|
|
|
|
|
|
2,850,000
|
|
|
15
|
%
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Market
|
|
|
5,202,000
|
|
|
50
|
%
|
|
|
4,042,000
|
|
|
51
|
%
|
|
|
1,160,000
|
|
|
29
|
%
|
Veterinary
Market
|
|
|
19,577,000
|
|
|
57
|
%
|
|
|
17,014,000
|
|
|
55
|
%
|
|
|
2,563,000
|
|
|
15
|
%
|
Unallocated
amounts
|
|
|
2,094,000
|
|
|
|
|
|
|
1,939,000
|
|
|
|
|
|
|
155,000
|
|
|
8
|
%
|
Gross
profit
|
|
$
|
26,873,000
|
|
|
|
|
|
$
|
22,995,000
|
|
|
|
|
|
$
|
3,878,000
|
|
|
17
|
%
|
(1)
The
percentage reported is based on revenues by operating segment.
Medical
Market
Revenues
for
Medical Market Segment
During
the
six
months
ended September 30, 2007, total revenues in the medical market increased 33%,
or
$2,600,000, as compared to the six months ended September 30, 2006. Components
of the change were as follows:
Instruments.
Total
revenues from our Piccolo chemistry analyzers increased 31%, or $1,002,000,
during the six months ended September 30, 2007, as compared to the six months
ended September 30, 2006. We sold a total of 355 Piccolo chemistry analyzers
during the six months ended September 30, 2007, as compared to 297 Piccolo
chemistry analyzers sold during the six months ended September 30, 2006. The
changes in revenues were attributed to (a) an increase in revenues in North
America (excluding the U.S. government) of 30%, or $751,000, primarily due
to
increased distributor sales; (b) an increase in revenues in
Europe
of
160%,
or
$340,000, primarily due to increased distributor sales; and (c) an increase
in
revenues in Asia Pacific and rest of the world of 1400%, or $70,000. The
increase in revenues was partially offset by a decrease in Piccolo chemistry
analyzers sold to the U.S. government of 30%, or $159,000, primarily due to
a
decrease in the U.S. Military’s needs for our products, which were not
predictable.
Reagent
discs.
Total
revenues from reagent discs sold in the medical market increased 35%, or
$1,461,000,
during
the six months ended September 30, 2007, as compared to the six months ended
September 30, 2006. We sold 612,000 medical reagent discs during the six months
ended September 30, 2007, as compared to 457,000 medical reagent discs sold
during the six months ended September 30, 2006. The total increase in revenues
from medical reagent discs was primarily attributed to the expanded installed
base of our Piccolo chemistry analyzers and was comprised of (a) an increase
in
revenues in North America (excluding the U.S. government) of 47%, or $1,273,000;
(b) an increase in revenues in Europe of 47%, or $168,000; and (c) an increase
in revenues in Asia Pacific and rest of the world of 96%, or $46,000. The
increase in revenues was partially offset by a decrease in medical reagent
discs
sold to the U.S. government of 2%, or $26,000.
Gross
Profit for Medical Market Segment
Gross
profit for the medical market segment increased 29%, or $1,160,000, during
the
six months ended September 30, 2007, as compared to the six months ended
September 30, 2006. Gross profit percentages for the medical market segment
during the six months ended September 30, 2007 and 2006 were 50% and 51%,
respectively. In absolute dollars, the increase in gross profit for the medical
market segment was due to (a) an increase in Piccolo chemistry analyzers and
medical reagent discs sold during the six months ended September 30, 2007 and
(b) higher average selling prices of Piccolo chemistry analyzers and medical
reagent discs during the six months ended September 30, 2007.
Veterinary
Market
Revenues
for
Veterinary Market Segment
During
the
six
months ended September 30, 2007, total revenues in the veterinary market
increased 12%, or $3,724,000, as compared to the six months ended September
30,
2006. Components of the change were as follows:
Instruments.
We sold
a total of 1,093 VetScan chemistry analyzers and hematology instruments during
the six months ended September 30, 2007, as compared to 1,148 veterinary
instruments sold during the six months ended September 30, 2006. The primary
factors of the change were as follows:
(i)
Sales
of our VetScan chemistry analyzers decreased 16%, or $918,000, comprised of
(a)
a decrease in North America of 20%, or $832,000, primarily due to manufacturing
issues on our new chemistry analyzer resulting from a limited supply of quality
products, and (b) a decrease in Asia Pacific and rest of the world of 60%,
or
$409,000, primarily in Japan due to the termination of a distribution
arrangement during the first quarter of fiscal 2008. The decrease in revenues
was partially offset by an increase in Europe of 31%, or $323,000, primarily
due
to increased distributor sales.
(ii)
Sales of our hematology instruments increased 13%, or $544,000, comprised of
an
increase in North America of 24%, or $837,000, primarily due to the release
of
the VetScan HM5 in September 2007. The increase in revenues was partially offset
by (a) a decrease in Europe of 11%, or $23,000, and (b) a decrease in Asia
Pacific and rest of the world of 57%, or $270,000, primarily in Japan due to
the
termination of a distribution arrangement during the first quarter of fiscal
2008.
Reagent
discs and kits.
Total
revenues from reagent discs and kits sold in the veterinary market increased
20%, or $4,088,000, during the six months ended September 30, 2007, as compared
to the six months ended September 30, 2006. The primary factors of the change
were as follows:
(i)
Total
revenues from reagent discs sold in the veterinary market increased 22%, or
$4,106,000, during the six months ended September 30, 2007, as compared to
the
six months ended September 30, 2006. We sold 1,770,000 veterinary reagent discs
during the six months ended September 30, 2007, as compared to 1,507,000
veterinary reagent discs sold during the six months ended September 30, 2006.
The increase in revenues from veterinary reagent discs was primarily attributed
to the expanded installed base of our VetScan chemistry analyzers and was
comprised of (a) an increase in revenues in North America of 23%, or $3,433,000;
(b) an increase in revenues in Europe of 22%, or $624,000; and (c) an increase
in revenues in Asia Pacific and rest of the world of 6%, or
$49,000.
(ii)
Total revenues from hematology reagent kits sold in the veterinary market
decreased 1%, or $18,000, during the six months ended September 30, 2007, as
compared to the six months ended September 30, 2006. The decrease in revenues
from hematology reagent kits was attributed to (a) a decrease in revenues in
Asia Pacific and rest of the world of 36%, or $35,000, partially offset by
(b)
an increase in revenues in North America of 1%, or $13,000, and (c) an increase
in revenues in Europe of 4%, or $4,000.
Gross
Profit for Veterinary Market Segment
Gross
profit for the veterinary market segment increased 15%, or $2,563,000, during
the six months ended September 30, 2007, as compared to the six months ended
September 30, 2006. Gross profit percentages for the veterinary market segment
during the six months ended September 30, 2007 and 2006 were 57% and 55%,
respectively. In absolute dollars, the increase in gross profit for the
veterinary market segment was due to (a) an increase in veterinary reagent
discs
sold during the six months ended September 30, 2007, partially offset by (b)
a
decrease in VetScan chemistry analyzers sold during the six months ended
September 30, 2007 and (c) higher manufacturing costs on the VetScan chemistry
analyzers during the six months ended September 30, 2007.
Cost
of Revenues
The
following sets forth, for the periods indicated, our
cost
of
revenues
:
|
|
|
Three
Months Ended
September
30,
|
|
Change
|
|
|
|
Six
Months Ended
September
30,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
Change
|
|
Cost
of revenues
|
|
$
|
11,335,000
|
|
$
|
9,479,000
|
|
$
|
1,856,000
|
|
|
20
%
|
|
|
$
|
21,250,000
|
|
$
|
18,400,000
|
|
$
|
2,850,000
|
|
|
15
|
%
|
Percentage
of total revenues
|
|
|
45
|
%
|
|
45
|
%
|
|
|
|
|
|
|
|
|
44
|
%
|
|
44
|
%
|
|
|
|
|
|
|
Cost
of
revenues
includes
the costs associated with manufacturing, assembly, packaging, warranty repairs,
test and quality assurance for our instruments, reagent discs and hematology
reagent kits and manufacturing overhead, including costs of personnel and
equipment associated with manufacturing support.
Three
and Six Months Ended September 30, 2007 Compared to Three and Six Months Ended
September 30, 2006
The
increase in cost of revenues during the three and six months ended September
30,
2007, as compared to the three and six months ended September 30, 2006, was
primarily due to (a) an increase in the sales volume of medical and veterinary
reagent discs and (b) an increase in costs associated with manufacturing
the
VetScan
VS2 and Piccolo xpress
chemistry analyzers.
Operating
Expenses
Research
and Development
The
following sets forth, for the periods indicated, our research and development
expenses:
|
|
|
Three
Months Ended
September
30,
|
|
Change
|
|
|
|
Six
Months Ended
September
30,
|
|
|
Change
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
Research
and development expenses
|
|
$
|
1,822,000
|
|
$
|
1,519,000
|
|
$
|
303,000
|
|
|
20
|
%
|
|
$
|
3,475,000
|
|
$
|
3,236,000
|
|
$
|
239,000
|
|
|
7
|
%
|
Percentage
of total revenues
|
|
|
7
|
%
|
|
7
|
%
|
|
|
|
|
|
|
|
|
7
|
%
|
|
8
|
%
|
|
|
|
|
|
|
Research
and development expenses consist of personnel costs (including salaries,
benefits and share-based compensation expense), consulting expenses and
materials and related expenses associated with the development of new tests
and
test methods, product improvements and enhancement of existing products and
clinical trials.
Three
and Six Months Ended September 30, 2007 Compared to Three and Six Months Ended
September 30, 2006
The
increase in research and development expenses during the three and six months
ended September 30, 2007, as compared to the three and six months ended
September 30, 2006, was primarily due to new product development and enhancement
of existing products and clinical trials. Research and development expenses
are
based on the project activities planned and the level of spending depend on
budgeted expenditures. The projects primarily relate to new product development
in both the medical and veterinary markets and costs related to compliance
with
FDA regulations and clinical trials. Share-based compensation expense was
$36,000 and $31,000 during the three months ended September 30, 2007 and 2006,
respectively, and was $71,000 and $58,000 during the six months ended September
30, 2007 and 2006, respectively.
We
anticipate the dollar amount of research and development expenses to increase
in
fiscal 2008 from fiscal 2007 but remain consistent as a percentage of total
revenues, as we complete new products for both the medical and veterinary
markets. There can be no assurance, however, that we will undertake such
research and development activities in future periods or, if we do, that such
activities will be successful.
Sales
and Marketing
The
following sets forth, for the periods indicated, our sales and marketing
expenses:
|
|
|
Three
Months Ended
September
30,
|
|
Change
|
|
|
Six
Months Ended
September
30,
|
|
|
Change
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Percent
Change
|
|
|
2007
|
|
|
2006
|
|
|
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
Sales
and marketing expenses
|
|
$
|
6,381,000
|
|
$
|
5,533,000
|
|
$
|
848,000
|
|
|
15
%
|
|
$
|
11,610,000
|
|
$
|
10,004,000
|
|
$
|
1,606,000
|
|
|
16
|
%
|
Percentage
of total revenues
|
|
|
25
|
%
|
|
26
|
%
|
|
|
|
|
|
|
|
24
|
%
|
|
24
|
%
|
|
|
|
|
|
|
Sales
and
marketing expenses consist of personnel costs (including salaries, benefits
and
share-based compensation expense), commissions and travel-related expenses
for
personnel engaged in selling, costs associated with advertising, lead
generation, marketing programs, trade shows, and services related to customer
and technical support.
Three
and Six Months Ended September 30, 2007 Compared to Three and Six Months Ended
September 30, 2006
The
increase in sales and marketing expenses during the three and six months ended
September 30, 2007, as compared to the three and six months ended September
30,
2006, was primarily due to personnel-related costs resulting from an increase
in
headcount in various divisions including sales and marketing, customer service
and technical service, to support the growth in both our medical and veterinary
markets. Share-based compensation expense was $88,000 and $76,000 during the
three months ended September 30, 2007 and 2006, respectively, and was $168,000
and $153,000 during the six months ended September 30, 2007 and 2006,
respectively.
General
and Administrative
The
following sets forth, for the periods indicated, our
general
and administrative
expenses:
|
|
|
Three
Months Ended
September
30,
|
|
Change
|
|
|
Six
Months Ended
September
30,
|
|
|
Change
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase/
(Decrease)
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
General
and administrative expenses
|
|
$
|
1,538,000
|
|
$
|
1,386,000
|
|
$
|
152,000
|
|
|
11
%
|
|
$
|
3,189,000
|
|
$
|
2,970,000
|
|
$
|
219,000
|
|
|
7
|
%
|
Percentage
of total revenues
|
|
|
6
|
%
|
|
7
|
%
|
|
|
|
|
|
|
|
7
|
%
|
|
7
|
%
|
|
|
|
|
|
|
General
and administrative expenses consist of personnel costs
(including salaries, benefits and share-based compensation expense),
and
expenses for outside professional services related to general corporate
functions, including accounting, human resources and legal.
Three
and Six Months Ended September 30, 2007 Compared to Three and Six Months Ended
September 30, 2006
The
increase in general and administrative expenses during the three and six months
ended September 30, 2007, as compared to the three and six months ended
September 30, 2006, was primarily due to an increase in personnel-related costs,
which includes share-based compensation expense. Share-based compensation
expense was $130,000 and $84,000 during the three months ended September 30,
2007 and 2006, respectively, and was $252,000 and $150,000 during the six months
ended September 30, 2007 and 2006, respectively.
Interest
and Other Income (Expense), Net
The
following sets forth, for the periods indicated, our interest and other income
(expense), net:
|
|
|
Three
Months Ended
September
30,
|
|
|
Change
|
|
|
Six
Months Ended
September
30,
|
|
|
Change
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase/
(Decrease)
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase/
(Decrease)
|
|
|
Percent
Change
|
|
Interest
and other income (expense), net
|
|
$
|
529,000
|
|
$
|
367,000
|
|
$
|
162,000
|
|
|
44
%
|
|
$
|
1,028,000
|
|
$
|
703,000
|
|
$
|
325,000
|
|
|
46
|
%
|
Interest
and other income (expense), net, consists primarily of interest income earned
on
cash, cash equivalents and short-term investments.
Three
and Six Months Ended September 30, 2007 Compared to Three and Six Months Ended
September 30, 2006
The
increase in interest and other income (expense), net, during the three and
six
months ended September 30, 2007, as compared to the three and six months ended
September 30, 2006, was primarily attributed to interest income in our
investment portfolio resulting from higher average invested balances compared
to
the same periods in fiscal 2007.
Income
Tax Provision
The
following sets forth, for the periods indicated, our income tax
provision:
|
|
|
Three
Months Ended
September
30,
|
|
|
Six
Months Ended
September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Income
tax provision
|
|
$
|
1,757,000
|
|
$
|
1,373,000
|
|
$
|
3,641,000
|
|
$
|
2,973,000
|
|
Effective
tax rate
|
|
|
38
|
%
|
|
39
|
%
|
|
38
|
%
|
|
40
|
%
|
Three
and Six Months Ended September 30, 2007 Compared to Three and Six Months Ended
September 30, 2006
The
decrease in the effective tax rate for the three and six months ended
September
30,
2007,
as compared to the three and six months ended
September
30,
2006,
was primarily due to tax benefits resulting from (a) federal research and
development tax credits, which temporarily expired in the
three
and six months ended September 30, 2006
,
and (b)
a change in our investment portfolio.
We
adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN No. 48”) on April 1, 2007. As a result of
implementing FIN No. 48, we did not change the amount of unrecognized tax
benefits related to tax positions taken in prior periods. We did not have any
unrecognized tax benefits as of April 1, 2007, the date of adoption, or as
of
September
30,
2007. Our policy to include interest and penalties related to gross unrecognized
tax benefits within our provision for income taxes did not change. During the
three and six months ended
September
30,
2007, we did not recognize any interest and penalties related to unrecognized
tax benefits.
LIQUIDITY
AND CAPITAL RESOURCES
Total
cash, cash equivalents and short-term investments at September 30, 2007 and
March 31, 2007 were as follows:
|
|
|
September
30,
|
|
|
March
31,
|
|
|
|
|
2007
|
|
|
2007
|
|
Cash
and cash equivalents
|
|
$
|
10,820,000
|
|
$
|
10,183,000
|
|
Short-term
investments
|
|
|
40,911,000
|
|
|
35,028,000
|
|
Total
cash, cash equivalents and short-term investments
|
|
$
|
51,731,000
|
|
$
|
45,211,000
|
|
Percentage
of total assets
|
|
|
47
|
%
|
|
44
|
%
|
Cash
Flow Changes
Cash
provided (used) in the six months ended September 30, 2007 and 2006 were as
follows:
|
|
|
Six
Months Ended
September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
Net
cash provided by operating activities
|
|
$
|
6,546,000
|
|
$
|
8,131,000
|
|
Net
cash used in investing activities
|
|
|
(7,563,000
|
)
|
|
(8,014,000
|
)
|
Net
cash provided by financing activities
|
|
|
1,654,000
|
|
|
2,946,000
|
|
Net
increase in cash and cash equivalents
|
|
$
|
637,000
|
|
$
|
3,063,000
|
|
At
September 30, 2007, we had net working capital of $81,530,000 compared to
$74,517,000 at March 31, 2007. Cash and cash equivalents at September 30, 2007
were $10,820,000, compared to $10,183,000, at March 31, 2007. The increase
in
cash and cash equivalents was primarily due to proceeds from maturities of
short-term investments and proceeds from exercises of stock options, partially
offset by purchases of short-term investments and purchases of property and
equipment.
Operating
Activities
During
the six months ended
September
30,
2007,
we generated $6,546,000 in cash from operating activities. The cash provided
by
operating activities during the six months ended
September
30,
2007
was primarily the result of net income of $5,986,000, adjusted for the effects
of non-cash adjustments including depreciation and amortization of $1,656,000
and share-based compensation expense of $546,000, partially offset by a decrease
of $138,000 related to excess tax benefits from share-based awards and a
decrease in net deferred tax assets of $3,128,000.
Our
net
trade receivables increased by $2,417,000, from $16,929,000 at March 31, 2007
to
$19,346,000 as of
September
30,
2007,
primarily due to higher sales in the last month of the quarter ended September
30, 2007. Net inventories increased by $1,099,000, from $14,813,000 at March
31,
2007 to $15,912,000 as of
September
30,
2007,
primarily due to instrument manufacturing problems associated with new chemistry
analyzers. Prepaid expenses decreased by $363,000, from $1,321,000 at March
31,
2007 to $958,000 as of
September
30,
2007,
primarily due to the timing of payments. Current net deferred tax asset
decreased by $3,128,000, from $8,979,000 at March 31, 2007 to $5,851,000 as
of
September
30,
2007,
primarily as a result of the utilization of federal net operating loss
carryforwards and California research and development tax credit carryforwards
during the six months ended September 30, 2007.
Accounts
payable decreased by $1,254,000, from $6,505,000 at March 31, 2007 to $5,251,000
as of
September
30,
2007,
primarily due to the timing and payment of services and inventory purchases.
Accrued payroll and related expenses increased by $332,000, from $3,830,000
at
March 31, 2007 to $4,162,000 as of
September
30,
2007,
primarily due to an increase in personnel costs resulting from an increase
in
headcount during the six months ended September 30, 2007. Total warranty
reserves increased by $447,000, resulting from an increase in the current
portion of warranty reserves of $633,000, from $315,000 at March 31, 2007 to
$948,000 as of
September
30,
2007,
partially offset by a decrease in the non-current portion of warranty reserves
of $186,000, from $532,000 at March 31, 2007 to $346,000 as of
September
30,
2007.
The net change in warranty reserves is based on (a) the number of instruments
in
standard warranty and estimated repair costs and (b) an estimate of defective
reagent discs and replacement costs. Total deferred revenue decreased by
$166,000, resulting from a decrease in the current portion of deferred revenue
of $106,000, from $917,000 at March 31, 2007 to $811,000 as of
September
30,
2007,
and a decrease in the non-current portion of deferred revenue of $60,000, from
$1,244,000 at March 31, 2007 to $1,184,000 as of
September
30,
2007,
primarily due to the amortization of maintenance contracts offered to customers
from time to time as incentives in the form of free goods in connection with
the
sale of our products.
We
anticipate that we will incur incremental additional costs to support our future
operations, including further additional pre-clinical testing and clinical
trials for our current and future products; research and design costs related
to
the continuing development of our current and future products; and acquisition
of capital equipment for our manufacturing facility, which includes the ongoing
costs related to the continuing development of our current and future
products.
Investing
Activities
Net
cash
used in investing activities during the six months ended September 30, 2007
totaled $7,563,000. This was
attributed
to our short-term investments and property and equipment, as described below:
Short-term
Investments.
Cash
used to purchase short-term investments, consisting of corporate debt securities
and auction rate securities, totaled $33,751,000 during the six months ended
September
30,
2007.
Cash provided by proceeds from maturities of short-term investments totaled
$27,868,000 during the
six
months
ended
September
30,
2007.
Property
and Equipment
.
Cash
used to purchase property and equipment totaled $1,680,000 during the six months
ended September 30, 2007, primarily to support (a) new product introduction
and
(b) more efficient production lines. We anticipate that we will continue to
purchase property and equipment necessary in the normal course of our
business.
Financing
Activities
Net
cash
provided by financing activities during the
six
months
ended September 30, 2007 totaled $1,654,000, primarily consisting of $1,625,000
from proceeds from stock options exercises and $
138,000
from excess tax benefits from share-based awards
,
partially offset by $109,000 from payment of income withholding taxes due upon
vesting of restricted stock units.
Line
of Credit
We
have a
line of credit with Comerica Bank-California which provides for borrowings
of up
to $2,000,000. The line of credit terminates upon notification by either party
and any outstanding balance is payable upon demand. The line of credit bears
interest at the bank’s prime rate minus 0.25%, which totaled 7.50% at
September
30,
2007,
and is payable monthly. Of the $2,000,000 available, $410,000 was committed
to
secure a letter of credit for our facilities lease at
September
30,
2007.
At
September
30,
200
7,
there
was no amount outstanding under our line of credit. The weighted average
interest rates on the line of credit during the three months ended
September
30,
2007
and 2006 were 7.93% and 8.00%, respectively.
The
line
of credit agreement contains certain financial covenants, which are evaluated
on
a quarterly basis. At
September
30,
2007,
we were in compliance with each of these covenants. Included in these financial
covenants, among other stipulations, are the following
requirements:
·
|
We
must have a minimum net income of $25,000 before preferred stock
dividends
and accretion on preferred stock in any three quarters of a fiscal
year,
provided that any loss before preferred stock dividends and accretion
on
preferred stock incurred in the remaining quarter is not to exceed
$250,000.
|
·
|
We
are required to be profitable, as defined, on a fiscal year to date
basis
beginning with the six month period ended September 30, 2007 and
to have
net income before preferred stock dividends and accretion on preferred
stock of at least $1,150,000 for the fiscal year ending March 31,
2008.
|
·
|
We
are required to comply with certain financial covenants as
follows:
|
Financial
Covenants
|
Requirements
|
Quick
ratio, as defined
|
Not
less than 2.00 to 1.00
|
Cash
flow coverage, as defined
|
Not
less than 1.25 to 1.00
|
Debt
to net worth ratio, as defined
|
Not
greater than 1.00 to 1.00
|
Tangible
effective net worth, as defined
|
Not
less than $25,731,000
|
Borrowings
under the line of credit are collateralized by our net book value of assets
of
$96.0 million at
September
30,
2007,
including our intellectual property.
Purchase
Commitments
A
discussion of our amended
original
equipment manufacturing agreement with Diatron
Messtechnik GmbH
is
included in the Notes to the Unaudited Condensed Financial
Statements.
Contingencies
We
are
involved from time to time in various litigation matters in the normal course
of
business. While the outcome of these proceedings and claims cannot be predicted
with certainty, we do not believe that the ultimate resolution of these matters
will have a material effect on our financial position or results of
operations.
Off-Balance
Sheet Arrangements
We
have
no off-balance sheet arrangements.
Financial
Condition
We
anticipate that our existing capital resources, available line of credit and
anticipated revenue from the sales of our products will be adequate to satisfy
our currently planned operating and financial requirements through at least
the
next 12 months. Our future capital requirements will largely depend upon the
increased market acceptance of our point-of-care blood analyzer products.
However, our sales for any future periods are not predictable with a significant
degree of certainty. Regardless, we may seek to raise additional funds to pursue
strategic opportunities.
RECENT
ACCOUNTING PRONOUNCEMENTS
A
discussion of recent accounting pronouncements is included in Note 2 of the
Notes to the Unaudited Condensed Financial Statements.