Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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, and may depend on a number of factors outside of our control,
including inventory or timing considerations by our distributors. 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 was 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 potentially defective reagent discs is now 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
adversely 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
.
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 estimated costs
for
defective reagent discs, which includes the replacement costs and freight
of a
defective reagent disc, was recorded as part of sales and other allowances.
Starting on July 1, 2007,
the
provision for defective reagent discs is now 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 No. 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 No. 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
December 31, 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 nine months ended December
31,
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 measurements. 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 nine months ended
December
31,
2007
and 2006 were as follows:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
December
31,
|
|
Change
|
|
December
31,
|
|
Change
|
|
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
Revenues
by Geographic Region
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
North
America
|
|
$
|
21,628,000
|
|
$
|
18,221,000
|
|
$
|
3,407,000
|
|
|
19
|
%
|
$
|
61,868,000
|
|
$
|
52,652,000
|
|
$
|
9,216,000
|
|
|
18
|
%
|
Percentage
of total revenues
|
|
|
84
|
%
|
|
83
|
%
|
|
|
|
|
|
|
|
84
|
%
|
|
83
|
%
|
|
|
|
|
|
|
Europe
|
|
|
3,397,000
|
|
|
2,781,000
|
|
|
616,000
|
|
|
22
|
%
|
|
9,629,000
|
|
|
7,543,000
|
|
|
2,086,000
|
|
|
28
|
%
|
Percentage
of total revenues
|
|
|
13
|
%
|
|
13
|
%
|
|
|
|
|
|
|
|
13
|
%
|
|
12
|
%
|
|
|
|
|
|
|
Asia
Pacific and rest of the world
|
|
|
665,000
|
|
|
1,016,000
|
|
|
(351,000
|
)
|
|
(35
|
%)
|
|
2,316,000
|
|
|
3,218,000
|
|
|
(902,000
|
)
|
|
(28
|
%)
|
Percentage
of total revenues
|
|
|
3
|
%
|
|
4
|
%
|
|
|
|
|
|
|
|
3
|
%
|
|
5
|
%
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
25,690,000
|
|
$
|
22,018,000
|
|
$
|
3,672,000
|
|
|
17
|
%
|
$
|
73,813,000
|
|
$
|
63,413,000
|
|
$
|
10,400,000
|
|
|
16
|
%
|
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
December
31,
|
|
Change
|
|
December
31,
|
|
Change
|
|
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
Revenues
by Product Category
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
Instruments
|
|
$
|
8,393,000
|
|
$
|
8,369,000
|
|
$
|
24,000
|
|
|
-
|
|
$
|
22,319,000
|
|
$
|
21,667,000
|
|
$
|
652,000
|
|
|
3
|
%
|
Percentage
of total revenues
|
|
|
33
|
%
|
|
38
|
%
|
|
|
|
|
|
|
|
30
|
%
|
|
34
|
%
|
|
|
|
|
|
|
Reagent
discs and kits
|
|
|
15,305,000
|
|
|
12,239,000
|
|
|
3,066,000
|
|
|
25
|
%
|
|
45,244,000
|
|
|
36,629,000
|
|
|
8,615,000
|
|
|
24
|
%
|
Percentage
of total revenues
|
|
|
59
|
%
|
|
56
|
%
|
|
|
|
|
|
|
|
61
|
%
|
|
58
|
%
|
|
|
|
|
|
|
Other
products
|
|
|
1,462,000
|
|
|
964,000
|
|
|
498,000
|
|
|
52
|
%
|
|
4,797,000
|
|
|
3,728,000
|
|
|
1,069,000
|
|
|
29
|
%
|
Percentage
of total revenues
|
|
|
6
|
%
|
|
4
|
%
|
|
|
|
|
|
|
|
7
|
%
|
|
6
|
%
|
|
|
|
|
|
|
Product
sales, net
|
|
|
25,160,000
|
|
|
21,572,000
|
|
|
3,588,000
|
|
|
17
|
%
|
|
72,360,000
|
|
|
62,024,000
|
|
|
10,336,000
|
|
|
17
|
%
|
Percentage
of total revenues
|
|
|
98
|
%
|
|
98
|
%
|
|
|
|
|
|
|
|
98
|
%
|
|
98
|
%
|
|
|
|
|
|
|
Development
and licensing revenues
|
|
|
530,000
|
|
|
446,000
|
|
|
84,000
|
|
|
19
|
%
|
|
1,453,000
|
|
|
1,389,000
|
|
|
64,000
|
|
|
5
|
%
|
Percentage
of total revenues
|
|
|
2
|
%
|
|
2
|
%
|
|
|
|
|
|
|
|
2
|
%
|
|
2
|
%
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
25,690,000
|
|
$
|
22,018,000
|
|
$
|
3,672,000
|
|
|
17
|
%
|
$
|
73,813,000
|
|
$
|
63,413,000
|
|
$
|
10,400,000
|
|
|
16
|
%
|
Three
Months Ended December 31, 2007 Compared to Three Months Ended December 31,
2006
North
America
.
During
the three months ended December 31, 2007, total revenues in North America
increased 19%, or $3,407,000,
as
compared to the three months ended
December
31
,
2006.
Components of the change in North America were as follows:
Instruments.
During
the
three
months ended
December
31
,
200
7
,
total
revenues from instruments sold in North America increased 3%, or $176,000,
as
compared to the three months ended
December
31
,
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 35%, or $529,000, primarily due to increased sales
to
distributors. Sales of our Piccolo chemistry analyzers to the U.S. government
increased 76%, or $137,000.
(ii)
Sales of our VetScan
chemistry
analyzers
in North
America decreased 39%, or $1,209,000, primarily due to a shift in our sales
and
marketing focus from an instrument only emphasis to a focus on both instrument
and reagent discs as a result of the manufacturing issues that we experienced
in
previous quarters. Sales of our hematology instruments in North America
increased 41%, or $719,000, primarily due to the release of our VetScan HM5
in
September 2007.
Reagent
discs and kits.
During
the
three
months ended
December
31, 2007
,
total
revenues from reagent discs and kits sold in North America increased 26%,
or
$2,638,000, as compared to the three months ended
December
31
,
2006.
The primary factors of the change were as follows:
(i)
Medical reagent discs sales in North America (excluding the U.S.
government
)
increased 17%, or $298,000, primarily due to the expanded installed base
of our
Piccolo chemistry analyzers. Medical reagent discs sold to the U.S. government
decreased 13%, or $81,000.
(ii)
Veterinary reagent discs sales in North America increased 32%, or $2,255,000,
primarily due to the expanded installed base of our VetScan chemistry
analyzers
.
Sales of
hematology reagent kits in North America increased 21%, or $166,000.
Other
products.
During
the
three
months ended
December
31
,
2007,
total revenues from other products sold in North America increased 54%, or
$509,000, as compared to the three months ended
December
31
,
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
three
months ended
December
31
,
2007,
total revenues from development and licensing in North America increased
19%, or
$84,000, as compared to the three months ended
December
31
,
2006.
Significant
concentration.
One
distributor in the United States, DVM Resources, accounted for 12% and 13%
of
total worldwide revenues for the three months ended
December
31
,
2007
and 2006, respectively.
Europe
.
During
the three months ended December 31, 2007, total revenues in Europe increased
22%, or $616,000,
as
compared to the three months ended
December
31, 2006
.
Components of the change in Europe were as follows:
Instruments.
During
the
three
months ended
December
31
,
2007,
total revenues from instruments sold in Europe increased 7%, or $81,000,
as
compared to the three months ended
December
31
,
2006.
The primary factors of the change were as follows:
(i)
Sales
of our Piccolo chemistry analyzers in
Europe
increased
144%, or $312,000, primarily due to increased sales to distributors.
(ii)
Sales of our VetScan chemistry analyzers in
Europe
decreased 34%, or $318,000, primarily due to decreased sales to distributors.
Sales of our hematology instruments in
Europe
increased 97%, or $87,000.
Reagent
discs and kits.
During
the
three
months ended
December
31
,
2007,
total revenues from reagent discs and kits sold in Europe increased 35%,
or
$533,000, as compared to the three months ended
December
31, 2006
.
The
primary factors of the change were as follows:
(i)
Medical reagent discs sales in Europe increased 43%, or $94,000.
(ii)
Veterinary reagent discs sales in Europe increased 36%, or $448,000, primarily
due to the expanded installed base of our VetScan chemistry analyzers. Sales
of
hematology reagent kits in Europe decreased 16%, or $9,000.
Other
products.
During
the
three
months ended
December
31
,
2007,
total revenues from other products sold in Europe increased 33%, or $2,000,
as
compared to the three months ended
December
31, 2006
.
Asia
Pacific and rest of the world
.
During
the three months ended December 31, 2007, total revenues in
Asia
Pacific and rest of the world
decreased 35%, or $351,000,
as
compared to the three months ended
December
31
,
2006.
Components of the change in Asia Pacific and rest of the world were as
follows:
Instruments.
During
the
three
months ended
December
31
,
2007,
total revenues from instruments sold in Asia Pacific and rest of the world
decreased 41%, or $233,000, as compared to the three months ended
December
31
,
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 200%, or $30,000.
(ii)
Sales of our VetScan chemistry analyzers in Asia Pacific and rest of the
world
decreased 81%, or $382,000, 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 147%,
or
$119,000.
Reagent
discs and kits.
During
the
three
months ended
December
31
,
2007,
total revenues from reagent discs and kits sold in Asia Pacific and rest
of the
world decreased 24%, or $105,000, as compared to the three months ended
December
31
,
2006.
The primary factors of the change were as follows:
(i)
Medical reagent discs sales in Asia Pacific and rest of the world increased
19%,
or $3,000.
(ii)
Veterinary reagent discs sales in Asia Pacific and rest of the world decreased
22%, or $80,000. Sales of hematology reagent kits in Asia Pacific and rest
of
the world decreased 51%, or $28,000.
Other
products.
During
the
three
months ended
December
31
,
2007,
total revenues from other products sold in Asia Pacific and rest of the world
decreased 87%, or $13,000, as compared to the three months ended
December
31
,
2006.
Nine
Months Ended December 31, 2007 Compared to Nine Months Ended December 31,
2006
North
America
.
During
the
nine
months
ended December 31, 2007, total revenues in North America increased 18%, or
$9,216,000,
as
compared to the nine months ended
December
31
,
2006.
Components of the change in North America were as follows:
Instruments.
During
the
nine
months ended
December
31
,
200
7
,
total
revenues from instruments sold in North America increased 4%, or $773,000,
as
compared to the nine months ended
December
31
,
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 32%, or $1,280,000, primarily due to increased sales
to
distributors. Sales of our Piccolo chemistry analyzers to the U.S. government
decreased 3%, or $22,000.
(ii)
Sales of our VetScan chemistry analyzers in North America decreased 28%,
or
$2,041,000, primarily due to a shift in our sales and marketing focus from
an
instrument only emphasis to a focus on both instrument and reagent discs
as a
result of the manufacturing issues that we experienced in previous quarters.
Sales of our hematology instruments in North America increased 30%, or
$1,556,000, primarily due to the release of our VetScan HM5 in September
2007.
Reagent
discs and kits.
During
the
nine
months
ended
December
31, 2007
,
total
revenues from reagent discs and kits sold in North America increased 24%,
or
$7,331,000, as compared to the nine months ended
December
31
,
2006.
The primary factors of the change were as follows:
(i)
Medical reagent discs sales in North America (excluding the U.S. government)
increased 36%, or $1,571,000, primarily due to the expanded installed base
of
our Piccolo chemistry analyzers. Medical reagent discs sold to the U.S.
government decreased 6%, or $107,000.
(ii)
Veterinary reagent discs sales in North America increased 26%, or $5,688,000,
primarily due to the expanded installed base of our VetScan chemistry analyzers.
Sales of hematology reagent kits in North America increased 8%, or $179,000.
Other
products.
During
the
nine
months ended
December
31
,
2007,
total revenues from other products sold in North America increased 29%, or
$1,048,000, as compared to the nine months ended
December
31
,
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
nine
months ended
December
31
,
2007,
total revenues from development and licensing in North America increased
5%, or
$64,000, as compared to the nine months ended
December
31
,
2006.
Significant
concentration.
One
distributor in the United States, DVM Resources, accounted for 13% and 15%
of
total worldwide revenues for the nine months ended
December
31
,
2007
and 2006, respectively.
Europe
.
During
the
nine
months
ended December 31, 2007, total revenues in Europe increased 28%, or $2,086,000,
as
compared to the nine months ended
December
31
,
2006.
Components of the change in Europe were as follows:
Instruments.
During
the
nine
months ended
December
31
,
2007,
total revenues from instruments sold in Europe increased 26%, or $721,000,
as
compared to the nine months ended
December
31
,
2006.
The primary factors of the change were as follows:
(i)
Sales
of our Piccolo chemistry analyzers in
Europe
increased
152%, or $652,000, primarily due to increased sales to distributors.
(ii)
Sales of our VetScan chemistry analyzers in
Europe
increased 1%, or $5,000. Sales of our hematology instruments in
Europe
increased 21%, or $64,000.
Reagent
discs and kits.
During
the
nine
months ended
December
31
,
2007,
total revenues from reagent discs and kits sold in Europe increased 28%,
or
$1,329,000, as compared to the nine months ended
December
31
,
2006.
The primary factors of the change were as follows:
(i)
Medical reagent discs sales in Europe increased 45%, or $262,000, primarily
due
to the expanded installed base of our Piccolo chemistry analyzers.
(ii)
Veterinary reagent discs sales in Europe increased 26%, or $1,072,000, primarily
due to the expanded installed base of our VetScan chemistry analyzers. Sales
of
hematology reagent kits in
Europe
decreased 3%, or $5,000.
Other
products.
During
the
nine
months ended
December
31
,
2007,
total revenues from other products sold in Europe increased 116%, or $36,000,
as
compared to the nine months ended
December
31
,
2006.
Asia
Pacific and rest of the world
.
During
the
nine
months
ended December 31, 2007, total revenues in
Asia
Pacific and rest of the world
decreased 28%, or $902,000,
as
compared to the nine months ended
December
31
,
2006.
Components of the change in Asia Pacific and rest of the world were as
follows:
Instruments.
During
the
nine
months ended
December
31
,
2007,
total revenues from instruments sold in Asia Pacific and rest of the world
decreased 49%, or $842,000, as compared to the nine months ended
December
31
,
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 500%, or $100,000.
(ii)
Sales of our VetScan chemistry analyzers in Asia Pacific and rest of the
world
decreased 69%, or $791,000. Sales of our hematology instruments in Asia Pacific
and rest of the world decreased 27%, or $151,000. 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
nine
months ended
December
31
,
2007,
total revenues from reagent discs and kits sold in Asia Pacific and rest
of the
world decreased 3%, or $45,000, as compared to the nine months ended
December
31
,
2006.
The primary factors of the change were as follows:
(i)
Medical reagent discs sales in Asia Pacific and rest of the world increased
77%,
or $49,000.
(ii)
Veterinary reagent discs sales in Asia Pacific and rest of the world decreased
2%, or $31,000. Sales of hematology reagent kits in Asia Pacific and rest
of the
world decreased 41%, or $63,000.
Other
products.
During
the
nine
months ended
December
31
,
2007,
total revenues from other products sold in Asia Pacific and rest of the world
decreased 54%, or $15,000, as compared to the nine months ended
December
31
,
2006.
Segment
Results
Three
Months Ended December 31, 2007 Compared to Three Months Ended December 31,
2006
The
following table presents revenues, cost of revenues, gross profit and percentage
of revenues by operating segments for the three months ended December 31,
2007
and 2006:
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
December
31,
|
|
Change
|
|
|
|
|
|
Percent
of
|
|
|
|
Percent
of
|
|
Increase/
|
|
Percent
|
|
|
|
2007
|
|
Revenues
(1)
|
|
2006
|
|
Revenues
(1)
|
|
(Decrease)
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Market
|
|
$
|
6,005,000
|
|
|
100
|
%
|
$
|
4,656,000
|
|
|
100
|
%
|
$
|
1,349,000
|
|
|
29
|
%
|
Percentage
of total revenues
|
|
|
23
|
%
|
|
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
Veterinary
Market
|
|
|
18,073,000
|
|
|
100
|
%
|
|
16,312,000
|
|
|
100
|
%
|
|
1,761,000
|
|
|
11
|
%
|
Percentage
of total revenues
|
|
|
70
|
%
|
|
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
|
Unallocated
amounts
|
|
|
1,612,000
|
|
|
|
|
|
1,050,000
|
|
|
|
|
|
562,000
|
|
|
54
|
%
|
Percentage
of total revenues
|
|
|
7
|
%
|
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
25,690,000
|
|
|
|
|
|
22,018,000
|
|
|
|
|
|
3,672,000
|
|
|
17
|
%
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Market
|
|
|
2,946,000
|
|
|
49
|
%
|
|
2,280,000
|
|
|
49
|
%
|
|
666,000
|
|
|
29
|
%
|
Veterinary
Market
|
|
|
8,677,000
|
|
|
48
|
%
|
|
7,643,000
|
|
|
47
|
%
|
|
1,034,000
|
|
|
14
|
%
|
Unallocated
amounts
|
|
|
458,000
|
|
|
|
|
|
516,000
|
|
|
|
|
|
(58,000
|
)
|
|
(11
|
%)
|
Total
cost of revenues
|
|
|
12,081,000
|
|
|
|
|
|
10,439,000
|
|
|
|
|
|
1,642,000
|
|
|
16
|
%
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Market
|
|
|
3,059,000
|
|
|
51
|
%
|
|
2,376,000
|
|
|
51
|
%
|
|
683,000
|
|
|
29
|
%
|
Veterinary
Market
|
|
|
9,396,000
|
|
|
52
|
%
|
|
8,669,000
|
|
|
53
|
%
|
|
727,000
|
|
|
8
|
%
|
Unallocated
amounts
|
|
|
1,154,000
|
|
|
|
|
|
534,000
|
|
|
|
|
|
620,000
|
|
|
116
|
%
|
Gross
profit
|
|
$
|
13,609,000
|
|
|
|
|
$
|
11,579,000
|
|
|
|
|
$
|
2,030,000
|
|
|
18
|
%
|
(1)
The
percentage reported is based on revenues by operating segment.
Medical
Market
Revenues
for
Medical Market Segment
During
the
three
months ended December 31, 2007, total revenues in the medical market increased
29%, or $1,349,000, as compared to the three months ended December 31, 2006.
Components of the change were as follows:
Instruments.
Total
revenues from our Piccolo chemistry analyzers increased 52%, or $1,008,000,
during the three months ended December 31, 2007, as compared to the three
months
ended December 31, 2006. We sold a total of 238 Piccolo chemistry analyzers
during the three months ended December 31, 2007, as compared to 164 Piccolo
chemistry analyzers sold during the three months ended December 31, 2006.
The
changes in revenues were attributed to (a) an increase in revenues in North
America (excluding the U.S. government) of 35%, or $529,000, primarily due
to
increased sales to distributors; (b) an increase in Piccolo chemistry analyzers
sold to the U.S. government of 76%, or $137,000; (c) an increase in revenues
in
Europe
of
144%,
or
$312,000, primarily due to increased sales to distributors; and (d) an increase
in revenues in Asia Pacific and rest of the world of 200%, or
$30,000.
Reagent
discs.
Total
revenues from reagent discs sold in the medical market increased 12%, or
$314,000,
during
the three months ended December 31, 2007, as compared to the three months
ended
December 31, 2006. We sold 316,000 medical reagent discs during the three
months
ended December 31, 2007, as compared to 284,000 medical reagent discs sold
during the three months ended December 31, 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 17%, or $298,000;
(b) an increase in revenues in Europe of 43%, or $94,000; and (c) an increase
in
revenues in Asia Pacific and rest of the world of 19%, or $3,000. The increase
was partially offset by a decrease in medical reagent discs sold to the U.S.
government of 13%, or $81,000.
Gross
Profit for Medical Market Segment
Gross
profit for the medical market segment increased 29%, or $683,000, during
the
three months ended December 31, 2007, as compared to the three months ended
December 31, 2006. Gross profit percentage for the medical market segment
during
each of the three months ended December 31, 2007 and 2006 was 51%. 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 three months ended December 31, 2007 and (b) higher average selling
prices of Piccolo chemistry analyzers and medical reagent discs during the
three
months ended December 31, 2007.
Veterinary
Market
Revenues
for
Veterinary Market Segment
During
the
three
months ended December 31, 2007, total revenues in the veterinary market
increased 11%, or $1,761,000, as compared to the three months ended December
31,
2006. Components of the change were as follows:
Instruments.
We sold
a total of
642
VetScan chemistry analyzers and hematology instruments
during
the three months ended December 31, 2007, as compared to 748 veterinary
instruments sold during the three months ended December 31, 2006. The primary
factors of the change were as follows:
(i)
Sales
of our VetScan chemistry analyzers decreased 42%, or $1,909,000, comprised
of
(a) a decrease in revenues in North America of 39%, or $1,209,000, primarily
due
to a shift in our sales and marketing focus from an instrument only emphasis
to
a focus on both instrument and reagent discs as a result of the manufacturing
issues that we experienced in previous quarters; (b) a decrease in revenues
in
Europe of 34%, or $318,000, primarily due to decreased sales to distributors;
and (c) a decrease in revenues in Asia Pacific and rest of the world of 81%,
or
$382,000, primarily in Japan due to the termination of a distribution
arrangement during the first quarter of fiscal 2008.
(ii)
Sales of our hematology instruments increased 48%, or $925,000, comprised
of (a)
an increase in revenues in North America of 41%, or $719,000; (b) an increase
in
revenues in Europe of 97%, or $87,000; and (c) an increase in revenues in
Asia
Pacific and rest of the world of 147%, or $119,000. The increase in revenues
from our hematology instruments is primarily due to the release of the VetScan
HM5 in September 2007.
Reagent
discs and kits.
Total
revenues from reagent discs and hematology reagent kits sold in the veterinary
market increased 29%, or $2,752,000, during the three months ended December
31,
2007, as compared to the three months ended December 31, 2006. The primary
factors of the change were as follows:
(i)
Total
revenues from reagent discs sold in the veterinary market increased 30%,
or
$2,623,000, during the three months ended December 31, 2007, as compared
to the
three months ended December 31, 2006. We sold 896,000 veterinary reagent
discs
during the three months ended December 31, 2007, as compared to 721,000
veterinary reagent discs sold during the three months ended December 31,
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 32%, or $2,255,000
and (b) an increase in revenues in Europe of 36%, or $448,000.
The
increase was partially offset by a decrease in revenues in Asia Pacific and
rest
of the world of 22%, or $80,000.
(ii)
Total revenues from hematology reagent kits sold in the veterinary market
increased 14%, or $129,000, during the three months ended December 31, 2007,
as
compared to the three months ended
December
31
,
2006.
The increase in revenues from hematology reagent kits was attributed to (a)
an
increase in revenues in North America of 21%, or $166,000, partially offset
by
(b) a decrease in revenues in Europe of 16%, or $9,000 and (c) a decrease
in
revenues in Asia Pacific and rest of the world of 51%, or $28,000.
Gross
Profit for Veterinary Market Segment
Gross
profit for the veterinary market segment increased 8%, or $727,000, during
the
three months ended December 31, 2007, as compared to the three months ended
December 31, 2006. Gross profit percentages for the veterinary market segment
during the three months ended December 31, 2007 and 2006 were 52% and 53%,
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 December 31, 2007.
Nine
Months Ended December 31, 2007 Compared to Nine Months Ended December 31,
2006
The
following table presents revenues, cost of revenues, gross profit and percentage
of revenues by operating segments for the nine months ended December 31,
2007
and 2006:
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
December
31,
|
|
Change
|
|
|
|
|
|
Percent
of
|
|
|
|
Percent
of
|
|
Increase/
|
|
Percent
|
|
|
|
2007
|
|
Revenues
(1)
|
|
2006
|
|
Revenues
(1)
|
|
(Decrease)
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Market
|
|
$
|
16,455,000
|
|
|
100
|
%
|
$
|
12,506,000
|
|
|
100
|
%
|
$
|
3,949,000
|
|
|
32
|
%
|
Percentage
of total revenues
|
|
|
22
|
%
|
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
Veterinary
Market
|
|
|
52,498,000
|
|
|
100
|
%
|
|
47,013,000
|
|
|
100
|
%
|
|
5,485,000
|
|
|
12
|
%
|
Percentage
of total revenues
|
|
|
71
|
%
|
|
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
|
Unallocated
amounts
|
|
|
4,860,000
|
|
|
|
|
|
3,894,000
|
|
|
|
|
|
966,000
|
|
|
25
|
%
|
Percentage
of total revenues
|
|
|
7
|
%
|
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
73,813,000
|
|
|
|
|
|
63,413,000
|
|
|
|
|
|
10,400,000
|
|
|
16
|
%
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Market
|
|
|
8,194,000
|
|
|
50
|
%
|
|
6,088,000
|
|
|
49
|
%
|
|
2,106,000
|
|
|
35
|
%
|
Veterinary
Market
|
|
|
23,525,000
|
|
|
45
|
%
|
|
21,330,000
|
|
|
45
|
%
|
|
2,195,000
|
|
|
10
|
%
|
Unallocated
amounts
|
|
|
1,612,000
|
|
|
|
|
|
1,421,000
|
|
|
|
|
|
191,000
|
|
|
13
|
%
|
Total
cost of revenues
|
|
|
33,331,000
|
|
|
|
|
|
28,839,000
|
|
|
|
|
|
4,492,000
|
|
|
16
|
%
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Market
|
|
|
8,261,000
|
|
|
50
|
%
|
|
6,418,000
|
|
|
51
|
%
|
|
1,843,000
|
|
|
29
|
%
|
Veterinary
Market
|
|
|
28,973,000
|
|
|
55
|
%
|
|
25,683,000
|
|
|
55
|
%
|
|
3,290,000
|
|
|
13
|
%
|
Unallocated
amounts
|
|
|
3,248,000
|
|
|
|
|
|
2,473,000
|
|
|
|
|
|
775,000
|
|
|
31
|
%
|
Gross
profit
|
|
$
|
40,482,000
|
|
|
|
|
$
|
34,574,000
|
|
|
|
|
$
|
5,908,000
|
|
|
17
|
%
|
(1)
The
percentage reported is based on revenues by operating segment.
Medical
Market
Revenues
for
Medical Market Segment
During
the
nine
months
ended December 31, 2007, total revenues in the medical market increased 32%,
or
$3,949,000, as compared to the nine months ended December 31, 2006. Components
of the change were as follows:
Instruments.
Total
revenues from our Piccolo chemistry analyzers increased 39%, or $2,010,000,
during the nine months ended December 31, 2007, as compared to the nine months
ended December 31, 2006. We sold a total of 593 Piccolo chemistry analyzers
during the nine months ended December 31, 2007, as compared to 461 Piccolo
chemistry analyzers sold during the nine months ended December 31, 2006.
The
changes in revenues were attributed to (a) an increase in revenues in North
America (excluding the U.S. government) of 32%, or $1,280,000, primarily
due to
increased sales to distributors; (b) an increase in revenues in
Europe
of
152%,
or
$652,000, primarily due to increased sales to distributors; and (c) an increase
in revenues in Asia Pacific and rest of the world of 500%, or $100,000. The
increase in revenues was partially offset by a decrease in Piccolo chemistry
analyzers sold to the U.S. government of 3%, or $22,000.
Reagent
discs.
Total
revenues from reagent discs sold in the medical market increased 26%, or
$1,775,000,
during
the nine months ended December 31, 2007, as compared to the nine months ended
December 31, 2006. We sold 928,000 medical reagent discs during the nine
months
ended December 31, 2007, as compared to 741,000 medical reagent discs sold
during the nine months ended December 31, 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 36%, or $1,571,000;
(b) an increase in revenues in Europe of 45%, or $262,000; and (c) an increase
in revenues in Asia Pacific and rest of the world of 77%, or $49,000. The
increase in revenues was partially offset by a decrease in medical reagent
discs
sold to the U.S. government of 6%, or $107,000.
Gross
Profit for Medical Market Segment
Gross
profit for the medical market segment increased 29%, or $1,843,000, during
the
nine months ended December 31, 2007, as compared to the nine months ended
December 31, 2006. Gross profit percentages for the medical market segment
during the nine months ended December 31, 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 nine months ended December 31, 2007
and
(b) higher average selling prices of Piccolo chemistry analyzers and medical
reagent discs during the nine months ended December 31, 2007.
Veterinary
Market
Revenues
for
Veterinary Market Segment
During
the
nine
months ended December 31, 2007, total revenues in the veterinary market
increased 12%, or $5,485,000, as compared to the nine months ended December
31,
2006. Components of the change were as follows:
Instruments.
We sold
a total of 1,735 VetScan chemistry analyzers and hematology instruments during
the nine months ended December 31, 2007, as compared to 1,896 veterinary
instruments sold during the nine months ended December 31, 2006. The primary
factors of the change were as follows:
(i)
Sales
of our VetScan chemistry analyzers decreased 27%, or $2,827,000, comprised
of
(a) a decrease in revenues in North America of 28%, or $2,041,000, primarily
due
to a shift in our sales and marketing focus from an instrument only emphasis
to
a focus on both instrument and reagent discs as a result of the manufacturing
issues that we experienced in previous quarters and (b) a decrease in revenues
in Asia Pacific and rest of the world of 69%, or $791,000, 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
revenues in Europe of 1%, or $5,000.
(ii)
Sales of our hematology instruments increased 24%, or $1,469,000, comprised
of
(a) an increase in revenues in North America of 30%, or $1,556,000, primarily
due to the release of the VetScan HM5 in September 2007 and (b) an increase
in
revenues in Europe of 21%, or $64,000. The increase in revenues was partially
offset by a decrease in revenues in Asia Pacific and rest of the world of
27%,
or $151,000, 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 hematology reagent kits sold in the veterinary
market increased 23%, or $6,840,000, during the nine months ended December
31,
2007, as compared to the nine months ended December 31, 2006. The primary
factors of the change were as follows:
(i)
Total
revenues from reagent discs sold in the veterinary market increased 25%,
or
$6,729,000, during the nine months ended December 31, 2007, as compared to
the
nine months ended December 31, 2006. We sold 2,666,000 veterinary reagent
discs
during the nine months ended December 31, 2007, as compared to 2,228,000
veterinary reagent discs sold during the nine months ended December 31, 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 26%, or $5,688,000
and (b) an increase in revenues in Europe of 26%, or $1,072,000. The increase
was partially offset by a decrease in revenues in Asia Pacific and rest of
the
world of 2%, or $31,000.
(ii)
Total revenues from hematology reagent kits sold in the veterinary market
increased 4%, or $111,000, during the nine months ended December 31, 2007,
as
compared to the nine months ended December 31, 2006. The increase in revenues
from hematology reagent kits was attributed to (a) an increase in revenues
in
North America of 8%, or $179,000, partially offset by (b) a decrease in revenues
in Europe of 3%, or $5,000 and (c) a decrease in revenues in Asia Pacific
and
rest of the world of 41%, or $63,000.
Gross
Profit for Veterinary Market Segment
Gross
profit for the veterinary market segment increased 13%, or $3,290,000, during
the nine months ended December 31, 2007, as compared to the
nine
months
ended December 31, 2006. Gross profit percentage for the veterinary market
segment during each of the nine months ended December 31, 2007 and 2006 was
55%.
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
nine months ended December 31, 2007, partially offset by (b) a decrease in
VetScan chemistry analyzers sold during the nine months ended December 31,
2007
and (c) higher manufacturing costs on the VetScan VS2 chemistry analyzers
during
the nine months ended December 31, 2007.
Cost
of Revenues
The
following sets forth, for the periods indicated, our
cost
of
revenues
:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
December
31,
|
|
Change
|
|
December
31,
|
|
Change
|
|
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
Cost
of revenues
|
|
$
|
12,081,000
|
|
$
|
10,439,000
|
|
$
|
1,642,000
|
|
|
16
|
%
|
$
|
33,331,000
|
|
$
|
28,839,000
|
|
$
|
4,492,000
|
|
|
16
|
%
|
Percentage
of total revenues
|
|
|
47
|
%
|
|
47
|
%
|
|
|
|
|
|
|
|
45
|
%
|
|
45
|
%
|
|
|
|
|
|
|
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 Nine Months Ended December 31, 2007 Compared to Three and Nine Months
Ended
December 31, 2006
The
increase in cost of revenues, in absolute dollars, during the three and nine
months ended December 31, 2007, as compared to the three and nine months
ended
December 31, 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
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
December
31,
|
|
Change
|
|
December
31,
|
|
Change
|
|
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
Research
and development expenses
|
|
$
|
1,629,000
|
|
$
|
1,495,000
|
|
$
|
134,000
|
|
|
9
|
%
|
$
|
5,104,000
|
|
$
|
4,731,000
|
|
$
|
373,000
|
|
|
8
|
%
|
Percentage
of total revenues
|
|
|
6
|
%
|
|
7
|
%
|
|
|
|
|
|
|
|
7
|
%
|
|
7
|
%
|
|
|
|
|
|
|
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 Nine Months Ended December 31, 2007 Compared to Three and Nine Months
Ended
December 31, 2006
The
increase in research and development expenses, in absolute dollars, during
the
three and nine months ended December 31, 2007, as compared to the three and
nine
months ended December 31, 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 during the three months ended December 31, 2007 and 2006, was $39,000
and $32,000, respectively, and during the nine months ended December 31,
2007
and 2006, was $110,000 and $90,000, 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
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
December
31,
|
|
Change
|
|
December
31,
|
|
Change
|
|
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
Sales
and marketing expenses
|
|
$
|
6,056,000
|
|
$
|
5,302,000
|
|
$
|
754,000
|
|
|
14
|
%
|
$
|
17,666,000
|
|
$
|
15,306,000
|
|
$
|
2,360,000
|
|
|
15
|
%
|
Percentage
of total revenues
|
|
|
24
|
%
|
|
24
|
%
|
|
|
|
|
|
|
|
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 Nine Months Ended December 31, 2007 Compared to Three and Nine Months
Ended
December 31, 2006
The
increase in sales and marketing expenses, in absolute dollars, during the
three
and nine months ended December 31, 2007, as compared to the three and nine
months ended December 31, 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 during
the
three months ended December 31, 2007 and 2006, was $91,000 and $75,000,
respectively, and during the nine months ended December 31, 2007 and 2006,
was
$259,000 and $228,000, respectively.
General
and Administrative
The
following sets forth, for the periods indicated, our
general
and administrative
expenses:
|
|
Three
Months Ended
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
December
31,
|
|
Change
|
|
December
31,
|
|
Change
|
|
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
General
and administrative expenses
|
|
$
|
1,571,000
|
|
$
|
1,262,000
|
|
$
|
309,000
|
|
|
24
|
%
|
$
|
4,760,000
|
|
$
|
4,232,000
|
|
$
|
528,000
|
|
|
12
|
%
|
Percentage
of total revenues
|
|
|
6
|
%
|
|
6
|
%
|
|
|
|
|
|
|
|
6
|
%
|
|
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 Nine Months Ended December 31, 2007 Compared to Three and Nine Months
Ended
December 31, 2006
The
increase in general and administrative expenses, in absolute dollars, during
the
three and nine months ended December 31, 2007, as compared to the three and
nine
months ended December 31, 2006, was primarily due to an increase in
personnel-related costs, which includes share-based compensation expense.
Share-based compensation during the three months ended December 31, 2007
and
2006, was $122,000 and $85,000, respectively, and during the nine months
ended
December 31, 2007 and 2006, was $374,000 and $235,000, 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
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
December
31,
|
|
Change
|
|
December
31,
|
|
Change
|
|
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
|
|
|
Increase/
|
|
Percent
|
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Change
|
|
Interest
and other income (expense), net
|
|
$
|
552,000
|
|
$
|
491,000
|
|
$
|
61,000
|
|
|
12
|
%
|
$
|
1,580,000
|
|
$
|
1,194,000
|
|
$
|
386,000
|
|
|
32
|
%
|
Interest
and other income (expense), net, consists primarily of interest income earned
on
cash, cash equivalents and short-term investments.
Three
and Nine Months Ended December 31, 2007 Compared to Three and Nine Months
Ended
December 31, 2006
The
increase in interest and other income (expense), net, during the three and
nine
months ended
December
31
,
2007,
as compared to the three and nine months ended December 31, 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
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Income
tax provision
|
|
$
|
1,700,000
|
|
$
|
1,235,000
|
|
$
|
5,341,000
|
|
$
|
4,208,000
|
|
Effective
tax rate
|
|
|
35
|
%
|
|
31
|
%
|
|
37
|
%
|
|
37
|
%
|
Three
and Nine Months Ended December 31, 2007 Compared to Three and Nine Months
Ended
December 31, 2006
The
increase in the effective tax rate for the three months ended December 31,
2007,
as compared to the three months ended December 31, 2006, was primarily due
to
the retroactive extension of the federal research and development tax credit
in
the three months ended December 31, 2006, which temporarily expired during
the
first six months of fiscal 2007, partially offset by a change in our investment
portfolio resulting in a tax benefit in the three months ended December 31,
2007.
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
December 31, 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 nine months ended December 31, 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 December 31, 2007 and March 31, 2007 were as follows:
|
|
December
31,
|
|
March
31,
|
|
|
|
2007
|
|
2007
|
|
Cash
and cash equivalents
|
|
$
|
11,792,000
|
|
$
|
10,183,000
|
|
Short-term
investments
|
|
|
43,966,000
|
|
|
35,028,000
|
|
Total
cash, cash equivalents and short-term investments
|
|
$
|
55,758,000
|
|
$
|
45,211,000
|
|
Percentage
of total assets
|
|
|
48
|
%
|
|
44
|
%
|
Cash
Flow Changes
Cash
provided (used) in the nine months ended December 31, 2007 and 2006 were
as
follows:
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Net
cash provided by operating activities
|
|
$
|
10,621,000
|
|
$
|
10,547,000
|
|
Net
cash used in investing activities
|
|
|
(11,460,000
|
)
|
|
(9,006,000
|
)
|
Net
cash provided by financing activities
|
|
|
2,448,000
|
|
|
3,298,000
|
|
Net
increase in cash and cash equivalents
|
|
$
|
1,609,000
|
|
$
|
4,839,000
|
|
At
December
31
,
2007,
we had net working capital of $85,457,000 compared to $74,517,000 at March
31,
2007. Cash and cash equivalents at
December
31
,
2007
were $11,792,000, 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 nine months ended December 31, 2007, we generated $10,621,000 in cash
from
operating activities. The cash provided by operating activities during the
nine
months ended December 31, 2007 was primarily the result of net income of
$9,191,000, adjusted for the effects of non-cash adjustments including
depreciation and amortization of $2,563,000 and share-based compensation
expense
of $831,000, partially offset by a decrease of $270,000 related to excess
tax
benefits from share-based awards and a decrease in net deferred tax assets
of
$4,689,000.
Our
net
trade receivables increased by $3,933,000, from $16,929,000 at March 31,
2007 to
$20,862,000 as of December 31, 2007, primarily due to higher sales in the
last
month of the quarter ended December 31, 2007. Net inventories increased by
$3,207,000, from $14,813,000 at March 31, 2007 to $18,020,000 as of December
31,
2007, primarily due to instrument manufacturing problems associated with
new
chemistry analyzers. Prepaid expenses decreased by $644,000, from $1,321,000
at
March 31, 2007 to $677,000 as of December 31, 2007, primarily due to the
timing
of payments. Current net deferred tax asset decreased by $4,846,000, from
$8,979,000 at March 31, 2007 to $4,133,000 as of December 31, 2007, primarily
as
a result of the utilization of federal net operating loss carryforwards and
California research and development tax credit carryforwards during the nine
months ended December 31, 2007.
Accounts
payable increased by $542,000, from $6,505,000 at March 31, 2007 to $7,047,000
as of December 31, 2007, primarily due to the timing and payment of services
and
inventory purchases. Accrued payroll and related expenses decreased by $243,000,
from $3,830,000 at March 31, 2007 to $3,587,000 as of December 31, 2007,
primarily due to a decrease in accrued bonus resulting from lower results
than
plan during the three months ended December 31, 2007. Total warranty reserves
increased by $806,000, resulting from an increase in the current portion
of
warranty reserves of $842,000, from $315,000 at March 31, 2007 to $1,157,000
as
of December 31, 2007, partially offset by a decrease in the non-current portion
of warranty reserves of $36,000, from $532,000 at March 31, 2007 to $496,000
as
of December 31, 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 $171,000, resulting from a decrease in the current portion
of deferred revenue of $137,000, from $917,000 at March 31, 2007 to $780,000
as
of December 31, 2007, and a decrease in the non-current portion of deferred
revenue of $34,000, from $1,244,000 at March 31, 2007 to $1,210,000 as of
December 31, 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 nine months ended
December
31
,
2007
totaled $11,460,000. 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 auction rate securities,
certificate of deposits, corporate debt securities and municipal bonds, totaled
$41,742,000 during the nine months ended December 31, 2007. Cash provided
by
proceeds from maturities of short-term investments totaled $32,804,000 during
the
nine
months
ended December 31, 2007.
Property
and Equipment
.
Cash
used to purchase property and equipment totaled $2,522,000 during the nine
months ended December 31, 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
nine
months
ended
December
31
,
2007
totaled $2,448,000, primarily consisting of $2,288,000 from proceeds from
stock
options exercises and $
270,000
from excess tax benefits from share-based awards
,
partially offset by $110,000 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 7.00% at
December
31,
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 December 31, 2007.
At
December
31, 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 December
31,
2007 and 2006 were 7.27% and 8.00%, respectively.
The
line
of credit agreement contains certain financial covenants, which are evaluated
on
a quarterly basis. At December 31, 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
$100.3 million at December 31, 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.