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 our current views with respect to future events and financial performance. In this report, the words “will,” “anticipates,” “believes,” “expects,” “intends,” “plans,” “future,” “projects,” “estimates,” “would,” “may,” “could,” “should,” “might,” 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 Part I, Item 1A of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”), that could cause actual results to differ materially from historical results or those anticipated. Such risks and uncertainties relate to the vulnerability of our manufacturing operations to potential interruptions and delays, fluctuations in our quarterly results of operations and difficulty in predicting future results, our dependence on certain sole or limited source suppliers, market acceptance of our products and services and the continuing development of our products and services, protection of Abaxis’ intellectual property or claims of infringement of intellectual property asserted by third parties, risks involved in carrying of inventory, development of our sales, marketing and distribution experience, and our ability to attract, train and retain competent sales personnel, general market conditions, competition and other risks detailed under “Risk Factors” in this Quarterly Report on Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We assume no obligation to update any forward-looking statements as circumstances change.
BUSINESS OVERVIEW
Company Description
Abaxis, Inc. 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. In October 2011, Abaxis also began providing veterinary reference laboratory diagnostic and consulting services for veterinarians through Abaxis Veterinary Reference Laboratories (“AVRL”).
Our corporate headquarters are located in Union City, California, from which we conduct our manufacturing, warehousing, research and development, regulatory, sales and marketing and administrative activities. We market and sell our products worldwide by maintaining direct sales forces and through independent distributors. Our sales force is primarily located in the United States. Abaxis Europe GmbH, our wholly-owned subsidiary in Germany since July 2008, markets and distributes diagnostic systems for medical and veterinary uses in the European market.
Financial Results.
In the third quarter of fiscal 2013, total revenues were $49.8 million, an increase of 32% over last year’s comparable quarter. The growth included increases in both revenues from instrument sales, which were $14.0 million, an increase of 54% when compared to last year’s quarter, and revenues from consumable sales, which were $32.8 million, an increase of 22% when compared to last year’s quarter. These increases were primarily attributable to initial stocking orders by our two new distributors during the third quarter of fiscal 2013, Abbott Point of Care Inc. (“Abbott”) for our medical products and MWI Veterinary Supply, Inc. (“MWI”) for our veterinary products, to support their marketing and sales efforts commencing in January 2013. Gross profit in the third quarter of fiscal 2013 was $26.1 million, an increase of 27% over last year’s comparable quarter primarily attributable to changes in the product mix in our veterinary market.
Sales and marketing expenses were $12.4 million in the third quarter of fiscal 2013 and $9.9 million for the same period last year, an increase of $2.5 million, or 25%. The increase in sales and marketing expenses was primarily due to costs associated with the restructuring of our sales and marketing personnel in the medical market resulting from our distribution agreement with Abbott, which we entered into in October 2012 and increased costs related to headcount and promotional and marketing spending to support the ongoing growth of our veterinary business in North America. General and administrative expenses were $2.2 million in the third quarter of fiscal 2013 and $3.3 million for the same period last year, a decrease of 33%, primarily due to higher legal expenses incurred last year related to pursuing a patent infringement case, which we resolved in September 2012.
Net income in the third quarter of fiscal 2013 was $5.0 million, an increase of $2.1 million from $2.9 million for the same period last year, due primarily to an increase in total revenues. Our diluted earnings per share increased to $0.22 in the third quarter of fiscal 2013 from $0.13 in the third quarter of fiscal 2012.
Cash, cash equivalents and investments increased by $809,000 during the nine months ended December 31, 2012 to a total of $91.8 million at December 31, 2012. The primary source of cash and cash equivalents during the nine months ended December 31, 2012 was operating cash flows of $26.1 million. Key non-operating uses of cash during the nine months ended December 31, 2012 included the payment of a special cash dividend of $1.00 per share, totaling $22.0 million to shareholders of record on December 17, 2012.
Products and Services.
We manage our business in two operating segments, the medical market and veterinary market, as described below. See “Segment Results” in this section for a detailed discussion of financial results.
Medical Market
.
We serve a worldwide customer group in the medical market consisting of military installations (ships, field hospitals and mobile care units), physicians’ office practices across all specialties, urgent care, outpatient and walk-in clinics (free-standing or hospital-connected), health screening operations, home care providers (national, regional or local), nursing homes, ambulance companies, oncology treatment clinics, dialysis centers, pharmacies and hospital laboratories. Starting in the first quarter of fiscal 2013, we also began to serve the pharmaceutical clinical trial market. As of January 2013, pursuant to our Exclusive Agreement (the “Abbott Agreement”) with Abbott, Abbott has the exclusive right to sell and distribute in the United States and China (including Hong Kong) our Piccolo Xpress chemistry analyzer and associated consumables in the professionally-attended human healthcare market in this territory, excluding sales and distribution to Catapult Health LLC and specified customer segments, including pharmacy and retail store clinics, shopping malls and contract research organizations (CROs) and cruise ship lines. We maintain the right to sell and distribute these products outside of this territory. Under the Abbott Agreement, we have certain responsibilities for providing technical support and warranty services to Abbott in support of its marketing and sales efforts. The initial term of the Abbott Agreement ends on December 31, 2017, and after the initial term, the Abbott Agreement renews automatically for successive one-year periods unless terminated by either party based upon a notice of non-renewal six months prior to the then-current expiration date.
The products manufactured and sold in the medical market segment primarily consist of Piccolo chemistry analyzers and medical reagent discs. The Piccolo chemistry analyzers provide on the spot routine multi-chemistry and electrolyte results using a small patient sample size in any treatment setting. The Piccolo profiles are used with the Piccolo chemistry analyzers and are packaged as single-use medical reagents, configured to aid in disease diagnosis or monitor disease treatment.
Veterinary Market
.
Our VetScan products serve a worldwide customer group in the veterinary market consisting of companion animal hospitals, animal clinics with mixed practices of small animals, birds and reptiles, equine and bovine practitioners, veterinary emergency clinics, veterinary referral hospitals, universities, government, pharmaceutical companies, biotechnology companies and private research laboratories. Our product and service offerings in the veterinary market are described as follows:
Point-of-Care Blood Chemistry Analyzers
. The products manufactured and sold in this segment primarily consist of VetScan chemistry analyzers and veterinary reagent discs. The VetScan is a chemistry, electrolyte, immunoassay and blood gas analyzer that delivers results from a sample of whole blood, serum or plasma. The VetScan profiles are packaged as single-use plastic veterinary reagent discs. Each reagent disc contains a diluent and all the profiles necessary to perform a complete multi-chemistry blood analysis.
Hematology
. We offer two types of VetScan hematology instruments and related reagent kits, the VetScan HM5 and VetScan HM2. The VetScan HM5 is a fully automated five-part cell counter offering a comprehensive 22-parameter complete blood count (“CBC”) analysis, including direct eosinophil counts and eosinophil percentage, specifically designed for veterinary applications. The VetScan HM2 is a fully automated three-part cell counter offering an 18-parameter CBC analysis, including a 3-part white blood cell differential (lymphocytes, monocytes and granulocytes).
VS
pro
Specialty
. We offer two tests, coagulation and fibrinogen testing, which are used with the VS
pro
specialty analyzer. The VetScan VS
pro
coagulation tests assist in the diagnosis and evaluation of suspected bleeding disorders, toxicity/poisoning, evaluation of disseminated intravascular coagulation, hepatic disease and in monitoring therapy and the progression of disease states. The VetScan VS
pro
Fibrinogen tests provide quantitative in-vitro determination of fibrinogen levels in equine platelet poor plasma from a citrated stabilized whole blood sample.
i-STAT
. The VetScan i-STAT analyzers and related VetScan i-STAT consumables are used to deliver accurate blood gas, electrolyte, chemistry and hematology results in minutes from 2-3 drops of whole blood.
Rapid Tests
. Our VetScan rapid tests include the following: Canine Heartworm Rapid Test, a highly sensitive and specific test for the detection of
Dirofilaria immitis
in canine or feline whole blood, serum or plasma; Canine Lyme Rapid Test, which detects
Borrelia burgdorferi
in canine whole blood, serum or plasma; Canine Parvovirus Rapid Test, a qualitative test for the detection of canine parvovirus antigen in feces; and Giardia Rapid Test, which detects giardiasis, a gastrointestinal infection caused by the protozoan parasite Giardia.
Abaxis Veterinary Reference Laboratories
. During fiscal 2011, we began developing AVRL, a full-service laboratory testing facility, based in Olathe, Kansas. In October 2011, we began providing veterinary reference laboratory diagnostic and consulting services for veterinarians in the United States through AVRL. AVRL also focuses on providing specialty and esoteric testing and analysis. This service complements our full suite of on-site laboratory instrumentation and rapid diagnostics for in hospital routine, critical care and emergency medicine laboratory needs.
Factors that May Impact Future Performance
Our industry is impacted by numerous competitive, regulatory and other significant factors. 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 but not limited to 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. Product sales in any quarter are generally dependent on orders booked and shipped in that quarter. As a result, any such revenues 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 achieve profitability in AVRL 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 condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the Securities and Exchange Commission. 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, 2012.
Revenue Recognition.
Our primary customers are distributors and direct customers in both the medical and veterinary markets. Service revenues are primarily generated from veterinary reference laboratory diagnostic and consulting services for veterinarians. Revenues from product sales and services, net of estimated sales allowances, discounts and rebates, are recognized when (i) evidence of an arrangement exists, (ii) upon shipment of the products or rendering of services 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. From time to time, we offer discounts on AVRL services for a specified period as incentives. Discounts are reductions to invoiced amounts within a specified period and are recorded at the time services are performed. Net service revenues are recognized at the time services are performed.
Amounts collected in advance of revenue recognition are recorded as a current or non-current deferred revenue liability based on the time from the balance sheet date to the future date of revenue recognition. We recognize revenues associated with extended maintenance agreements ratably over the life of the contract.
Multiple Element Revenue Arrangements
.
On April 1, 2011, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2009-13, Multiple-Deliverable Revenue Arrangements, an amendment to Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition (ASU 2009-13). We elected to apply the amendment prospectively to new or materially modified revenue arrangements after its effective date. The FASB amended the accounting standards for certain multiple deliverable revenue arrangements. A multiple-element arrangement includes the sale of one or more tangible product offerings with one or more associated services offerings, each of which are individually considered separate units of accounting. The determination of our units of accounting did not change with the adoption of the new revenue recognition guidance and as such we allocate revenues to each element in a multiple-element arrangement based upon the relative selling price of each deliverable. When applying the relative selling price method, we determine the selling price for each deliverable using vendor-specific objective evidence (“VSOE”) of selling price, if it exists, or third-party evidence (“TPE”) of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use our best estimate of selling price for that deliverable. Revenue allocated to each element is then recognized when all revenue recognition criteria are met for each element.
Our sales arrangements contain multiple element revenue arrangements in which a customer may purchase a combination of instruments, consumables or extended maintenance agreements. Additionally, we provide incentives in the form of free goods or extended maintenance agreements to customers in connection with the sale of our instruments. Pursuant to the guidance of ASU 2009-13, revenues from such sales are allocated separately to the instruments, consumables, extended maintenance agreements and incentives based on the relative selling price method. Amounts allocated to each element are based on its objectively determined fair value, such as the sales price for the product or service when it is sold separately. Revenues allocated to each element are then recognized when the basic revenue recognition criteria, as described above, are met for each element. Revenues associated with incentives in the form of free goods are deferred until the goods are shipped to the customer. Revenues associated with incentives in the form of extended maintenance agreements are deferred and recognized ratably over the life of the maintenance contract. Incentives in the form of extended maintenance agreements are our most significant multiple element arrangement.
Starting in fiscal 2012, we participate in selling arrangements in the veterinary market that include multiple deliverables, such as instruments, consumables and service agreements associated with our veterinary reference laboratory. Under these arrangements, we recognize revenue upon delivery of the product or performance of the service during the term of the service contract when the basic revenue recognition criteria, as described above, is met for each element. We allocate revenues to each element based on the relative selling price of each deliverable. Amounts allocated to each element are based on its objectively determined fair value, such as the sales price for the product or service when it is sold separately.
From time to time, we offer customer incentives comprising of arrangements with customers to include discounts on future sales of services associated with our veterinary reference laboratory. We apply judgment in determining whether future discounts are significant and incremental. When the future discount offered is not considered significant and incremental, we do not account for the discount as an element of the original arrangement. To determine whether a discount is significant and incremental, we look to the discount provided in comparison to standalone sales of the same product to similar customers, the level of discount provided on other elements in the arrangement, and the significance of the discount to the overall arrangement. If the discount in the multiple element arrangement approximates the discount typically provided in standalone sales, that discount is not considered incremental. During the three and nine months ended December 31, 2012, our customer incentive programs with future discounts were not significant.
Customer Programs
.
From time to time, we offer customer marketing and incentive programs. Our most significant customer programs are described as follows:
Instrument Trade-In Programs
. 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 based on the relative selling price method according to the policies described above.
Instrument Rental Programs
. We periodically offer programs to customers whereby certain instruments are made available to customers for rent or on an evaluation basis. These programs typically require customers to purchase a minimum quantity of consumables during a specified period for which we recognize revenues on the related consumables according to the policies described above. Depending on the program offered, customers may purchase the instrument during the rental or evaluation period. Proceeds from such sale are recorded as revenues according to the policies described above. Rental income, if any, are also recorded as revenue according to the policies described above.
Distributor and Customer Rebate Programs
. We periodically offer distributor pricing rebates and customer incentives, such as cash rebates, from time to time. The distributor pricing rebates are offered to distributors upon meeting the sales volume requirements during a qualifying period and are recorded as a reduction to gross revenues during a qualifying period. Cash rebates are offered to distributors or customers who purchase certain products or instruments during a promotional period and are recorded as a reduction to gross revenues.
Royalty Revenues
.
Royalties are typically based on licensees’ net sales of products that utilize our technology and are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured, such as upon the receipt of a royalty statement from the licensee. Our royalty revenue depends on the licensees’ use of our technology, and therefore, may vary from period to period and impact our revenues during a quarter.
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.
Fair Value Measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (“exit price”) in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. As of December 31, 2012, we used Level 1 assumptions for our cash equivalents which are traded in an active market. The valuations are based on quoted prices of the underlying security that are readily and regularly available in an active market, and accordingly, a significant degree of judgment is not required.
Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument. As of December 31, 2012, our available-for-sale investments in certificates of deposits, corporate bonds and municipal bonds, totaled $7.6 million, using Level 2 inputs, based on market pricing and other observable market inputs for similar securities obtained from various third party data providers.
Level 3: Unobservable inputs that are supported by little or no market data and require the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. As of December 31, 2012, we did not have any Level 3 financial assets or liabilities measured at fair value on a recurring basis.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are developed to reflect those that market participants would use in pricing the asset or liability at the measurement date. At December 31, 2012, we also had $36.7 million in investments classified as held-to-maturity and carried at amortized cost.
Investment in Unconsolidated Affiliate.
In February 2011, we purchased a 15% equity ownership interest in Scandinavian Micro Biodevices APS (“SMB”), for $2.8 million in cash. We use the equity method to account for our investment in this entity that we do not control, but where we have the ability to exercise significant influence. Equity method investments are recorded at original cost and adjusted periodically to recognize (1) our proportionate share of the investees’ net income or losses after the date of investment, (2) additional contributions made and dividends or distributions received, and (3) impairment losses resulting from adjustments to net realizable value. We eliminate all intercompany transactions in accounting for our equity method investments. We record our proportionate share of the investees’ net income or losses in “Interest and other income (expense), net” on the consolidated statements of income. At December 31, 2012, our investment in unconsolidated affiliate totaled $2.6 million.
We assess the potential impairment of our equity method investments when indicators such as a history of operating losses, a negative earnings and cash flow outlook, and the financial condition and prospects for the investee’s business segment might indicate a loss in value. To date, since our investment in SMB, we have not recorded an impairment charge on this investment.
Warranty Reserves.
We provide for the estimated future costs to be incurred under our standard warranty obligation on our instruments. Our standard warranty obligation on instruments ranges from one to three years, depending on the type of product. The estimated contractual warranty obligation is recorded when the related revenues are recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. Cost of revenues reflects estimated warranty expense for instruments sold in the current period and any adjustments in estimated warranty expense for the installed base under our standard warranty obligation based on our quarterly evaluation of service experience. While 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 our historical experience as to product failures, estimated product failure rates, estimated repair costs, material usage and freight incurred in repairing the instrument after failure and known design changes under the warranty plan.
A provision for defective reagent discs is recorded when the related sale is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated, at which time they are included in cost of revenues. The warranty cost includes the replacement costs and freight of a defective reagent disc.
As of December 31, 2012, our current portion of warranty reserves for instruments and reagent discs totaled $993,000 and our non-current portion of warranty reserves for instruments totaled $473,000, which reflects our estimate of warranty obligations based on the estimated product failure rates, the number of instruments in standard warranty, estimated repair and related costs of instruments, and an estimate of defective reagent discs and replacement and related costs of a defective reagent disc.
Each quarter, we reevaluate our estimate of warranty reserves, including our assumptions. During the nine months ended December 31, 2012, we recorded an adjustment to pre-existing warranties of $290,000, which reduced our warranty reserves and our cost of revenues, based on both historical and projected product performance rates of instruments.
Management periodically evaluates the sufficiency of the warranty provisions and makes adjustments when necessary. If an unusual performance rate related to warranty claims is noted, an additional warranty accrual may be assessed and recorded when a failure event is probable and the cost can be reasonably estimated. We review the historical warranty cost trends and 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 estimated product failure rate, 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. Additionally, if factors change and we revise our assumptions on the product failure rate of instruments or reagent discs, then our warranty reserves and cost of revenues could be materially impacted in the quarter of such revision, as well as in following quarters.
Inventories.
We state inventories at the lower of cost or market, cost being determined using standard costs which approximate actual costs using 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.
Valuation of Long-Lived Assets.
We evaluate the carrying value of our long-lived assets, such as property and equipment and amortized intangible assets, whenever events or changes in business circumstances or our planned use of long-lived assets indicate that the carrying amount of an asset may not be fully recoverable or their useful lives are no longer appropriate. 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 and long-lived assets are written down to their respective fair values. We did not recognize any impairment charges on long-lived assets during the three or nine months ended December 31, 2012.
Income Taxes.
We account for income taxes using the liability method under which 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 expected to be recovered.
We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50 percent likely to be realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. At December 31, 2012 and March 31, 2012, we had no significant uncertain tax positions. Our policy is to include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes. During the three and nine months ended December 31, 2012 and 2011, we did not recognize any interest or penalties related to uncertain tax positions in the consolidated statements of income, and at December 31, 2012 and March 31, 2012, we had no accrued interest or penalties.
On January 2, 2013, President Barack Obama signed into law The American Taxpayer Relief Act of 2012, which reinstated the federal research and development tax credit retroactive to January 1, 2012 and extended the credit through December 31, 2013. As a result of the new legislation, we expect to recognize a tax benefit of approximately $400,000 during the three months ending March 31, 2013.
Share-Based Compensation Expense.
We account for share-based compensation arrangements using the fair value method. We recognize share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award to employees and directors. As required by fair value provisions of share-based compensation, employee share-based compensation expense recognized is calculated over the requisite service period of the awards and reduced for estimated forfeitures. The forfeiture rate is estimated based on historical data of our share-based compensation awards that are granted and cancelled prior to vesting and upon historical experience of employee turnover. 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.
We have not granted any stock options since the beginning of fiscal 2007 and we did not grant stock options during the three and nine months ended December 31, 2012. We have recognized compensation expense during the requisite service period of the stock option. As of December 31, 2012, we had no unrecognized compensation expense related to stock options granted.
Since fiscal 2007, we grant restricted stock unit awards to employees and directors as part of our share-based compensation program. Equity award grants to consultants were insignificant. Awards of restricted stock units may be either grants of time-based or performance-based restricted stock units that are issued at no cost to the recipient, as described below.
For restricted stock unit awards (time vesting), the fair value of restricted stock unit awards (time vesting) used in our expense recognition method is measured based on the number of shares granted and the closing market price of our common stock on the date of grant. Share-based compensation expense is recognized net of an estimated forfeiture rate, over the requisite service period of the award. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future.
We grant restricted stock unit awards (performance vesting) starting in fiscal 2013. During the first quarter of fiscal 2013, our Board of Directors approved the grant of 84,000 shares of restricted stock unit awards (performance vesting), of which approximately 21,000 shares have been granted. Because each annual performance target is set at the start of each respective single-fiscal year performance period, only 25% of the total restricted stock unit awards (performance vesting) are deemed granted each year over the four-year period in accordance with ASC 718-10-55-95. Accordingly, 75% of the total restricted stock unit awards (performance vesting) approved are not deemed granted for accounting purposes as of December 31, 2012 pursuant to ASC 718-10-55-95. The performance periods for the fiscal 2013 grants run from April 1, 2012 through March 31, 2016, consisting of four one-year performance periods. Approximately 25% of the total 84,000 shares approved by the Board of Directors will be granted each year over such four-year period. Each grant has a vesting term of approximately one year, with vesting based upon: (1) achievement of certain pre-established corporate annual performance-related goals, as established by the Compensation Committee of our Board of Directors; and (2) the grantee’s satisfying service requirements through the vesting period. The fiscal 2013 performance target was established at the grant date following ASC 718-10-55-95 and the aggregate estimated grant date fair value was $752,000 or $35.62 per share based on the closing market price of our common stock on the date of grant. The number of vested restricted stock unit awards (performance vesting) is determined at the end of each annual performance period.
The fair value of our restricted stock unit awards (performance vesting) used in our expense recognition method is measured based on the number of shares granted, the closing market price of our common stock on the date of grant and an estimate of the probability of the achievement of the performance goals. We recognize any related share-based compensation expense ratably over the service period based on the most probable outcome of the performance condition. The amount of share-based compensation expense recognized in any one period can vary based on the attainment or expected attainment of the performance goals. If such performance goals are not ultimately met, no compensation expense is recognized and any previously recognized compensation expense is reversed.
Share-based compensation expense resulted in a material impact on our earnings per share and on our condensed consolidated financial statements for fiscal 2012 and during the three and nine months ended December 31, 2012. The impact of share-based compensation expense on our condensed consolidated financial results is disclosed in Note 10, “Equity Compensation Plans and Share-Based Compensation” in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. We expect that share-based compensation will materially impact our consolidated financial statements in the foreseeable future.
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. In October 2011, Abaxis began providing veterinary reference laboratory diagnostic and consulting services for veterinarians. 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 and Service Category.
Revenues by geographic region based on customer location and revenues by product and service category during the three and nine months ended December 31, 2012 and 2011 were as follows (in thousands, except percentages):
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Three Months Ended
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Nine Months Ended
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December 31,
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Change
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December 31,
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Change
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Revenues by Geographic Region
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2012
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2011
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2012
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2011
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North America
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$
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41,797
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$
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31,847
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$
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9,950
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31
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%
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$
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110,876
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|
|
$
|
93,540
|
|
|
$
|
17,336
|
|
|
|
19
|
%
|
Percentage of total revenues
|
|
|
84
|
%
|
|
|
84
|
%
|
|
|
|
|
|
|
|
|
|
|
81
|
%
|
|
|
82
|
%
|
|
|
|
|
|
|
|
|
Europe
|
|
|
6,197
|
|
|
|
4,516
|
|
|
|
1,681
|
|
|
|
37
|
%
|
|
|
19,906
|
|
|
|
16,326
|
|
|
|
3,580
|
|
|
|
22
|
%
|
Percentage of total revenues
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
15
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
Asia Pacific and rest of the world
|
|
|
1,808
|
|
|
|
1,487
|
|
|
|
321
|
|
|
|
22
|
%
|
|
|
5,292
|
|
|
|
4,012
|
|
|
|
1,280
|
|
|
|
32
|
%
|
Percentage of total revenues
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
49,802
|
|
|
$
|
37,850
|
|
|
$
|
11,952
|
|
|
|
32
|
%
|
|
$
|
136,074
|
|
|
$
|
113,878
|
|
|
$
|
22,196
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
December 31,
|
|
|
Change
|
|
Revenues by Product and Service
Category
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
Instruments(1)
|
|
$
|
13,969
|
|
|
$
|
9,079
|
|
|
$
|
4,890
|
|
|
|
54
|
%
|
|
$
|
35,456
|
|
|
$
|
25,364
|
|
|
$
|
10,092
|
|
|
|
40
|
%
|
Percentage of total revenues
|
|
|
28
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
26
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
Consumables(2)
|
|
|
32,786
|
|
|
|
26,808
|
|
|
|
5,978
|
|
|
|
22
|
%
|
|
|
91,680
|
|
|
|
83,019
|
|
|
|
8,661
|
|
|
|
10
|
%
|
Percentage of total revenues
|
|
|
66
|
%
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
67
|
%
|
|
|
73
|
%
|
|
|
|
|
|
|
|
|
Other products and services(3)
|
|
|
3,009
|
|
|
|
1,925
|
|
|
|
1,084
|
|
|
|
56
|
%
|
|
|
8,825
|
|
|
|
5,372
|
|
|
|
3,453
|
|
|
|
64
|
%
|
Percentage of total revenues
|
|
|
6
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
7
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
Product and service revenues, net
|
|
|
49,764
|
|
|
|
37,812
|
|
|
|
11,952
|
|
|
|
32
|
%
|
|
|
135,961
|
|
|
|
113,755
|
|
|
|
22,206
|
|
|
|
20
|
%
|
Percentage of total revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Development and licensing revenue
|
|
|
38
|
|
|
|
38
|
|
|
|
-
|
|
|
|
0
|
%
|
|
|
113
|
|
|
|
123
|
|
|
|
(10
|
)
|
|
|
(8
|
)%
|
Percentage of total revenues
|
|
<1%
|
|
|
<1%
|
|
|
|
|
|
|
|
|
|
|
<1%
|
|
|
<1%
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
49,802
|
|
|
$
|
37,850
|
|
|
$
|
11,952
|
|
|
|
32
|
%
|
|
$
|
136,074
|
|
|
$
|
113,878
|
|
|
$
|
22,196
|
|
|
|
19
|
%
|
(1)
|
Instruments include chemistry analyzers, hematology instruments, VS
pro
specialty analyzers and i-STAT analyzers.
|
(2)
|
Consumables include reagent discs, hematology reagent kits, VS
pro
cartridges, i-STAT cartridges and rapid tests.
|
(3)
|
Other products and services include veterinary reference laboratory diagnostic and consulting services.
|
Three Months Ended December 31, 2012 Compared to Three Months Ended December 31, 2011
North America
.
During the three months ended December 31, 2012, total revenues in North America increased by 31%, or $10.0 million, as compared to the same period in fiscal 2012. The change in total revenues in North America was primarily attributable to the following:
·
|
Total sales of our Piccolo chemistry analyzers and medical reagent discs in North America (excluding sales to the U.S. government) increased by 19%, or $1.1 million, primarily due to an increase in the sales volume of Piccolo chemistry analyzers and medical reagent discs to our distributor, Abbott, as initial stocking order since we entered into the Abbott Agreement in October 2012.
|
·
|
Total sales of our Piccolo chemistry analyzers and medical reagent discs to the U.S. government decreased by 48%, or $313,000, primarily due to a decrease in the U.S. Military’s needs for our products as a result of U.S. troops leaving Iraq in 2011.
|
·
|
Total sales of our VetScan chemistry analyzers and veterinary reagent discs in North America increased by 37%, or $5.5 million, primarily due to (a) an increase in the sales volume of VetScan chemistry analyzers due in part to additional sales personnel and sales to various distributors, including MWI as initial stocking order since we entered into a distribution agreement in September 2012 and (b) an increase in the sales volume of veterinary reagent discs resulting from an expanded installed base of our VetScan chemistry analyzers.
|
·
|
Total sales of our VetScan hematology instruments and hematology reagent kits in North America increased by 56%, or $2.1 million, primarily due to an increase in the sales volume of VetScan hematology instruments due in part to additional sales personnel and sales to various distributors, including MWI as initial stocking order.
|
·
|
Total sales from our VetScan VS
pro
specialty analyzers and related consumables, VetScan i-STAT analyzers and related consumables and VetScan rapid tests in North America increased by 11%, or $560,000, primarily due to an increase in the sales volume of VetScan VS
pro
specialty analyzers and VetScan i-STAT analyzers, due in part to additional sales personnel and sales to various distributors, including MWI as initial stocking order. The increase in sales was partially offset by a decrease in the sales volume of VetScan rapid tests primarily due to inventory stock adjustments by distributors.
|
·
|
Other product and service revenues in North America increased by 58%, or $1.0 million, primarily due to an increase in service revenues from veterinary reference laboratory diagnostic and consulting services to new customers and increased business with current customers. The increase in other products and services was partially offset by an increase in deferred revenue related to extended maintenance contracts offered to customers from time to time as incentives in the form of free services in connection with the sale of our products.
|
Europe
.
During the three months ended December 31, 2012, total revenues in Europe increased by 37%, or $1.7 million, as compared to the same period in fiscal 2012. Revenues from Piccolo chemistry analyzers and medical reagent discs increased by 5%, or $75,000, primarily due to sales of Piccolo chemistry analyzers to an international medical supplies sourcing and support company to support a pharmaceutical clinical trial conducted by a biotechnology company. Total VetScan chemistry analyzers and veterinary reagent discs sales increased by 63%, or $1.5 million, primarily due to an increase in the sales volume of veterinary reagent discs of 117%, or $1.6 million, primarily resulting from lower inventory purchases by a distributor in the third quarter of fiscal 2012.
Asia Pacific and rest of the world
.
During the three months ended December 31, 2012, total revenues in Asia Pacific and rest of the world increased by 22%, or $321,000, as compared to the same period in fiscal 2012. The increase in total revenues in Asia Pacific and rest of the world was primarily attributable to an increase in sales of VetScan chemistry analyzers and veterinary reagent discs by 41%, or $348,000, primarily due to an increase in the sales volume of VetScan chemistry analyzers and veterinary reagent discs to various distributors.
Significant concentration
.
During the three months ended December 31, 2012, one distributor in the United States, MWI, accounted for 12% of our total worldwide revenues. During the three months ended December 31, 2011, one distributor in the United States, Animal Health International, accounted for 15% of our total worldwide revenues. Animal Health International was formed in 2011 from two animal health companies, which included Walco International, Inc., d/b/a DVM Resources.
Nine Months Ended December 31, 2012 Compared to Nine Months Ended December 31, 2011
North America
.
During the nine months ended December 31, 2012, total revenues in North America increased by 19%, or $17.3 million, as compared to the same period in fiscal 2012. The change in total revenues in North America was primarily attributable to the following:
·
|
Total sales of our Piccolo chemistry analyzers and medical reagent discs in North America (excluding sales to the U.S. government) increased by 6%, or $977,000, primarily due to an increase in the sales volume of Piccolo chemistry analyzers and medical reagent discs to our distributor, Abbott, as initial stocking order since we entered into the Abbott Agreement in October 2012.
|
·
|
Total sales of our Piccolo chemistry analyzers and medical reagent discs to the U.S. government decreased by 47%, or $1.3 million, primarily due to a decrease in the U.S. Military’s needs for our products as a result of U.S. troops leaving Iraq in 2011.
|
·
|
Total sales of our VetScan chemistry analyzers and veterinary reagent discs in North America increased by 21%, or $9.6 million, primarily due to (a) an increase in the sales volume of VetScan chemistry analyzers due in part to additional sales personnel and sales to various distributors, including MWI as initial stocking order, (b) an increase in the sales volume of veterinary reagent discs resulting from an expanded installed base of our VetScan chemistry analyzers and (c) higher average selling prices of VetScan chemistry analyzers and veterinary reagent discs.
|
·
|
Total sales of our VetScan hematology instruments and hematology reagent kits in North America increased by 33%, or $3.6 million, primarily due to an increase in the sales volume of VetScan hematology instruments due in part to additional sales personnel and sales to various distributors, including MWI as initial stocking order.
|
·
|
Total sales from our VetScan VS
pro
specialty analyzers and related consumables, VetScan i-STAT analyzers and related consumables and VetScan rapid tests in North America increased by 8%, or $1.3 million, primarily due to an increase in the sales volume of VetScan VS
pro
specialty analyzers and VetScan i-STAT analyzers, due in part to additional sales personnel and sales to various distributors, including MWI as initial stocking order. The increase in sales was partially offset by a decrease in the sales volume of VetScan rapid tests primarily due to inventory stock adjustments by distributors during the third quarter of fiscal 2013.
|
·
|
Other product and service revenues in North America increased by 64%, or $3.2 million, primarily due to an increase in service revenues from veterinary reference laboratory diagnostic and consulting services to new customers and increased business with current customers. Veterinary reference laboratory diagnostic and consulting services provided by AVRL started in the third quarter of fiscal 2012. The increase in other products and services was partially offset in the third quarter of fiscal 2013 by an increase in deferred revenue related to extended maintenance contracts offered to customers from time to time as incentives in the form of free services in connection with the sale of our products.
|
Europe
.
During the nine months ended December 31, 2012, total revenues in Europe increased by 22%, or $3.6 million, as compared to the same period in fiscal 2012. Revenues from Piccolo chemistry analyzers and medical reagent discs increased by 74%, or $2.7 million, primarily due to (a) sales of Piccolo chemistry analyzers to an international medical supplies sourcing and support company to support a pharmaceutical clinical trial conducted by a biotechnology company and (b) an increase in the sales volume of medical reagent discs to various distributors. Total VetScan chemistry analyzers and veterinary reagent discs sales increased by 5%, or $524,000, primarily due to an increase in the sales volume of veterinary reagent discs to a distributor.
Asia Pacific and rest of the world
.
During the nine months ended December 31, 2012, total revenues in Asia Pacific and rest of the world increased by 32%, or $1.3 million, as compared to the same period in fiscal 2012. Revenues from veterinary instruments increased by 54%, or $647,000, primarily due to an increase in the sales volume of VetScan chemistry analyzers to various distributors. Revenues from veterinary consumables increased by 25%, or $575,000, primarily due to an increase in the sales volume of veterinary reagent discs to various distributors.
Significant concentration
.
During the nine months ended December 31, 2012, one distributor in the United States, Animal Health International, accounted for 11% of our total worldwide revenues. During the nine months ended December 31, 2011, one distributor in the United States, Animal Health International, accounted for 12% of our total worldwide revenues.
Segment Results
Total Revenues, Cost of Revenues and Gross Profit by Segment.
We identify our reportable segments as those customer groups that represent more than 10% of our combined revenue or gross profit or loss of all reported operating segments. We manage our business on the basis of the following two reportable segments: (i) the medical market and (ii) the veterinary market, which are based on the products sold and services provided by market and customer group.
Three Months Ended December 31, 2012 Compared to Three Months Ended December 31, 2011
The following table presents revenues, cost of revenues, gross profit and percentage of revenues by operating segments and from certain unallocated items for the three months ended December 31, 2012 and 2011 (in thousands, except percentages):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2012
|
|
|
Revenues(1)
|
|
|
2011
|
|
|
Revenues(1)
|
|
|
(Decrease)
|
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market
|
|
$
|
8,977
|
|
|
|
100
|
%
|
|
$
|
8,147
|
|
|
|
100
|
%
|
|
$
|
830
|
|
|
|
10
|
%
|
Percentage of total revenues
|
|
|
18
|
%
|
|
|
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Veterinary Market
|
|
|
39,865
|
|
|
|
100
|
%
|
|
|
28,467
|
|
|
|
100
|
%
|
|
|
11,398
|
|
|
|
40
|
%
|
Percentage of total revenues
|
|
|
80
|
%
|
|
|
|
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other(2)
|
|
|
960
|
|
|
|
|
|
|
|
1,236
|
|
|
|
|
|
|
|
(276
|
)
|
|
|
(22
|
)%
|
Percentage of total revenues
|
|
|
2
|
%
|
|
|
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
49,802
|
|
|
|
|
|
|
|
37,850
|
|
|
|
|
|
|
|
11,952
|
|
|
|
32
|
%
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market(3)
|
|
|
4,282
|
|
|
|
48
|
%
|
|
|
3,514
|
|
|
|
43
|
%
|
|
|
768
|
|
|
|
22
|
%
|
Veterinary Market(3)
|
|
|
17,980
|
|
|
|
45
|
%
|
|
|
12,472
|
|
|
|
44
|
%
|
|
|
5,508
|
|
|
|
44
|
%
|
Other(2)(3)
|
|
|
1,464
|
|
|
|
|
|
|
|
1,386
|
|
|
|
|
|
|
|
78
|
|
|
|
6
|
%
|
Total cost of revenues
|
|
|
23,726
|
|
|
|
|
|
|
|
17,372
|
|
|
|
|
|
|
|
6,354
|
|
|
|
37
|
%
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market(3)
|
|
|
4,695
|
|
|
|
52
|
%
|
|
|
4,633
|
|
|
|
57
|
%
|
|
|
62
|
|
|
|
1
|
%
|
Veterinary Market(3)
|
|
|
21,885
|
|
|
|
55
|
%
|
|
|
15,995
|
|
|
|
56
|
%
|
|
|
5,890
|
|
|
|
37
|
%
|
Other(2)(3)
|
|
|
(504
|
)
|
|
|
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
(354
|
)
|
|
|
(236
|
)%
|
Gross profit
|
|
$
|
26,076
|
|
|
|
|
|
|
$
|
20,478
|
|
|
|
|
|
|
$
|
5,598
|
|
|
|
27
|
%
|
(1)
|
The percentages reported are based on revenues by operating segment.
|
(2)
|
Represents unallocated items, not specifically identified to any particular business segment.
|
(3)
|
Includes certain prior period amounts by operating segment and unallocated items that were reclassified to conform to the current period presentation.
|
Medical Market
Revenues for Medical Market Segment
During the three months ended December 31, 2012, total revenues in the medical market increased by 10% or $830,000, as compared to the same period in fiscal 2012. Total revenues from Piccolo chemistry analyzers increased by 21%, or $479,000, during the three months ended December 31, 2012, as compared to the same period in fiscal 2012, primarily attributable to (a) an increase in the sales volume of Piccolo chemistry analyzers in North America to our distributor, Abbott, as initial stocking order since we entered into the Abbott Agreement in October 2012 and (b) sales to an international medical supplies sourcing and support company in Europe to support a pharmaceutical clinical trial conducted by a biotechnology company. These increases were partially offset by a decrease in sales to the U.S. government due to a decrease in the U.S. Military’s needs for our products as a result of U.S. troops leaving Iraq in 2011.
Total revenues from medical reagent discs increased by 6%, or $314,000, during the three months ended December 31, 2012, as compared to the same period in fiscal 2012, primarily attributable to an increase in the sales volume of medical reagent discs in North America to our distributor, Abbott, as initial stocking order.
Gross Profit for Medical Market Segment
Gross profit for the medical market segment was flat during the three months ended December 31, 2012, as compared to the same period in fiscal 2012. Gross profit percentages for the medical market segment during the three months ended December 31, 2012 and 2011 were 52% and 57%, respectively. In absolute dollars, the increase in gross profit for the medical market segment was primarily due to an increase in the sales volume of Piccolo chemistry analyzers and medical reagent discs to Abbott, partially offset by lower average selling prices of Piccolo chemistry analyzers and medical reagent discs to Abbott. As a percentage of total revenues, the decrease in gross profit margin was primarily due to lower average selling prices of medical reagent discs.
Veterinary Market
Revenues for Veterinary Market Segment
During the three months ended December 31, 2012, total revenues in the veterinary market increased by 40%, or $11.4 million, as compared to the same period in fiscal 2012. Total revenues from veterinary instruments increased by 65%, or $4.4 million, during the three months ended December 31, 2012, as compared to the same period in fiscal 2012, primarily attributable to (a) an increase in the sales volume of VetScan chemistry analyzers, VetScan hematology instruments, VetScan VS
pro
specialty analyzers and VetScan i-STAT analyzers in North America, due in part to additional sales personnel and sales to various distributors, including MWI as initial stocking order and (b) an increase in the sales volume of VetScan chemistry analyzers to various distributors in Asia Pacific and rest of the world.
Total revenues from consumables in the veterinary market increased by 27%, or $5.7 million, during the three months ended December 31, 2012, as compared to the same period in fiscal 2012, primarily attributable to (a) an increase in the sales volume of veterinary reagent discs in North America resulting from an expanded installed base of our VetScan chemistry analyzers, (b) an increase in the sales volume of veterinary reagent discs in Europe, primarily resulting from lower inventory purchases by a distributor in the third quarter of fiscal 2012, and (c) an increase in the sales volume of veterinary reagent discs to various distributors in Asia Pacific and rest of the world. These increases were partially offset by a decrease in the sales volume of VetScan rapid tests primarily due to inventory stock adjustments by distributors in North America.
Total revenues from other products and services in the veterinary market increased by $1.3 million, during the three months ended December 31, 2012, as compared to the same period in fiscal 2012, primarily attributable to veterinary reference laboratory diagnostic and consulting services provided by AVRL in North America from sales to new customers and increased business with current customers.
Gross Profit for Veterinary Market Segment
Gross profit for the veterinary market segment increased by 37%, or $5.9 million, during the three months ended December 31, 2012, as compared to the same period in fiscal 2012. Gross profit percentages for the veterinary market segment during the three months ended December 31, 2012 and 2011 were 55% and 56%, respectively. In absolute dollars, the increase in gross profit for the veterinary market segment was primarily attributable to an increase in the sales volume of VetScan chemistry analyzers, VetScan hematology instruments, and veterinary reagent discs, partially offset by a decrease in the sales volume of VetScan rapid tests and an increase in costs of services for veterinary reference laboratory diagnostic and consulting services provided by AVRL. As a percentage of total revenues, the decrease in gross profit margin was primarily due to (a) an increase in the sales volume of our OEM supplied products, which have a lower margin contribution and (b) costs of services for veterinary reference laboratory diagnostic and consulting services provided by AVRL.
Other
Gross profit in our other category decreased by $354,000, during the three months ended December 31, 2012, as compared to the same period in fiscal 2012, primarily attributable to an increase in deferred revenue related to extended maintenance contracts offered to customers as incentives in the form of free goods in connection with the sale of our products.
Nine Months Ended December 31, 2012 Compared to Nine Months Ended December 31, 2011
The following table presents revenues, cost of revenues, gross profit and percentage of revenues by operating segments and from certain unallocated items for the nine months ended December 31, 2012 and 2011 (in thousands, except percentages):
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2012
|
|
|
Revenues(1)
|
|
|
2011
|
|
|
Revenues(1)
|
|
|
(Decrease)
|
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market
|
|
$
|
25,267
|
|
|
|
100
|
%
|
|
$
|
22,636
|
|
|
|
100
|
%
|
|
$
|
2,631
|
|
|
|
12
|
%
|
Percentage of total revenues
|
|
|
19
|
%
|
|
|
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Veterinary Market
|
|
|
107,299
|
|
|
|
100
|
%
|
|
|
87,684
|
|
|
|
100
|
%
|
|
|
19,615
|
|
|
|
22
|
%
|
Percentage of total revenues
|
|
|
79
|
%
|
|
|
|
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other(2)
|
|
|
3,508
|
|
|
|
|
|
|
|
3,558
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
(1
|
)%
|
Percentage of total revenues
|
|
|
2
|
%
|
|
|
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
136,074
|
|
|
|
|
|
|
|
113,878
|
|
|
|
|
|
|
|
22,196
|
|
|
|
19
|
%
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market(3)
|
|
|
11,286
|
|
|
|
45
|
%
|
|
|
10,180
|
|
|
|
45
|
%
|
|
|
1,106
|
|
|
|
11
|
%
|
Veterinary Market(3)
|
|
|
48,582
|
|
|
|
45
|
%
|
|
|
37,893
|
|
|
|
43
|
%
|
|
|
10,689
|
|
|
|
28
|
%
|
Other(2)(3)
|
|
|
4,158
|
|
|
|
|
|
|
|
4,083
|
|
|
|
|
|
|
|
75
|
|
|
|
2
|
%
|
Total cost of revenues
|
|
|
64,026
|
|
|
|
|
|
|
|
52,156
|
|
|
|
|
|
|
|
11,870
|
|
|
|
23
|
%
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market(3)
|
|
|
13,981
|
|
|
|
55
|
%
|
|
|
12,456
|
|
|
|
55
|
%
|
|
|
1,525
|
|
|
|
12
|
%
|
Veterinary Market(3)
|
|
|
58,717
|
|
|
|
55
|
%
|
|
|
49,791
|
|
|
|
57
|
%
|
|
|
8,926
|
|
|
|
18
|
%
|
Other(2)(3)
|
|
|
(650
|
)
|
|
|
|
|
|
|
(525
|
)
|
|
|
|
|
|
|
(125
|
)
|
|
|
(24
|
)%
|
Gross profit
|
|
$
|
72,048
|
|
|
|
|
|
|
$
|
61,722
|
|
|
|
|
|
|
$
|
10,326
|
|
|
|
17
|
%
|
(1)
|
The percentages reported are based on our revenues by operating segment.
|
(2)
|
Represents unallocated items, not specifically identified to any particular business segment.
|
(3)
|
Includes certain prior period amounts by operating segment and unallocated items that were reclassified to conform to the current period presentation.
|
Medical Market
Revenues for Medical Market Segment
During the nine months ended December 31, 2012, total revenues in the medical market increased by 12%, or $2.6 million, as compared to the same period in fiscal 2012. Total revenues from Piccolo chemistry analyzers increased by 44%, or $2.6 million, during the nine months ended December 31, 2012, as compared to the same period in fiscal 2012, primarily attributable to (a) an increase in the sales volume of Piccolo chemistry analyzers in North America to our distributor, Abbott, as initial stocking order since we entered into the Abbott Agreement in October 2012 and (b) sales to an international medical supplies sourcing and support company in Europe to support a pharmaceutical clinical trial conducted by a biotechnology company. These increases were partially offset by a decrease in sales to the U.S. government due to a decrease in the U.S. Military’s needs for our products as a result of U.S. troops leaving Iraq in 2011.
Total revenues from medical reagent discs were flat during the nine months ended December 31, 2012, as compared to the same period in fiscal 2012, primarily attributable to (a) an increase in the sales volume of medical reagent discs in North America to our distributor, Abbott, as initial stocking order and (b) an increase in the sales volume of medical reagent discs to various distributors in Europe. These increases were partially offset by a decrease in sales to the U.S. government due to a decrease in the U.S. Military’s needs for our products as a result of U.S. troops leaving Iraq in 2011.
Gross Profit for Medical Market Segment
Gross profit for the medical market segment increased by 12%, or $1.5 million, during the nine months ended December 31, 2012, as compared to the same period in fiscal 2012. Gross profit percentages for the medical market segment during the nine months ended December 31, 2012 and 2011 were 55% for each respective period. In absolute dollars, the increase in gross profit for the medical market segment was primarily due to (a) sales of Piccolo chemistry analyzers to an international medical supplies sourcing and support company to support a pharmaceutical clinical trial conducted by a biotechnology company and (b) an increase in the sales volume of Piccolo chemistry analyzers to Abbott, partially offset by lower average selling prices of Piccolo chemistry analyzers and medical reagent discs to Abbott.
Veterinary Market
Revenues for Veterinary Market Segment
During the nine months ended December 31, 2012, total revenues in the veterinary market increased by 22%, or $19.6 million, as compared to the same period in fiscal 2012. Total revenues from veterinary instruments increased by 38%, or $7.5 million, during the nine months ended December 31, 2012, as compared to the same period in fiscal 2012, primarily attributable to (a) an increase in the sales volume of VetScan chemistry analyzers, VetScan hematology instruments, VetScan VS
pro
specialty analyzers and VetScan i-STAT analyzers in North America, due in part to additional sales personnel and sales to various distributors, including MWI as initial stocking order, (b) higher average selling prices of VetScan chemistry analyzers in North America, and (c) an increase in the sales volume of VetScan chemistry analyzers to various distributors in Asia Pacific and rest of the world.
Total revenues from consumables in the veterinary market increased by 13%, or $8.8 million, during the nine months ended December 31, 2012, as compared to the same period in fiscal 2012, primarily attributable to (a) an increase in the sales volume of veterinary reagent discs in North America resulting from an expanded installed base of our VetScan chemistry analyzers, (b) higher average selling prices of veterinary reagent discs in North America, (c) an increase in the sales volume of veterinary reagent discs to a distributor in Europe, and (d) an increase in the sales volume of veterinary reagent discs to various distributors in Asia Pacific and rest of the world. These increases were partially offset by a decrease in the sales volume of VetScan rapid tests primarily due to inventory stock adjustments by distributors in North America during the third quarter of fiscal 2013.
Total revenues from other products and services in the veterinary market increased by $3.2 million, during the nine months ended December 31, 2012, as compared to the same period in fiscal 2012, primarily attributable to veterinary reference laboratory diagnostic and consulting services provided by AVRL in North America from sales to new customers and increased business with current customers. Veterinary reference laboratory diagnostic and consulting services provided by AVRL started in the third quarter of fiscal 2012.
Gross Profit for Veterinary Market Segment
Gross profit for the veterinary market segment increased by 18%, or $8.9 million, during the nine months ended December 31, 2012, as compared to the same period in fiscal 2012. Gross profit percentages for the veterinary market segment during the nine months ended December 31, 2012 and 2011 were 55% and 57%, respectively. In absolute dollars, the increase in gross profit for the veterinary market segment was primarily attributable to (a) an increase in the sales volume of VetScan chemistry analyzers, VetScan hematology instruments, and veterinary reagent discs and (b) higher average selling prices of veterinary reagent discs and hematology reagent kits. These increases in gross profit were partially offset by (a) an increase in freight costs to ship products and (b) costs of services for veterinary reference laboratory diagnostic and consulting services provided by AVRL beginning in the third quarter of fiscal 2012. As a percentage of total revenues, the decrease in gross profit margin was primarily due to (a) an increase in the sales volume of our OEM supplied products, which have a lower margin contribution and (b) costs of services for veterinary reference laboratory diagnostic and consulting services provided by AVRL beginning in the third quarter of fiscal 2012.
Other
Gross profit in our other category decreased by $125,000, during the nine months ended December 31, 2012, as compared to the same period in fiscal 2012, primarily attributable to higher costs on materials and overhead allocations on facilities, both related to our instrument repair and support center, which were not allocated to a particular segment.
Cost of Revenues
The following sets forth our cost of revenues for the periods indicated (in thousands, except percentages):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
December 31,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
Change
|
|
Cost of revenues
|
|
$
|
23,726
|
|
|
$
|
17,372
|
|
|
$
|
6,354
|
|
|
|
37
|
%
|
|
$
|
64,026
|
|
|
$
|
52,156
|
|
|
$
|
11,870
|
|
|
|
23
|
%
|
Percentage of total revenues
|
|
|
48
|
%
|
|
|
46
|
%
|
|
|
|
|
|
|
|
|
|
|
47
|
%
|
|
|
46
|
%
|
|
|
|
|
|
|
|
|
Cost of revenues includes the cost of material, costs associated with manufacturing, assembly, packaging, warranty repairs, test and quality assurance for our instruments and consumables and manufacturing overhead, including costs of personnel and equipment associated with manufacturing support. Beginning in the third quarter of fiscal 2012, cost of revenues includes cost of services for veterinary reference laboratory diagnostic and consulting services provided by AVRL.
Three and Nine Months Ended December 31, 2012 Compared to Three and Nine Months Ended December 31, 2011
The increase in cost of revenues, in absolute dollars and as a percentage of revenues, during the three months ended December 31, 2012, as compared to the same period in fiscal 2012, was primarily due to (a) an increase in the sales volume of veterinary instruments, (b) an increase in the sales volume of medical and veterinary reagent discs, and (c) costs of services provided by AVRL.
The increase in cost of revenues, in absolute dollars and as a percentage of revenues, during the nine months ended December 31, 2012, as compared to the same period in fiscal 2012, was primarily due to (a) an increase in the sales volume of medical and veterinary instruments, (b) an increase in the sales volume of veterinary reagent discs, (c) an increase in freight costs to ship products, and (d) costs of services provided by AVRL beginning in the third quarter of fiscal 2012.
Gross Profit
The following sets forth our gross profit for the periods indicated (in thousands, except percentages):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
December 31,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
Change
|
|
Gross profit
|
|
$
|
26,076
|
|
|
$
|
20,478
|
|
|
$
|
5,598
|
|
|
|
27
|
%
|
|
$
|
72,048
|
|
|
$
|
61,722
|
|
|
$
|
10,326
|
|
|
|
17
|
%
|
Gross profit percentage
|
|
|
52
|
%
|
|
|
54
|
%
|
|
|
|
|
|
|
|
|
|
|
53
|
%
|
|
|
54
|
%
|
|
|
|
|
|
|
|
|
Three and Nine Months Ended December 31, 2012 Compared to Three and Nine Months Ended December 31, 2011
Gross profit during the three months ended December 31, 2012 increased by 27%, or $5.6 million, as compared to the same period in fiscal 2012, primarily attributable to the following: (a) an increase in the sales volume of Piccolo chemistry analyzers and medical reagent discs to Abbott and (b) an increase in the sales volume of VetScan chemistry analyzers, VetScan hematology instruments, and veterinary reagent discs. These increases in gross profit were partially offset by (a) lower average selling prices of Piccolo chemistry analyzers and medical reagent discs to Abbott, (b) a decrease in the sales volume of VetScan rapid tests and (c) an increase in costs of services for veterinary reference laboratory diagnostic and consulting services provided by AVRL. As a percentage of total revenues, the decrease in gross profit margin was primarily due to (a) an increase in the sales volume of our OEM supplied products, which have a lower margin contribution and (b) costs of services for veterinary reference laboratory diagnostic and consulting services provided by AVRL.
Gross profit during the nine months ended December 31, 2012 increased by 17%, or $10.3 million, as compared to the same period in fiscal 2012, primarily attributable to the following: (a) sales of Piccolo chemistry analyzers to an international medical supplies sourcing and support company to support a pharmaceutical clinical trial conducted by a biotechnology company, (b) an increase in the sales volume of Piccolo chemistry analyzers to Abbott, (c) an increase in the sales volume of VetScan chemistry analyzers, VetScan hematology instruments, and veterinary reagent discs, and (d) higher average selling prices of veterinary reagent discs and hematology reagent kits. These increases in gross profit were partially offset by (a) lower average selling prices of Piccolo chemistry analyzers and medical reagent discs to Abbott, (b) an increase in freight costs to ship products and (c) costs of services for veterinary reference laboratory diagnostic and consulting services provided by AVRL beginning in the third quarter of fiscal 2012. As a percentage of total revenues, the decrease in gross profit margin was primarily due to (a) an increase in the sales volume of our OEM supplied products, which have a lower margin contribution and (b) costs of services for veterinary reference laboratory diagnostic and consulting services provided by AVRL beginning in the third quarter of fiscal 2012.
Research and Development
The following sets forth our research and development expenses for the periods indicated (in thousands, except percentages):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
December 31,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
Change
|
|
Research and development expenses
|
|
$
|
3,802
|
|
|
$
|
2,634
|
|
|
$
|
1,168
|
|
|
|
44
|
%
|
|
$
|
10,348
|
|
|
$
|
9,096
|
|
|
$
|
1,252
|
|
|
|
14
|
%
|
Percentage of total revenues
|
|
|
8
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
8
|
%
|
|
|
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, clinical trials, product improvements and optimization and enhancement of existing products and expenses related to regulatory and quality assurance. Research and development expenses are primarily based on the project activities planned and the level of spending depends on budgeted expenditures.
Three and Nine Months Ended December 31, 2012 Compared to Three and Nine Months Ended December 31, 2011
The increase in research and development expenses, in absolute dollars, during the three and nine months ended December 31, 2012, as compared to the same period in fiscal 2012, was primarily attributable to new product development and enhancement of existing products in both the medical and veterinary markets. Share-based compensation expense included in research and development expenses during the three months ended December 31, 2012 and 2011 was $300,000 and $226,000, respectively, and during the nine months ended December 31, 2012 and 2011 was $854,000 and $641,000, respectively.
We anticipate research and development expenses for fiscal 2013 to remain consistent as a percentage of total revenues, as we develop 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 or cost effective.
Sales and Marketing
The following sets forth our sales and marketing expenses
for the periods indicated (in thousands, except percentages):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
December 31,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
Change
|
|
Sales and marketing expenses
|
|
$
|
12,373
|
|
|
$
|
9,927
|
|
|
$
|
2,446
|
|
|
|
25
|
%
|
|
$
|
35,647
|
|
|
$
|
28,414
|
|
|
$
|
7,233
|
|
|
|
25
|
%
|
Percentage of total revenues
|
|
|
25
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
26
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
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, services related to customer and technical support and costs associated with advertising and marketing of AVRL.
Three and Nine Months Ended December 31, 2012 Compared to Three and Nine Months Ended December 31, 2011
The increase in sales and marketing expenses, in absolute dollars, during the three and nine months ended December 31, 2012, as compared to the same period in fiscal 2012, was primarily due to (a) costs associated with restructuring our sales and marketing personnel in the medical market resulting from our distribution agreement with Abbott and (b) increased costs related to headcount and promotional and marketing spending to support AVRL and the ongoing growth of our veterinary business in North America. AVRL began providing services starting in the third quarter of fiscal 2012. Share-based compensation expense included in sales and marketing expenses during the three months ended December 31, 2012 and 2011 was $613,000 and $475,000, respectively, and during the nine months ended December 31, 2012 and 2011 was $1.9 million and $1.4 million, respectively.
General and Administrative
The following sets forth our general and administrative expenses for the periods indicated (in thousands, except percentages):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
December 31,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
Change
|
|
General and administrative expenses
|
|
$
|
2,210
|
|
|
$
|
3,280
|
|
|
$
|
(1,070
|
)
|
|
|
(33
|
)%
|
|
$
|
10,153
|
|
|
$
|
11,194
|
|
|
$
|
(1,041
|
)
|
|
|
(9
|
)%
|
Percentage of total revenues
|
|
|
4
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
7
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
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 and legal, and other general and administrative expenses.
Three and Nine Months Ended December 31, 2012 Compared to Three and Nine Months Ended December 31, 2011
General and administrative expenses, in absolute dollars, during the three months ended December 31, 2012, as compared to the same period in fiscal 2012, decreased primarily due to higher legal expenses in the third quarter of fiscal 2012. Share-based compensation expense included in general and administrative expenses during the three months ended December 31, 2012 and 2011 was $638,000 and $624,000, respectively.
General and administrative expenses, in absolute dollars, during the nine months ended December 31, 2012, as compared to the same period in fiscal 2012, decreased primarily due to $1.6 million related to start-up costs incurred to develop AVRL during the first six months of fiscal 2012, partially offset by an increase in share-based compensation expense because forfeiture estimates were adjusted to reflect actual forfeitures when an award vested in the first quarter of fiscal 2013. Share-based compensation expense included in general and administrative expenses during the nine months ended December 31, 2012 and 2011 was $1.9 million and $1.5 million, respectively.
Gain from Legal Settlement
On September 24, 2012 we resolved our patent infringement litigation with Cepheid. As part of the settlement, the parties agreed to terminate all pending and future claims connected with the litigation in exchange for a one-time payment by Cepheid of $17.3 million, which we recognized as an offset to operating expenses during the second quarter of fiscal 2013.
Interest and Other Income (Expense), Net
The following sets forth our interest and other income (expense), net, for the periods indicated (in thousands):
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
December 31,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
Interest and other income (expense), net
|
|
$
|
293
|
|
|
$
|
(91
|
)
|
|
$
|
384
|
|
|
$
|
318
|
|
|
$
|
259
|
|
|
$
|
59
|
|
Interest and other income (expense), net consists primarily of interest earned on cash and cash equivalents and investments, foreign currency exchange gains and losses and our equity in net income (loss) of an unconsolidated affiliate.
Three and Nine Months Ended December 31, 2012 Compared to Three and Nine Months Ended December 31, 2011
The increase in interest and other income (expense), net, during the three months ended December 31, 2012, as compared to the same period in fiscal 2012, was primarily attributable to net favorable foreign currency exchange rates during the third quarter of fiscal 2013.
The increase in interest and other income (expense), net, during the nine months ended December 31, 2012, as compared to the same period in fiscal 2012, was primarily attributable to net favorable foreign currency exchange rates.
Income Tax Provision
The following sets forth our income tax provision for the periods indicated (in thousands, except percentages):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Income tax provision
|
|
$
|
2,996
|
|
|
$
|
1,696
|
|
|
$
|
12,707
|
|
|
$
|
4,892
|
|
Effective tax rate
|
|
|
38
|
%
|
|
|
37
|
%
|
|
|
38
|
%
|
|
|
37
|
%
|
Three and Nine Months Ended December 31, 2012 Compared to Three and Nine Months Ended December 31, 2011
During the three months ended December 31, 2012 and 2011, our income tax provision was $3.0 million, based on an effective tax rate of 38%, and $1.7 million, based on an effective tax rate of 37%, respectively. During the nine months ended December 31, 2012 and 2011, our income tax provision was $12.7 million, based on an effective tax rate of 38%, and $4.9 million, based on an effective tax rate of 37%, respectively. During the three and nine months ended December 31, 2012, our effective tax rates were primarily impacted by higher state tax expense and the expiration of the federal research and development tax credit, as compared to the three and nine months ended December 31, 2011.
On January 2, 2013, President Barack Obama signed into law The American Taxpayer Relief Act of 2012, which reinstated the federal research and development tax credit retroactive to January 1, 2012 and extended the credit through December 31, 2013. As a result of the new legislation, we expect to recognize a tax benefit of approximately $400,000 during the three months ending March 31, 2013.
We did not have any unrecognized tax benefits as of December 31, 2012 and March 31, 2012. During the three and nine months ended December 31, 2012 and 2011, we did not recognize any interest or penalties related to unrecognized tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents and Investments
The following table summarizes our cash, cash equivalents and short-term and long-term investments at December 31, 2012 and March 31, 2012 (in thousands, except percentages):
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2012
|
|
Cash and cash equivalents
|
|
$
|
47,427
|
|
|
$
|
45,843
|
|
Short-term investments
|
|
|
22,644
|
|
|
|
21,689
|
|
Long-term investments
|
|
|
21,712
|
|
|
|
23,442
|
|
Total cash, cash equivalents and investments
|
|
$
|
91,783
|
|
|
$
|
90,974
|
|
Percentage of total assets
|
|
|
47
|
%
|
|
|
50
|
%
|
At December 31, 2012, we had net working capital of $117.8 million compared to $110.0 million at March 31, 2012.
Cash Flow Changes
Cash provided by (used in) operating, investing and financing activities for the nine months ended December 31, 2012 and 2011 were as follows (in thousands):
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Net cash provided by operating activities
|
|
$
|
26,138
|
|
|
$
|
17,339
|
|
Net cash (used in) provided by investing activities
|
|
|
(4,157
|
)
|
|
|
2,935
|
|
Net cash used in financing activities
|
|
|
(20,188
|
)
|
|
|
(28,060
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(209
|
)
|
|
|
(317
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
1,584
|
|
|
$
|
(8,103
|
)
|
Cash and cash equivalents at December 31, 2012 were $47.4 million compared to $45.8 million at March 31, 2012. The increase in cash and cash equivalents during the nine months ended December 31, 2012 was primarily due to net cash provided by operating activities of $26.1 million and proceeds from maturities and redemptions of investments of $18.5 million. The increase was partially offset by purchases of investments of $18.3 million and dividends payment of $22.0 million during the nine months ended December 31, 2012.
Cash Flows from Operating Activities
During the nine months ended December 31, 2012, we generated $26.1 million in cash from operating activities, compared to $17.3 million during the nine months ended December 31, 2011. The cash provided by operating activities during the nine months ended December 31, 2012 was primarily the result of net income of $20.8 million, adjusted for the effects of non-cash adjustments including depreciation and amortization of $4.4 million and share-based compensation expense of $5.3 million, partially offset by a decrease of $1.8 million related to excess tax benefits from share-based awards.
Other changes in operating activities during the nine months ended December 31, 2012 were as follows:
(i) Receivables, net increased by $5.4 million, from $30.7 million at March 31, 2012 to $36.1 million as of December 31, 2012, primarily due to higher sales in the last month of the quarter ended December 31, 2012.
(ii) Inventories increased by $5.5 million, from $19.6 million at March 31, 2012 to $25.1 million as of December 31, 2012, primarily due to an increase in raw materials and finished goods to support future demand.
(iii) Prepaid expenses and other current assets increased by $1.7 million, from $5.4 million at March 31, 2012 to $7.1 million as of December 31, 2012, primarily attributable to the timing of estimated income tax payments.
(iv) Accounts payable increased by $5.1 million, from $6.4 million at March 31, 2012 to $11.5 million as of December 31, 2012, primarily due to the timing and payment of services and inventory purchases.
(v) Accrued payroll and related expenses increased by $2.1 million, from $6.3 million at March 31, 2012 to $8.4 million as of December 31, 2012, primarily due to an increase in accrued payroll as a result of timing of payment obligations.
(vi) Total deferred revenue increased by $1.3 million, resulting from an increase in the current portion of deferred revenue of $176,000, from $1.2 million at March 31, 2012 to $1.4 million as of December 31, 2012, and an increase in the non-current portion of deferred revenue of $1.1 million from $2.4 million at March 31, 2012 to $3.5 million as of December 31, 2012. The increase in deferred revenue balances is due to (a) an increase in extended maintenance contracts offered to customers in the form of free services in connection with the sale of our instruments during the nine months ended December 31, 2012 and (b) selling arrangements offered from time to time in the veterinary market that include multiple deliverables, such as instruments, consumables and service agreements associated with our veterinary reference laboratory. The net increase in deferred revenue was partially offset by deferred revenue recognized ratably over the life of the maintenance contract.
(vii) Total warranty reserves decreased by $380,000, resulting from a decrease in the current portion of warranty reserves of $252,000, from $1.2 million at March 31, 2012 to $993,000 as of December 31, 2012, and a decrease in the non-current portion of warranty reserves of $128,000, from $601,000 at March 31, 2012 to $473,000 as of December 31, 2012. During the nine months ended December 31, 2012, we recorded an adjustment to pre-existing warranties of $290,000, which reduced our warranty reserves and our cost of revenues, based on both historical and projected product performance rates of instruments. Our warranty reserves is primarily based on (a) the number of instruments in standard warranty, estimated product failure rates and estimated repair costs and (b) an estimate of defective reagent discs and replacement costs. Management continually evaluates the sufficiency of the warranty provisions and makes adjustments when necessary. If an unusual performance rate related to warranty claims is noted, an additional warranty accrual may be assessed and recorded when a failure event is probable and the cost can be reasonably estimated.
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; acquisition of capital equipment for our manufacturing facility and costs to operate AVRL. Furthermore, during the nine months ended December 31, 2012, we incurred legal costs related to a patent infringement lawsuit against Cepheid. In the future, we may continue to incur additional legal costs.
Cash Flows from Investing Activities
Net cash used in investing activities during the nine months ended December 31, 2012 totaled $4.2 million, compared to net cash provided by investing activities of $2.9 million during the nine months ended December 31, 2011. Changes in investing activities were as follows:
Investments.
Cash used to purchase investments in certificates of deposits, corporate bonds and municipal bonds totaled $18.3 million during the nine months ended December 31, 2012. Cash provided by proceeds from maturities and redemptions of investments in certificates of deposits, corporate bonds and municipal bonds totaled $18.5 million during the nine months ended December 31, 2012.
Property and Equipment
.
Cash used to purchase property and equipment totaled $4.3 million during the nine months ended December 31, 2012, primarily to support increased capacity requirements in our production line and AVRL operations. We anticipate that we will continue to purchase property and equipment as necessary in the normal course of our business.
Cash Flows from Financing Activities
Net cash used in financing activities during the nine months ended December 31, 2012 totaled $20.2 million, compared to net cash used in financing activities of $28.1 million during the nine months ended December 31, 2011. The changes during the nine months ended December 31, 2012 were primarily due to payments made for tax withholdings related to net share settlements of restricted stock units of $1.6 million and dividends payment of $22.0 million, partially offset by proceeds from the exercise of stock options of $1.6 million and excess tax benefits from share-based awards of $1.8 million. In December 2012, our Board of Directors declared a special cash dividend of $1.00 per share on our outstanding common stock. This dividend, which totaled $22.0 million, was paid on December 28, 2012. Additionally, during the nine months ended December 31, 2012, we did not purchase any shares pursuant to our share repurchase program described below.
Share Repurchase Program
In August 2011, our Board of Directors authorized the repurchase of up to an aggregate of $40.0 million of our common stock. In January 2012, the Board of Directors approved a $15.0 million increase to the Company’s existing share repurchase program, to a total of $55.0 million. Since the share repurchase program began, through December 31, 2012, we have repurchased 1.2 million shares of our common stock at a total cost of $27.3 million. As of December 31, 2012, $27.7 million of our common stock may yet be purchased under such authorization. The repurchases are made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. Repurchased shares are retired. During the three and nine months ended December 31, 2012, we did not repurchase any of our common stock.
Financial Condition
We believe that cash and cash equivalents, investments and expected cash flows from operations will be sufficient to fund our operations, capital requirements and share repurchase program for at least the next twelve months. Our future capital requirements will largely depend upon the increased market acceptance of our point-of-care blood analyzer products and of our Abaxis Veterinary Reference Laboratories. 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.
Contractual Obligations
Purchase Commitments.
In October 2008, we entered into an original equipment manufacturing (“OEM”) agreement with SMB of Denmark to purchase VS
pro
specialty analyzers and related cartridges. Effective January 2011, we amended and restated our OEM agreement, including the terms of our minimum purchase commitments. Under the amended agreement, we committed to purchase a minimum number of VS
pro
specialty analyzers and related cartridges on an annual basis during each calendar year 2011 through 2015. Our purchase obligations in the future may be adjusted if our minimum purchase commitments are not met during a calendar year period. At December 31, 2012, our total remaining outstanding commitment due is approximately $9.4 million.
In December 2011, we executed a term sheet to enter into a development and supply equipment agreement with Diatron MI PLC (“Diatron”) of Hungary to purchase Diatron hematology instruments. Effective July 2012, we entered into a development and supply agreement with Diatron and under the agreement terms, we committed to purchase a minimum number of hematology instruments on an annual basis through fiscal year 2015. At December 31, 2012, our total remaining outstanding commitment due is approximately $7.9 million. Furthermore, at December 31, 2012, we prepaid $1.5 million to Diatron for future purchases of hematology instruments and reagents, which was recorded in prepaid expenses and other currents assets on the consolidated balance sheet. The commitment amount is based on the minimum number of hematology instruments that we are required to purchase, the cost of the instruments and the Euro exchange rate at period-end. Because the exchange rate will fluctuate in the future, the amount of the purchase commitment in dollars will change accordingly.
Notes Payable.
We have a ten year loan agreement with the Community Redevelopment Agency of the City of Union City (“the Agency”) whereby the Agency provides us with an unsecured loan of up to $1.0 million, primarily to purchase capital equipment. The loan was effective January 2011, bears interest at 5.0% and is payable quarterly. As of December 31, 2012, our short-term and long-term notes payable balances were $100,000 and $707,000, respectively, and we recorded the short-term balance in other accrued liabilities on the consolidated balance sheets. The entire outstanding balance of the note shall be payable in full on the earlier of: (i) December 2020, or (ii) the date Abaxis ceases operations in Union City, California. The Agency also has the right to accelerate the maturity date and declare all balances immediately due and payable upon the event of default as defined in the loan agreement. We evaluate covenants in our loan agreement on a quarterly basis, and we were in compliance with such covenants as of December 31, 2012.
In accordance with the terms of the loan agreement, the Agency will provide Abaxis with an annual credit that can be applied against the accrued interest and outstanding principal balance on a quarterly basis. The Agency determines the annual credit based on certain taxes paid by Abaxis to the City of Union City, California for a specified period, as defined in the loan agreement. We anticipate that our annual credits from the Agency will be used to fully repay our notes payable due to the Agency. We may carry forward unused quarterly credits to apply against our outstanding balance in a future period. Credits applied to repay our notes payable and accrued interest are recorded in “Interest and other income (expense), net” on the consolidated statements of income.
Patent Licensing Agreement.
Effective January 2009, we entered into a license agreement with Alere. Under our license agreement, we licensed co-exclusively certain worldwide patent rights related to lateral flow immunoassay technology in the field of animal health diagnostics in the professional marketplace. The license agreement provides that Alere shall not grant any future rights to any third parties under its current lateral flow patent rights in the animal health diagnostics field in the professional marketplace. The license agreement enables us to develop and market products under rights from Alere to address animal health and laboratory animal research markets.
In exchange for the license rights, we (i) paid an up-front license fee of $5.0 million to Alere in January 2009, (ii) agreed to pay royalties during the term of the agreement, based solely on sales of products in a jurisdiction country covered by valid and unexpired claims in that jurisdiction under the licensed Alere patent rights, and (iii) agreed to pay a yearly minimum license fee of between $500,000 to $1.0 million per year, which fee will be creditable against any royalties due during such calendar year. The royalties, if any, are payable through the date of the expiration of the last valid patent licensed under the agreement that includes at least one claim in a jurisdiction covering products we sell in that jurisdiction. The yearly minimum fees became payable starting in fiscal 2011 for so long as we desire to maintain exclusivity under the agreement.
Contingencies
On June 28, 2010, we filed a patent infringement lawsuit against Cepheid. On September 24, 2012, the parties agreed to terminate all pending and future claims connected with the litigation in exchange for a one-time payment by Cepheid of $17.3 million, which we recognized as an offset to operating expenses during the second quarter of fiscal 2013.
On October 1, 2012, St. Louis Police Retirement System, a purported shareholder of Abaxis, filed a lawsuit against certain officers and each of our directors in the United States District Court for the Northern District of California alleging, among other things, that the directors violated Section 14(a) of the Securities Exchange Act of 1934 and breached their fiduciary duties by allegedly failing to disclose material information in our 2010 proxy statement, breached their fiduciary duties by allegedly violating the terms of our 2005 Equity Incentive Plan, and breached their fiduciary duties by failing to disclose alleged material information in our 2012 proxy statement regarding (1) the events leading up to our proposal to amend the 2005 Equity Incentive Plan to eliminate the limit on the number of shares that may be issued pursuant to restricted stock units, and (2) the effects of the proposed amendment on certain settled and outstanding restricted stock units. The plaintiff seeks, among other things, damages, disgorgement and attorney’s fees. In addition, the plaintiff sought, and on October 23, 2012 the court issued, an order preliminarily enjoining our shareholder vote on Proposal 2 in our 2012 proxy statement, regarding an amendment to the 2005 Equity Incentive Plan, until such time as additional disclosures could be made. The Company filed with the SEC and mailed to shareholders supplemental proxy materials approved by the court, the injunction was lifted and our shareholders approved the proposal to amend our 2005 Equity Incentive Plan. The defendants have filed motions to dismiss the claims. A hearing on the motions is currently scheduled for March 5, 2013. Management believes the claims raised by the plaintiff are without merit and intends to contest them vigorously.
We are involved from time to time in various litigation matters in the normal course of business. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.
Off-Balance Sheet Arrangements
As of December 31, 2012, we did not have any off-balance sheet arrangements, as defined in Item 303 of Regulation S-K promulgated under the Securities Act of 1933. In addition, we identified no variable interests in any variable interest entities.
RECENT ACCOUNTING PRONOUNCEMENTS
A discussion of recent accounting pronouncements is included in Note 2 of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.