-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OoDLWqUhJykzBxl+eunACEXEPXXclxRsdfJEoTDHod2YooTcAupJlM0hTvb7aFsG q41fluNL2vMDm5Q/wQtfFg== 0000891618-98-004939.txt : 19981118 0000891618-98-004939.hdr.sgml : 19981118 ACCESSION NUMBER: 0000891618-98-004939 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABAXIS INC CENTRAL INDEX KEY: 0000881890 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 770213001 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19720 FILM NUMBER: 98749836 BUSINESS ADDRESS: STREET 1: 1320 CHESAPEAKE TERRACE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087340200 MAIL ADDRESS: STREET 2: 1320 CHESAPEAKE TERRACE CITY: SUNNYVALE STATE: CA ZIP: 94089 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 000-19720 ABAXIS, INC. (Exact name of registrant as specified in its charter) California 77-0213001 (State or other jurisdiction of (I.R.S. Employer incorporation or organization ) Identification No.) 1320 Chesapeake Terrace Sunnyvale, California 94089 (Address of principal executive offices) Telephone: (408) 734-0200 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), Yes [X] No and (2) has been subject to such filing requirements for the 90 days. Yes [X] No At November 11, 1998, 13,882,980 shares of common stock, no par value, were outstanding. This Report on Form 10-Q consists of 14 pages. The exhibit index is on page 13. 2 TABLE OF CONTENTS
PAGE ---- ITEM Facing Sheet ........................................................................ 1 Table of Contents ................................................................... 2 Part I. Financial Information Item 1. Financial Statements: Condensed Statements of Operations - Three Months and Six Months Ended September 30, 1998 and 1997 3 Condensed Balance Sheets -September 30, 1998 and March 31, 1998 4 Condensed Statements of Cash Flows - Six Months Ended September 30, 1998 and 1997 ............... 5 Notes to Condensed Financial Statements ........................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 8 Part II. Other Information Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 12 Item 6. Exhibits and Reports on Form 8-K ............................... 13 Signatures ..................................................... 14
2 3 PART 1-FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ABAXIS, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Revenues: Product sales, net $ 3,382,000 $ 3,205,000 $ 6,629,000 $ 5,885,000 Development and licensing revenue 101,000 83,000 133,000 156,000 ------------ ------------ ------------ ------------ Total revenues 3,483,000 3,288,000 6,762,000 6,041,000 ------------ ------------ ------------ ------------ Costs and operating expenses: Cost of product sales 2,431,000 2,866,000 5,029,000 5,461,000 Research and development 712,000 368,000 1,233,000 743,000 Selling, general, and administrative 1,363,000 1,172,000 2,616,000 2,388,000 ------------ ------------ ------------ ------------ Total costs and operating expenses 4,506,000 4,406,000 8,878,000 8,592,000 ------------ ------------ ------------ ------------ Loss from operations (1,023,000) (1,118,000) (2,116,000) (2,551,000) Interest income (expense), net (6,000) 85,000 31,000 143,000 Other income (expense) -- -- -- (1,000) ------------ ------------ ------------ ------------ Net loss $ (1,029,000) $ (1,033,000) $ (2,085,000) $ (2,409,000) ============ ============ ============ ============ Basic and diluted loss per share (a) $ (0.07) $ (0.15) $ (0.15) $ (0.27) ------------ ------------ ------------ ------------ Shares used in calculating loss per share - basic and diluted 13,883,000 11,886,987 13,669,000 11,886,570 ============ ============ ============ ============
(a) Loss attributable to common shareholders used in computation of loss per share for the six months ended September 30, 1998 was $(2,096,000). Loss attributable to common shareholders used in computation of loss per share for the three and six months ended September 30, 1997 was $(1,783,000) and $(3,159,000), respectively. See Note 3 of Notes to Condensed Financial Statements. See notes to condensed financial statements. 3 4 ABAXIS, INC. CONDENSED BALANCE SHEETS
September 30, 1998 March 31, 1998 (unaudited) (Note 1) ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 2,745,000 $ 1,701,000 Short-term investments 1,499,000 4,196,000 Trade and other receivables 2,078,000 1,930,000 Interest receivable 10,000 130,000 Inventories 2,074,000 1,531,000 Prepaid expenses 178,000 150,000 ------------ ------------ Total current assets 8,584,000 9,638,000 Property and equipment - net 2,642,000 2,309,000 Deposits and other assets 197,000 85,000 ------------ ------------ Total assets 11,423,000 12,032,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 723,000 $ 1,510,000 Accrued payroll and related expenses 730,000 769,000 Other accrued liabilities 253,000 392,000 Warranty reserve 714,000 707,000 Deferred rent 64,000 68,000 Current portion of note payable 593,000 174,000 Short-term debt 1,034,000 Deferred revenue 259,000 266,000 ------------ ------------ Total current liabilities 4,370,000 3,886,000 Note payable 1,218,000 263,000 Commitments and contingencies Shareholders' equity: Convertible preferred stock, no par value: authorized shares - -- 2,429,000 5,000,000; issued and outstanding shares - none on September 30, 1998 and 2,623 on March 31, 1998 Common stock, no par value: 35,000,000 authorized; issued and 63,578,000 61,112,000 outstanding shares - 13,882,980 on September 30, 1998 and 12,187,620 on March 31, 1998 Accumulated deficit (57,743,000) (55,658,000) ------------ ------------ Total shareholders' equity 5,835,000 7,883,000 Total liabilities and shareholders' equity $ 11,423,000 $ 12,032,000 ============ ============
See notes to condensed financial statements. Note 1 - Amounts are derived from audited financial statements. 4 5 ABAXIS, INC CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended September 30, ------------------------------ 1998 1997 ----------- ----------- Operating activities: Net loss $(2,085,000) $(2,409,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 346,000 370,000 Write-down of capital equipment 12,000 50,000 Changes in assets and liabilities: Trade and other receivables (148,000) 111,000 Interest receivable 120,000 (16,000) Inventories (543,000) 885,000 Prepaid expenses (28,000) (35,000) Deposits and other assets (112,000) (8,000) Accounts payable (787,000) 642,000 Accrued payroll and related expenses (39,000) 173,000 Other accrued liabilities (139,000) 291,000 Warranty reserve 7,000 197,000 Deferred revenue and other (11,000) 15,000 ----------- ----------- Net cash provided by (used in) operating activities (3,407,000) 266,000 Investing activities: Purchase of available-for-sale securities (2,474,000) (8,920,000) Maturities of available-for-sale securities 5,171,000 5,200,000 Purchase of property and equipment (691,000) (290,000) Net cash provided by (used in) investing activities 2,006,000 (4,010,000) Financing activities: Proceeds from issuance of common stock 37,000 2,000 Proceeds from issuance of preferred stock -- 2,732,000 Net proceeds from equipment financing 1,457,000 513,000 Repayment of equipment financing (83,000) -- Net proceeds from note payable 1,034,000 -- ----------- ----------- Net cash provided by financing activities 2,445,000 3,247,000 Increase (decrease) in cash and cash equivalents 1,044,000 (497,000) Cash and cash equivalents at beginning of period 1,701,000 1,436,000 ----------- ----------- Cash and cash equivalents at end of period $ 2,745,000 $ 939,000 =========== =========== Supplemental disclosures of cash flow information: Interest paid $ 60,000 $ 32,000 Noncash financing activities: Conversion of preferred stock into common stock $ 2,440,000 -- Accretion of preferred stock $ 11,000 --
See notes to condensed financial statements 5 6 ABAXIS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report to Shareholders for the fiscal year ended March 31, 1998. The unaudited condensed financial statements included herein reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the periods presented. Certain amounts as presented in the March 31, 1998 financial statements have been reclassified to conform to the fiscal year 1999 financial statement presentation. The results for the periods presented are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 1999 or for any future period. 2. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. The Company has not yet determined its reporting segments. Adoption of this statement will not impact the Company's financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. The Company will adopt this statement in its financial statements for the year ending March 31, 1999. In June 1998, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", (SFAS 133) which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that entities recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Adoption of this statement is not expected to have a material impact on the Company's financial position, results of operations or cash flows. The Company will adopt SFAS 133 in its financial statements in the first quarter of the fiscal year ending March 31, 2000. 3. PER SHARE INFORMATION The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128) in the third quarter of fiscal 1998 and has restated earnings per share (EPS) data for prior periods to conform with current presentation. SFAS 128 requires a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution from securities and other contracts, which are exercisable or convertible into common shares. As a result of operating losses, there is no difference between the basic and diluted calculations of EPS. Loss attributable to common shareholders includes the accretion relating to the calculated imbedded yield representing the discount on the assumed potential conversion of the preferred stock issued by the Company. 6 7 The reconciliation of net loss to net loss attributable to common shareholders is as follows:
Three months ended Six months ended September 30, September 30, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net loss $(1,029,000) $(1,033,000) $(2,085,000) $(2,409,000) Value assigned to accretion of preferred stock -- (750,000) (11,000) ( 750,000) ----------- ----------- ----------- ----------- Loss attributable to common shareholders $(1,029,000) $(1,783,000) $(2,096,000) $(3,159,000) =========== =========== =========== ===========
4. INVENTORY Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:
SEPTEMBER 30, 1998 MARCH 31, 1998 ------------------ -------------- Raw materials $1,057,000 $ 909,000 Work-in-process 461,000 261,000 Finished goods 556,000 361,000 ---------- ---------- $2,074,000 $1,531,000 ========== ==========
5. EQUITY FINANCING On July 18, 1997, RGC International Investors LDC and Advantage Fund Ltd., each of which is an accredited investor as defined in Regulation D pursuant to the Securities Act of 1933, as amended (the "Securities Act") to the best knowledge of the Company, purchased from the Company 3,000 shares of Series B Convertible Preferred Stock at a price per share of $1,000, with net proceeds to the Company of approximately $2,732,000. The shares which were sold in this private offering transaction under Rule 506 and/or Section 4(2) of the Securities Act have not been registered with the Securities and Exchange Commission and carry a restrictive legend. The Series B Preferred Stock is convertible to the Company's common stock. The Company filed a registration statement on Form S-3 on September 29, 1997 to register the resale of the common stock issuable upon conversion of the preferred stock. The registration was declared effective on October 30, 1997. As of June 30, 1998, all shares of Series B Preferred Stock were converted into a total of 1,903,502 shares of common stock. 6. COMPREHENSIVE INCOME In the first quarter of fiscal year 1999, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which requires an enterprise to report, by major components and as a single total, the change in net assets during the period from non-owner sources. For the six months ended September 30, 1998 and 1997, comprehensive income was the same as net income attributable to common shareholders. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. In this report, the words "anticipates", "believes", "expects", "future", "intends", "plans", and similar expressions identify forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties, including but not limited to those discussed below, that could cause actual results to differ materially from historical results or those anticipated. Such risks and uncertainties include market acceptance of the Company's products and continuing development of its products, including obtaining required Food and Drug Administration ("FDA") clearance and other government approvals, risks associated with manufacturing and distributing products on a commercial scale, including complying with Federal and state food and drug regulations and general market conditions and competition. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Abaxis develops, manufactures and markets portable blood analysis systems for use in any patient-care setting to provide clinicians with rapid blood constituent measurements. The Company's products consist of a compact 6.9 kilogram analyzer and a series of single-use plastic disks called reagent discs that contain all the chemicals required to perform a panel of up to 12 tests. The system can be operated with minimal training and performs multiple routine tests on whole blood using either venous or fingerstick samples. The system provides test results in less than 15 minutes with the precision and accuracy equivalent to a clinical laboratory. The Company currently markets this system for veterinary use under the name VetScan(R) and in the human market under the name Piccolo(R). During the quarter ended September 30, 1998, the Company shipped 216 point-of-care blood chemistry analyzers and approximately 182,000 reagent discs compared to 281 analyzers and 112,000 reagent discs during the quarter ended September 30, 1997. Through September 30, 1998, the Company has placed a total of 2,600 units of the point-of-care blood chemistry analyzer worldwide. Reagent disc shipments have increased each quarter consistent with the Company's belief that there will be recurring reagent disc revenue as the Company's product lines mature. This growth is mostly attributable to the expanded installed base of VetScan systems and higher consumption rates of institutional users. There can be no assurance this growth will continue. Eighty-six percent (86%) of reagent disc shipments in the second quarter of fiscal 1999 were for veterinary applications. Product sales in North America accounted for 78%, international sales accounted for 13% and Orbos contract revenue accounted for 6% of total revenues for the second quarter of fiscal 1999. Internationally (outside of North America), sales to Asia (primarily Japan) constituted 31% and sales to Europe constituted 69% of the total international sales during the quarter. The Company believes that economic conditions and currency rates in Asia have resulted in a decreased demand for point-of-care blood chemistry. The Company continues to develop new products that the Company believes will provide further opportunities for market penetration. The Company is working on the development of four-electrolyte test methods: total carbon dioxide, chloride, potassium and sodium. Clinical trials of these test methods have begun and are expected to be completed during the fourth quarter of fiscal 1999. The chloride test's performance in the clinic was below the expectations of the Company. Additional development work will have to be completed prior to completing additional clinical studies. Additional future test methods development for other disc products will be targeted at specific applications based on fulfilling clinical needs. The Company's current focus of test methods development is in clinical chemistry. In addition to clinical chemistry, the Company has demonstrated its ability to perform immunoassay tests in its blood analysis system by successfully developing its Thyroxine (T4) test for the veterinary market. The Company believes other homogeneous immunoassay methods can be performed in its discs to measure a wide assortment of low concentration blood analytes, such as therapeutic drugs and drugs of abuse. The Company is not currently developing additional immunoassay methods. There can be no assurance that Abaxis will be able to develop any of these potential products. While the Company believes that its technology will allow it to develop reagent disc products in the future to provide a variety of additional blood tests, there can be no 8 9 assurance that such future products will be developed, that such products will receive required regulatory clearance, or that the Company will be able to manufacture or market such products successfully. Sales for any future periods are not predictable with a significant degree of certainty. The Company generally operates with limited order backlog because its products typically are shipped shortly after orders are received. The Company's expense levels, which are to a large extent fixed, are based in part on its expectations as to future revenues. Accordingly the Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, any such shortfall would have an immediate materially adverse impact on operating results and financial condition. The Company's periodic operating results have in the past varied and in the future may vary significantly depending on a number of factors including, but not limited to, the level of competition; the size and timing of sales orders; market acceptance of current and new products; new product announcements by the Company or its competitors; changes in pricing by the Company or its competitors; the ability of the Company to develop, introduce and market new products on a timely basis; component costs and supply constraints; manufacturing capacities and ability to scale up production; the mix of product sales between the analyzers and the reagent discs; the mix in sales channels; levels of expenditure on research and development; changes in Company strategy; personnel changes; regulatory changes; and general economic trends. The Company believes that period to period comparisons of its results of operations are not necessarily meaningful. The Company continues to explore the application of its proprietary technology used to produce the dry reagents used in the reagent discs, called the Orbos Discrete Lyophilization Process, to other companies' products. This process allows the production of an accurate, precise amount of active chemical ingredients in the form of a soluble bead. The Company believes that the Orbos process has broad applications in products where delivery of active ingredients in a stable, pre-metered format is desired. The Company has contracts with Becton Dickinson Immunocytometry Systems and Pharmacia Biotech, Inc. to either supply products or license Orbos technology. The Company is currently working with other companies to determine potential suitability of the Orbos technology to these companies' products. As resources permit, the Company will pursue other development, licensing or manufacturing agreement opportunities for its Orbos technology with other companies. There can be no assurances, however, that other applications will be identified or that additional agreements with the Company will result. RESULTS OF OPERATIONS REVENUES During the three-month period ended September 30, 1998, the Company reported total revenues of approximately $3,483,000 ($3,382,000 in product revenue and $101,000 in Orbos contract and licensing revenue), a $195,000 or 6% increase as compared to total revenues of approximately $3,288,000 ($3,205,000 in product revenue and $83,000 in Orbos contract revenue) for the same period in fiscal 1998. The increase in revenue for the quarter ended September 30, 1998 compared to the quarter ended September 30, 1997 primarily was due to total sales in the domestic veterinary market, which increased 100%, and the European market, which increased 125%. These increases were offset by declines in the Asian market of 80% and sales to the U.S. military of 97%. The decline in the Asian market was due primarily to economic conditions in that market and unfavorable currency rates. The Company believes that revenues in the Asian market will not recover to previous levels until economic conditions and currency rates improve. The decline in the U.S. military revenues was due to significant instrument sales during the quarter ended September 30, 1997 that fulfilled the Company's current contract obligations to the U.S. Navy. The Company does not expect significant new purchases by the U.S. military until the Company completes development and obtains regulatory approval for the new electrolyte tests. During the six-month period ended September 30, 1998, the Company reported total revenues of approximately $6,762,000 ($6,629,000 in product revenue and $133,000 in Orbos contract and licensing revenue), a $721,000 or 12% increase as compared to total revenues of approximately $6,041,000 ($5,885,000 in product revenue and $156,000 in Orbos contract revenue) for the same period in fiscal 1998. The increase in revenue for the six months ended September 30, 1998 compared to the quarter ended September 30, 1997 primarily was due to total sales in the domestic veterinary market, which increased 72% and the European market which increased 57%. These increases were offset by declines in the Asian market of 49% and sales to the U.S. military of 90%. 9 10 COST OF PRODUCT SALES Cost of product sales during the quarter ended September 30, 1998, was approximately $2,431,000, or 70% of total revenues, as compared to approximately $2,866,000, or 87% of total revenues, for the quarter ended September 30, 1997. Cost of product sales during the six months ended September 30, 1998, was approximately $5,029,000, or 74% of total revenues, as compared to approximately $5,461,000, or 90% of total revenues for the six months ended September 30, 1997. The decrease in cost of product sales as a percentage of total revenues is due to lower unit costs resulting from better standardized manufacturing processes and economies of scale related to increased manufacturing volume. The gross margin on the Company's consumable reagent disc sales continued to increase during the quarter ended September 30, 1998 to 20% of net rotor sales compared to a negative 31% gross margin in the quarter ended September 30, 1997. There can be no assurance that the Company will continue to maintain or improve gross margin in future quarters. RESEARCH AND DEVELOPMENT Research and development expenses during the second quarter of fiscal 1999 were approximately $712,000, or 20% of total revenues. Second quarter fiscal 1999 research and development expenses increased $344,000 or 93% from research and development expenses of approximately $368,000, or 11% of total revenues, for the same period in fiscal 1998. Research and development expenses during the six months ended September 30, 1998 were approximately $1,233,000, or 18% of total revenues. During the six months ended September 30, 1998 research and development expenses increased $490,000 or 66% from research and development expenses of approximately $743,000, or 12% of total revenues, for the same period in fiscal 1998. The increase is the result of the Company's development of new test methods to expand its test menus, as well as other development projects and increased expenses to support regulatory and quality assurance projects. The Company expects research and development expenses to increase at a slower rate during the third quarter of fiscal 1999 as compared to the second quarter of fiscal 1999, particularly those expenses associated with clinical trials of new test methods. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses totaled approximately $1,363,000 or 39% of total revenues for the three-month period ended September 30, 1998, representing a $191,000 or 16% increase from selling, general and administrative expenses of approximately $1,172,000 or 36% of total revenues for the three-month period ending September 30, 1997. Selling, general and administrative expenses totaled approximately $2,616,000 or 39% of total revenues for the six-month period ended September 30, 1998, representing a $228,000 or 10% increase from selling, general and administrative expenses of approximately $2,388,000 or 40% of total revenues for the six-month period ending September 30, 1997. This increase is the result of additional expenses associated with staffing, travel and advertising to support sales and marketing activities. During the remaining quarters of fiscal 1999, the Company expects total selling, general and administrative expenses to increase as compared to total selling, general and administrative expenses for the first and second quarters of fiscal 1999 due to an increase in selling expenses related to increasing the number of territories in the United States. NET INTEREST INCOME (EXPENSE) Net interest income (expense) totaled approximately ($6,000) for the quarter ended September 30, 1998, compared to $85,000 in the comparable quarter of fiscal 1998. Net interest (expense) income totaled approximately ($31,000) for the six months ended September 30, 1998, compared to $143,000 in the comparable period of fiscal 1998. The decrease in interest income was primarily the result of decreased investment levels and higher interest expense due to higher loan balances outstanding. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1998, the Company had approximately $4,244,000 in cash, cash equivalents and short-term investments. The Company expects to incur substantial additional costs to support its future operations, including further 10 11 commercialization of its products and development of new test methods that will allow the Company to further penetrate the human diagnostic market; acquisition of capital equipment for the Company's manufacturing facilities, which includes the ongoing construction and implementation of an automated manufacturing line to provide capacity for commercial volumes; costs related to continuing development of its current and future products; and additional pre-clinical testing and clinical trials for its current and future products. The Company's new automated disc assembly line was delivered and installed during July 1998. The Company estimates the final cost of this new assembly line will be approximately $1,500,000 of which approximately $1,457,000 was paid through September 30, 1998. In April 1997, in anticipation of taking delivery of the automated assembly line, the Company arranged for an equipment financing loan of up to $2,000,000, with 36 monthly payments, and a final balloon payment equal to 10% of the original principal amount. The equipment-financing loan is collateralized by the Company's equipment and bears interest at approximately 16%. In April 1997, the Company borrowed $600,000 against this loan and in August 1998, the Company borrowed the remaining $1,400,000. Additional manufacturing equipment will also need to be added during fiscal 1999 to provide additional production capabilities. In July 1998, the Company signed a commitment letter for an additional $1,000,000 financing loan for equipment to be purchased during fiscal 1999. The terms of the equipment financing are 36 monthly payments with a final balloon payment equal to 10% of the original principal amount. The equipment-financing loan is collateralized by the Company's equipment and bears interest at approximately 16%. Additionally, inventories and receivables related to the commercialization of the VetScan and Piccolo systems could increase significantly in future periods, which would require significant capital resources. In August 1998 the Company signed an accounts receivable line of credit of $2,500,000. This line is secured by the Company's accounts receivable, the term is for one year and the interest is 2.5% over the prime rate. As of September 30, 1998, $1,034,000 has been borrowed against the credit line. Net cash used in operating activities during the six months ended September 30, 1998 was approximately $3,407,000 compared to net cash provided by operating activities of approximately $266,000 for the same period ended September 30, 1997. The increase in net cash used in operating activities was due to increases in receivables and inventories and decreases in accounts payable, accrued payroll, other accrued liabilities and deferred revenue, offset by a decrease in net loss. Net cash provided by investing activities during the six months ended September 30, 1998 was approximately $2,006,000, compared to approximately $4,010,000 used in investing activities during the six months ended September 30, 1997. The change from net cash used in investing activities in the six months ended September 30, 1997 to net cash used by investing activities in the six months ended September 30, 1998 was primarily the result of an increase in maturities of short-term investments, offset by an increase in property and equipment primarily related to the new automated assembly line. Net cash provided by financing activities for the six month period ended September 30, 1998 was approximately $2,445,000 compared to approximately $3,247,000 net cash provided by financing activities for the same period in fiscal 1998. Net cash provided by financing activities in fiscal 1998 was due to the net proceeds received from the issuance of preferred stock. Net cash provided by financing activities during fiscal 1999 resulted from proceeds from the equipment and accounts receivable debt financing offset by repayment on the equipment loan. The Company anticipates that its existing capital resources, debt financing and anticipated revenue from the sales of its products will be adequate to satisfy its currently planned operating and financial requirements through fiscal 1999. The Company's future capital requirements will largely depend upon the increased market acceptance of its point-of-care blood chemistry analyzer products. However, the Company's sales are not predictable due to its limited market experience with its products. In the event the sales are significantly below the anticipated level or there are other unexpected adverse developments affecting cash flow, the Company will need to obtain additional equity or debt financing if it is to sustain its currently planned level of operating expenses during fiscal 1999 and beyond. In the event that the Company is unsuccessful in raising sufficient funding, the Company will have to significantly reduce its operating expenses and curtail operations. There can be no assurance that any such financing will be available, and any additional equity financing may be dilutive to shareholders, while debt financing may involve restrictive covenants. 11 12 YEAR 2000 PREPAREDNESS Readiness The Company has identified the following areas where efforts are underway to resolve year 2000 issues: (i) internal information technology (IT) systems, (ii) the Piccolo and VetScan instruments the Company markets, (iii) test equipment used in research and development, and (iv) third party vendors who do business with the Company. The Company has upgraded the internal IT systems to the vendors' specifications for year 2000 compliance. The IT systems will be tested over the next two quarters to determine that the IT systems are working within the specifications. The Company's Piccolo and VetScan systems were designed for year 2000 compliance. Tests have been completed on the systems that confirm year 2000 compliance. The Company intends to address year 2000 issues regarding its test equipment used in research and development and third party vendors who do business with the Company in the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000. Costs Aggregate costs for year 2000 efforts in fiscal 1999 and 2000 currently are anticipated to be less than $1.0 million, including approximately $50,000 expensed in the six months ended September 30, 1998 for software and consulting services. The remaining estimated costs for year 2000 issues are expected to be consulting services which will be expensed in the period they occur. Risks The Company is presently unable to assess the likelihood that the Company will experience significant operational problems due to unresolved year 2000 problems of third parties that do business with the Company. There can be no assurance that other entities will achieve timely year 2000 compliance; if they do not, year 2000 problems could have a material adverse impact on the Company's operations. Contingency Plans The Company presently believes that the most reasonably likely worst-case scenario that the Company might confront with respect to year 2000 issues has to do with failure at one or more of the Company's distributors over which the Company has no control. For example, if one or more of the Company's distributors were unable to ship product to the end-user, the Company would have to take orders and ship direct to the end-user customers. There are policies and procedures in place for direct shipment to the end user as the Company currently ships product directly to some national accounts. Should this worst case scenario occur, the Company would have to increase headcount in a number of operating areas, such as customer service, shipping and accounting. There can be no assurance that the Company can increase the operating capacity in a timely manner and there can be no assurance that these additional operating expenses would not have a material adverse financial impact on the Company. PART II-OTHER INFORMATION ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to financial market risks with respect to interest rates on the Company's accounts receivable line of credit and short-term investments. The Company does not use derivative financial instruments for speculative or trading purposes. The accounts receivable line of credit monthly interest expense is based on 2.5% over the prime rate. An increase in the prime rate would expose the Company to higher interest expenses. The balance on the line of credit was $1,034,000 as of September 30, 1998. For each 1% increase in the prime rate the Company would pay approximately $3,500 of additional interest expense each quarter. The Company has investments in marketable debt securities that are subject to interest rate risks. These investments are classified as "available for sale" securities. The Company does not attempt to reduce or eliminate its market exposure on these investments. Although changes in interest rates may affect the fair market value of "available for sale" securities and cause unrealized gains or losses, such gains or losses would not be realized unless the investments were sold. As of September 30, 1998, the amount of short-term investments was $1,499,000. Any change in interest rates would cause an immaterial gain or loss. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits included herein (numbered in accordance with Item 601 of Regulation S-K)
Exhibit Number Description -------------- ----------- 27.0 Financial Data Schedule
(b) Reports on Form 8-K None 12 13 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ABAXIS, INC. November 14, 1998 by: /s/Clinton H. Severson Date Clinton H. Severson President and Chief Executive Officer (Principal Executive Officer) November 14, 1998 by: /s/ Donald J. Stewart Date Donald J. Stewart Vice President of Finance & Administration and Chief Financial Officer (Principal Financial and Accounting Officer) 13 14 INDEX TO EXHIBITS
Exhibit Number Description - ------ ----------- 27.0 Financial Data Schedule
EX-27.0 2 FINANCIAL DATA SCHEDULE
5 1 3-MOS MAR-31-1998 JUL-01-1998 SEP-30-1998 2,745,000 1,499,000 2,088,000 0 2,074,000 8,584,000 2,642,000 0 11,423,000 4,370,000 0 0 0 63,578,000 0 11,423,000 3,382,000 3,483,000 2,431,000 4,506,000 0 0 6,000 (1,029,000) 0 (1,029,000) 0 0 0 (1,029,000) (0.07) (0.07)
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