PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
ABAXIS, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2013
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
71,446
|
|
|
$
|
54,910
|
|
Short-term investments
|
|
|
14,447
|
|
|
|
23,354
|
|
Receivables (net of allowances of $210 at September 30, 2013 and $319 at March 31, 2013)
|
|
|
35,127
|
|
|
|
40,005
|
|
Inventories
|
|
|
27,368
|
|
|
|
26,786
|
|
Prepaid expenses and other current assets
|
|
|
5,808
|
|
|
|
3,319
|
|
Net deferred tax assets, current
|
|
|
4,909
|
|
|
|
4,589
|
|
Total current assets
|
|
|
159,105
|
|
|
|
152,963
|
|
Long-term investments
|
|
|
17,969
|
|
|
|
17,000
|
|
Investment in unconsolidated affiliate
|
|
|
2,629
|
|
|
|
2,613
|
|
Property and equipment, net
|
|
|
25,859
|
|
|
|
25,330
|
|
Intangible assets, net
|
|
|
2,373
|
|
|
|
3,122
|
|
Net deferred tax assets, non-current
|
|
|
649
|
|
|
|
643
|
|
Other assets
|
|
|
81
|
|
|
|
92
|
|
Total assets
|
|
$
|
208,665
|
|
|
$
|
201,763
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,001
|
|
|
$
|
8,123
|
|
Accrued payroll and related expenses
|
|
|
5,507
|
|
|
|
6,261
|
|
Accrued taxes
|
|
|
433
|
|
|
|
440
|
|
Other accrued liabilities
|
|
|
2,378
|
|
|
|
2,838
|
|
Deferred revenue
|
|
|
1,235
|
|
|
|
1,362
|
|
Warranty reserve
|
|
|
872
|
|
|
|
995
|
|
Total current liabilities
|
|
|
17,426
|
|
|
|
20,019
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
751
|
|
|
|
729
|
|
Deferred revenue
|
|
|
4,412
|
|
|
|
3,750
|
|
Warranty reserve
|
|
|
741
|
|
|
|
389
|
|
Notes payable, less current portion
|
|
|
632
|
|
|
|
682
|
|
Total non-current liabilities
|
|
|
6,536
|
|
|
|
5,550
|
|
Total liabilities
|
|
|
23,962
|
|
|
|
25,569
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value: 5,000,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, no par value: 35,000,000 shares authorized; 22,320,000 and 22,120,000 shares issued and outstanding at September 30, 2013 and at March 31, 2013, respectively
|
|
|
122,311
|
|
|
|
121,019
|
|
Retained earnings
|
|
|
62,358
|
|
|
|
55,133
|
|
Accumulated other comprehensive income
|
|
|
34
|
|
|
|
42
|
|
Total shareholders' equity
|
|
|
184,703
|
|
|
|
176,194
|
|
Total liabilities and shareholders' equity
|
|
$
|
208,665
|
|
|
$
|
201,763
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
(In thousands, except share and per share data)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Revenues
|
|
$
|
45,851
|
|
|
$
|
44,258
|
|
|
$
|
89,020
|
|
|
$
|
86,272
|
|
Cost of revenues
|
|
|
23,979
|
|
|
|
21,135
|
|
|
|
46,256
|
|
|
|
40,300
|
|
Gross profit
|
|
|
21,872
|
|
|
|
23,123
|
|
|
|
42,764
|
|
|
|
45,972
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,418
|
|
|
|
3,581
|
|
|
|
6,591
|
|
|
|
6,546
|
|
Sales and marketing
|
|
|
9,902
|
|
|
|
11,505
|
|
|
|
19,930
|
|
|
|
23,274
|
|
General and administrative
|
|
|
2,853
|
|
|
|
4,621
|
|
|
|
5,908
|
|
|
|
7,943
|
|
Gain from legal settlement
|
|
|
-
|
|
|
|
(17,250
|
)
|
|
|
-
|
|
|
|
(17,250
|
)
|
Total operating expenses
|
|
|
16,173
|
|
|
|
2,457
|
|
|
|
32,429
|
|
|
|
20,513
|
|
Income from operations
|
|
|
5,699
|
|
|
|
20,666
|
|
|
|
10,335
|
|
|
|
25,459
|
|
Interest and other income (expense), net
|
|
|
507
|
|
|
|
255
|
|
|
|
911
|
|
|
|
25
|
|
Income before income tax provision
|
|
|
6,206
|
|
|
|
20,921
|
|
|
|
11,246
|
|
|
|
25,484
|
|
Income tax provision
|
|
|
2,210
|
|
|
|
8,012
|
|
|
|
4,021
|
|
|
|
9,711
|
|
Net income
|
|
$
|
3,996
|
|
|
$
|
12,909
|
|
|
$
|
7,225
|
|
|
$
|
15,773
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.18
|
|
|
$
|
0.59
|
|
|
$
|
0.32
|
|
|
$
|
0.72
|
|
Diluted net income per share
|
|
$
|
0.18
|
|
|
$
|
0.58
|
|
|
$
|
0.32
|
|
|
$
|
0.71
|
|
Shares used in the calculation of net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
22,306,000
|
|
|
|
21,920,000
|
|
|
|
22,268,000
|
|
|
|
21,869,000
|
|
Weighted average common shares outstanding - diluted
|
|
|
22,574,000
|
|
|
|
22,306,000
|
|
|
|
22,589,000
|
|
|
|
22,280,000
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
ABAXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Net income
|
|
$
|
3,996
|
|
|
$
|
12,909
|
|
|
$
|
7,225
|
|
|
$
|
15,773
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gain (loss) on investments
|
|
|
8
|
|
|
|
44
|
|
|
|
(14
|
)
|
|
|
38
|
|
Provision (benefit) for income taxes related to items of other comprehensive income
|
|
|
3
|
|
|
|
18
|
|
|
|
(6
|
)
|
|
|
16
|
|
Other comprehensive income (loss), net of tax
|
|
|
5
|
|
|
|
26
|
|
|
|
(8
|
)
|
|
|
22
|
|
Comprehensive income
|
|
$
|
4,001
|
|
|
$
|
12,935
|
|
|
$
|
7,217
|
|
|
$
|
15,795
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
ABAXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In thousands)
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
7,225
|
|
|
$
|
15,773
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,584
|
|
|
|
2,916
|
|
Investment premium amortization, net
|
|
|
322
|
|
|
|
448
|
|
Net loss on disposals of property and equipment
|
|
|
6
|
|
|
|
20
|
|
Net (gain) loss on foreign exchange translation
|
|
|
(406
|
)
|
|
|
292
|
|
Share-based compensation expense
|
|
|
4,102
|
|
|
|
3,511
|
|
Excess tax benefits from share-based awards
|
|
|
(1,729
|
)
|
|
|
(1,145
|
)
|
Provision for deferred income taxes
|
|
|
(428
|
)
|
|
|
(303
|
)
|
Equity in net (income) loss of unconsolidated affiliate
|
|
|
(16
|
)
|
|
|
34
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
4,962
|
|
|
|
(17,691
|
)
|
Inventories
|
|
|
(1,174
|
)
|
|
|
(3,121
|
)
|
Prepaid expenses and other current assets
|
|
|
(699
|
)
|
|
|
3,988
|
|
Other assets
|
|
|
13
|
|
|
|
6
|
|
Accounts payable
|
|
|
(1,126
|
)
|
|
|
1,824
|
|
Accrued payroll and related expenses
|
|
|
(769
|
)
|
|
|
1,736
|
|
Accrued taxes
|
|
|
(17
|
)
|
|
|
3,700
|
|
Other accrued liabilities
|
|
|
(460
|
)
|
|
|
1,118
|
|
Deferred rent
|
|
|
22
|
|
|
|
50
|
|
Deferred revenue
|
|
|
535
|
|
|
|
585
|
|
Warranty reserve
|
|
|
229
|
|
|
|
(366
|
)
|
Net cash provided by operating activities
|
|
|
14,176
|
|
|
|
13,375
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of held-to-maturity investments
|
|
|
(8,036
|
)
|
|
|
(13,961
|
)
|
Proceeds from maturities and redemptions of held-to-maturity investments
|
|
|
15,113
|
|
|
|
11,951
|
|
Proceeds from maturities and redemptions of available-for-sale investments
|
|
|
525
|
|
|
|
249
|
|
Purchases of property and equipment
|
|
|
(2,761
|
)
|
|
|
(2,945
|
)
|
Proceeds from disposals of property and equipment
|
|
|
9
|
|
|
|
-
|
|
Net cash provided by (used in) investing activities
|
|
|
4,850
|
|
|
|
(4,706
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
26
|
|
|
|
261
|
|
Tax withholdings related to net share settlements of restricted stock units
|
|
|
(4,591
|
)
|
|
|
(1,495
|
)
|
Excess tax benefits from share-based awards
|
|
|
1,729
|
|
|
|
1,145
|
|
Net cash used in financing activities
|
|
|
(2,836
|
)
|
|
|
(89
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
346
|
|
|
|
(314
|
)
|
Net increase in cash and cash equivalents
|
|
|
16,536
|
|
|
|
8,266
|
|
Cash and cash equivalents at beginning of period
|
|
|
54,910
|
|
|
|
45,843
|
|
Cash and cash equivalents at end of period
|
|
$
|
71,446
|
|
|
$
|
54,109
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds
|
|
$
|
4,006
|
|
|
$
|
3,308
|
|
Supplemental disclosure of non-cash flow information:
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on investments, net of tax
|
|
$
|
(8
|
)
|
|
$
|
22
|
|
Transfers of equipment between inventory and property and equipment, net
|
|
$
|
618
|
|
|
$
|
693
|
|
Net change in capitalized share-based compensation
|
|
$
|
26
|
|
|
$
|
35
|
|
Common stock withheld for employee taxes in connection with share-based compensation
|
|
$
|
4,591
|
|
|
$
|
1,495
|
|
Repayment of notes payable by credits from municipal agency
|
|
$
|
50
|
|
|
$
|
50
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
ABAXIS, INC.
NOTES TO CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business.
Abaxis, Inc. (“Abaxis,” the “Company” or “we”), incorporated in California in 1989, 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. Abaxis provides veterinary reference laboratory diagnostic and consulting services for veterinarians. We conduct business worldwide and manage our business on the basis of the following two reportable segments: the medical market and the veterinary market.
Abaxis Europe GmbH, our wholly-owned subsidiary in Darmstadt, Germany, markets, promotes and distributes diagnostic systems for medical and veterinary uses in the European market.
Principles of Consolidation.
The accompanying unaudited condensed consolidated financial statements include the accounts of Abaxis and our wholly-owned subsidiary, Abaxis Europe GmbH. Intercompany transactions and balances have been eliminated in consolidation.
Basis of Presentation
.
We have prepared the unaudited condensed consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim periods. The unaudited condensed
consolidated
financial statements included herein reflect all normal recurring adjustments, which are, in the opinion of our management, necessary to state fairly the results of operations and financial position for the periods presented. The results for the three and six month periods ended September 30, 2013 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2014 or for any interim or future period.
These unaudited condensed
consolidated
financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013.
Reclassifications.
Certain reclassifications have been made to prior periods’ financial statements to conform to the current period presentation, primarily related to segment categories (see Note 14, “Segment Reporting Information”). These reclassifications did not result in any change in previously reported net income, total assets or shareholders’ equity.
Use of Estimates.
The preparation of these condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period, and related disclosures. Such management estimates include allowance for doubtful accounts, sales and other allowances, estimated selling price of our products, fair value of investments, valuation of inventory, fair value and useful lives of intangible assets, income taxes, valuation allowance for deferred tax assets, share-based compensation and warranty reserves. Our management bases their estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Our actual results may differ materially from these estimates.
Significant Accounting Policies.
The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in our Annual Report on Form 10-K for the year ended March 31, 2013 filed with the SEC on June 14, 2013, and have not changed significantly since such filing.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income:
In February 2013,
the Financial Accounting Standards Board (“
FASB”) issued
Accounting Standards Update
No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” (Topic 220)
-
Comprehensive Income (“ASU 2013-02”), to amend existing rules to improve the reporting of reclassification out of accumulated other comprehensive income (“AOCI”). The amendment expands the existing disclosure by requiring entities to present information about significant items reclassified out of AOCI by component. In addition, an entity is required to provide information about the effects on net income of significant amounts reclassified out of each component of AOCI to net income either on the face of the statement where net income is presented or as a separate disclosure in the notes of the financial statements. We adopted ASU 2013-02 as of April 1, 2013.
As this update only required additional disclosures, adoption of this
amendment
did not have a material impact on our financial
position
, results of operations and cash flows
during the three and six months ended September 30, 2013
.
NOTE 3
. INVESTMENTS
Our investments are classified as either available-for-sale or held-to-maturity. The following table summarizes available-for-sale and held-to-maturity investments as of September 30, 2013 and March 31, 2013 (in thousands):
|
|
Available-for-Sale Investments
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
September 30, 2013
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Value
|
|
Certificates of deposit
|
|
$
|
996
|
|
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
999
|
|
Corporate bonds
|
|
|
6,020
|
|
|
|
54
|
|
|
|
-
|
|
|
|
6,074
|
|
Total available-for-sale investments
|
|
$
|
7,016
|
|
|
$
|
57
|
|
|
$
|
-
|
|
|
$
|
7,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity Investments
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
September 30, 2013
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Value
|
|
Certificates of deposit
|
|
$
|
3,735
|
|
|
$
|
-
|
|
|
$
|
(5
|
)
|
|
$
|
3,730
|
|
Corporate bonds
|
|
|
16,285
|
|
|
|
63
|
|
|
|
(16
|
)
|
|
|
16,332
|
|
Municipal bonds
|
|
|
5,323
|
|
|
|
6
|
|
|
|
(67
|
)
|
|
|
5,262
|
|
Total held-to-maturity investments
|
|
$
|
25,343
|
|
|
$
|
69
|
|
|
$
|
(88
|
)
|
|
$
|
25,324
|
|
|
|
Available-for-Sale Investments
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
March 31, 2013
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Value
|
|
Certificates of deposit
|
|
$
|
996
|
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
1,001
|
|
Corporate bonds
|
|
|
6,029
|
|
|
|
65
|
|
|
|
-
|
|
|
|
6,094
|
|
Municipal bonds
|
|
|
529
|
|
|
|
-
|
|
|
|
-
|
|
|
|
529
|
|
Total available-for-sale investments
|
|
$
|
7,554
|
|
|
$
|
70
|
|
|
$
|
-
|
|
|
$
|
7,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity Investments
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
March 31, 2013
|
|
Cost
|
|
|
Gain
|
|
|
(Loss)
|
|
|
Value
|
|
Certificates of deposit
|
|
$
|
3,341
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,341
|
|
Corporate bonds
|
|
|
16,284
|
|
|
|
121
|
|
|
|
(3
|
)
|
|
|
16,402
|
|
Municipal bonds
|
|
|
13,105
|
|
|
|
32
|
|
|
|
(10
|
)
|
|
|
13,127
|
|
Total held-to-maturity investments
|
|
$
|
32,730
|
|
|
$
|
153
|
|
|
$
|
(13
|
)
|
|
$
|
32,870
|
|
The amortized cost of our held-to-maturity investments approximates their fair value. As of September 30, 2013 and March 31, 2013, we did not have other-than-temporary impairment in the fair value of any individual security classified as held-to-maturity or available-for-sale. As of September 30, 2013 and March 31, 2013, we had unrealized gains on available-for-sale investments,
net of related income taxes
of $34,000 and $42,000, respectively. During the three months ended September 30, 2013 and 2012, we did not have any redemptions of investments in accordance with callable provisions. During the six months ended September 30, 2013 and 2012, redemptions of investments in accordance with callable provisions were $623,000 and $717,000, respectively.
The following table summarizes the amortized cost and fair value of our investments, classified by stated maturity as of September 30, 2013 and March 31, 2013 (in thousands):
|
|
September 30, 2013
|
|
|
September 30, 2013
|
|
|
|
Available-for-Sale Investments
|
|
|
Held-to-Maturity Investments
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Due in less than one year
|
|
$
|
996
|
|
|
$
|
999
|
|
|
$
|
13,448
|
|
|
$
|
13,474
|
|
Due in 1 to 4 years
|
|
|
6,020
|
|
|
|
6,074
|
|
|
|
11,895
|
|
|
|
11,850
|
|
Total investments
|
|
$
|
7,016
|
|
|
$
|
7,073
|
|
|
$
|
25,343
|
|
|
$
|
25,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
March 31, 2013
|
|
|
|
Available-for-Sale Investments
|
|
|
Held-to-Maturity Investments
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Due in less than one year
|
|
$
|
1,027
|
|
|
$
|
1,029
|
|
|
$
|
22,325
|
|
|
$
|
22,387
|
|
Due in 1 to 4 years
|
|
|
6,527
|
|
|
|
6,595
|
|
|
|
10,405
|
|
|
|
10,483
|
|
Total investments
|
|
$
|
7,554
|
|
|
$
|
7,624
|
|
|
$
|
32,730
|
|
|
$
|
32,870
|
|
NOTE 4. 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.
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.
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.
The following table summarizes financial assets, measured at fair value on a recurring basis, by level within the fair value hierarchy as of September 30, 2013 and March 31, 2013 (in thousands):
|
|
As of September 30, 2013
|
|
|
|
Quoted Prices in
Active Markets
for Identical Assets
|
|
|
Significant
Other
Observable Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
20,079
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,079
|
|
Available-for-sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
-
|
|
|
|
999
|
|
|
|
-
|
|
|
|
999
|
|
Corporate bonds
|
|
|
-
|
|
|
|
6,074
|
|
|
|
-
|
|
|
|
6,074
|
|
Total assets at fair value
|
|
$
|
20,079
|
|
|
$
|
7,073
|
|
|
$
|
-
|
|
|
$
|
27,152
|
|
|
|
As of March 31, 2013
|
|
|
|
Quoted Prices in
Active Markets
for Identical Assets
|
|
|
Significant
Other
Observable Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
12,189
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,189
|
|
Available-for-sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
-
|
|
|
|
1,001
|
|
|
|
-
|
|
|
|
1,001
|
|
Corporate bonds
|
|
|
-
|
|
|
|
6,094
|
|
|
|
-
|
|
|
|
6,094
|
|
Municipal bonds
|
|
|
-
|
|
|
|
529
|
|
|
|
-
|
|
|
|
529
|
|
Total assets at fair value
|
|
$
|
12,189
|
|
|
$
|
7,624
|
|
|
$
|
-
|
|
|
$
|
19,813
|
|
As of September 30, 2013 and March 31, 2013, our Level 1 financial assets consisted of money market mutual funds. Our cash equivalents are highly liquid instruments with original or remaining maturities of three months or less at the time of purchase that are readily convertible into cash. The fair value of our Level 1 financial assets is based on quoted market prices of the underlying security. As of September 30, 2013 and March 31, 2013, we did not have any Level 1 financial liabilities.
Our Level 2 financial assets primarily consist of certificates of deposit, corporate bonds and municipal bonds. We review trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from third party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy. As of September 30, 2013 and March 31, 2013, we did not have any Level 2 financial liabilities.
As of September 30, 2013 and March 31, 2013, we did not have any Level 3 financial assets or liabilities measured at fair value on a recurring basis. During the three and six months ended September 30, 2013 and 2012, we did not have any Level 3 financial assets or liabilities measured at fair value on a recurring basis.
Inventories include material, labor and overhead, and are stated at the lower of cost (first-in, first-out method) or market. Components of inventories were as follows (in thousands):
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2013
|
|
Raw materials
|
|
$
|
13,275
|
|
|
$
|
12,621
|
|
Work-in-process
|
|
|
4,001
|
|
|
|
3,696
|
|
Finished goods
|
|
|
10,092
|
|
|
|
10,469
|
|
Inventories
|
|
$
|
27,368
|
|
|
$
|
26,786
|
|
NOTE 6. INVESTMENT IN UNCONSOLIDATED AFFILIATE
Our investment in an unconsolidated affiliate consists of an investment in equity securities of Scandinavian Micro Biodevices APS (“SMB”). In February 2011, we purchased a 15% equity ownership interest in SMB, for $2.8 million in cash. SMB is a privately-held developer and manufacturer of point-of-care diagnostic products for veterinary use. SMB, based in Farum, Denmark, has been the original equipment manufacturer of the Abaxis VetScan VS
pro
point-of-care specialty analyzer since 2008. Abaxis has had exclusive distribution rights for the analyzer and associated cartridges in North America since 2008. Starting January 2011, Abaxis has non-exclusive rights in other areas of the world. We accounted for our investment in SMB using the equity method due to our significant influence over SMB’s operations. Our allocated portions of SMB’s net income (loss) during the three months ended September 30, 2013 and 2012 were $(14,000) and $(51,000), respectively, and during the six months ended September 30, 2013 and 2012 were $16,000 and $(34,000), respectively.
NOTE 7. WARRANTY RESERVES
We provide for the estimated future costs to be incurred under our standard warranty obligation on our instruments and reagent discs.
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 revenue is 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. The estimated accrual for warranty exposure is based on 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. 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.
Reagent Discs.
We record a provision for defective reagent discs when the related sale is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. The warranty cost includes the replacement costs and freight of a defective reagent disc. The balance of accrued warranty reserve related to replacement of defective reagent discs at September 30, 2013 and March 31, 2013 was $500,000 and $571,000, respectively, which was classified as a current liability on the condensed consolidated balance sheets.
We evaluate our estimates for warranty reserves on an ongoing basis and believe we have the ability to reasonably estimate warranty costs. However, unforeseeable changes in factors may impact the estimate for warranty and such changes could cause a material change in our warranty reserve accrual in the period in which the change was identified.
The change in our accrued warranty reserve during the three and six months ended September 30, 2013 and 2012 is summarized as follows (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Balance at beginning of period
|
|
$
|
1,327
|
|
|
$
|
1,494
|
|
|
$
|
1,384
|
|
|
$
|
1,846
|
|
Provision for warranty expense
|
|
|
672
|
|
|
|
354
|
|
|
|
999
|
|
|
|
661
|
|
Warranty costs incurred
|
|
|
(386
|
)
|
|
|
(368
|
)
|
|
|
(770
|
)
|
|
|
(737
|
)
|
Adjustment to pre-existing warranties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(290
|
)
|
Balance at end of period
|
|
|
1,613
|
|
|
|
1,480
|
|
|
|
1,613
|
|
|
|
1,480
|
|
Non-current portion of warranty reserve
|
|
|
741
|
|
|
|
437
|
|
|
|
741
|
|
|
|
437
|
|
Current portion of warranty reserve
|
|
$
|
872
|
|
|
$
|
1,043
|
|
|
$
|
872
|
|
|
$
|
1,043
|
|
NOTE 8. BORROWINGS
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 September 30, 2013, our short-term and long-term notes payable balances were $100,000 and $632,000, respectively, and we recorded the short-term balance in “Other accrued liabilities” on the condensed consolidated balance sheets. The entire outstanding balance of the note is 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 September 30, 2013.
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 condensed consolidated statements of income.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Purchase Commitments.
We have purchase commitments, comprising of supply and inventory related agreements, totaling approximately $14.6 million as of September 30, 2013. These purchase order commitments include our purchase obligations with SMB of Denmark to purchase VS
pro
specialty analyzers and related cartridges and Diatron MI PLC of Hungary to purchase Diatron hematology instruments.
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 may 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 are payable for so long as we desire to maintain exclusivity under the agreement.
Litigation.
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. On October 1, 2013, before the court ruled on the motions to dismiss, the parties notified the court that they had reached a settlement of the lawsuit. The parties are in the process of formalizing the settlement agreement. Among other things, the proposed settlement terms provide for the claims against the defendants to be dismissed with prejudice and for the release of certain known or unknown claims that have been or could have been brought later in the court arising out of the same allegations. Abaxis has agreed that if the proposed settlement terms are approved by the court, it will adopt certain corporate governance measures, such measures to be in effect for at least five years. If the parties are not able to agree on the amount of an attorney’s fee award to be paid to the plaintiff’s counsel, subject to approval by the court, Abaxis anticipates that plaintiff will petition the court for an attorney’s fee award. The settlement is not contingent on the payment of any attorney’s fee award. We believe that any attorney’s fees that would be awarded to plaintiff’s counsel would not have a material adverse effect on Abaxis, our consolidated financial position and results of operations.
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.
NOTE 10. EQUITY COMPENSATION PLANS AND SHARE-BASED COMPENSATION
Equity Compensation Plan
As of September 30, 2013, we have one equity incentive plan under which our equity securities are authorized for issuance to our employees, directors and consultants. Our share-based compensation plan is described below.
2005 Equity Incentive Plan.
Our 2005 Equity Incentive Plan (the “Equity Incentive Plan”) restated and amended our 1998 Stock Option Plan. The Equity Incentive Plan allows for the awards of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance cash awards, performance shares, performance units, deferred compensation awards or other share-based awards to employees, directors and consultants. As of September 30, 2013, the Equity Incentive Plan provided for the issuance of a maximum of 6,786,000 shares, of which 939,000 shares of common stock were then available for future issuance. Shares that are canceled or forfeited from an award and shares withheld in satisfaction of tax withholding obligations are again available for issue under the Equity Incentive Plan.
Our current practice is to issue new shares of common stock from our authorized shares for share-based awards upon the exercise of stock options or vesting of restricted stock units.
The following table summarizes total share-based compensation expense, net of tax, related to restricted stock units during the three and six months ended September 30, 2013 and 2012, which is included in our condensed consolidated statements of income (in thousands, except per share data):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Cost of revenues
|
|
$
|
298
|
|
|
$
|
222
|
|
|
$
|
552
|
|
|
$
|
445
|
|
Research and development
|
|
|
215
|
|
|
|
254
|
|
|
|
582
|
|
|
|
554
|
|
Sales and marketing
|
|
|
595
|
|
|
|
584
|
|
|
|
1,301
|
|
|
|
1,272
|
|
General and administrative
|
|
|
745
|
|
|
|
649
|
|
|
|
1,667
|
|
|
|
1,240
|
|
Share-based compensation expense before income taxes
|
|
|
1,853
|
|
|
|
1,709
|
|
|
|
4,102
|
|
|
|
3,511
|
|
Income tax benefit
|
|
|
(633
|
)
|
|
|
(613
|
)
|
|
|
(1,401
|
)
|
|
|
(1,257
|
)
|
Total share-based compensation expense after income taxes
|
|
$
|
1,220
|
|
|
$
|
1,096
|
|
|
$
|
2,701
|
|
|
$
|
2,254
|
|
Net impact of share-based compensation on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.12
|
|
|
$
|
0.10
|
|
Diluted net income per share
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.12
|
|
|
$
|
0.10
|
|
Share-based compensation has been classified in the condensed consolidated statements of income or capitalized on the condensed consolidated balance sheets in the same manner as cash compensation paid to employees. Capitalized share-based compensation costs at September 30, 2013 and March 31, 2013 were $177,000 and $151,000, respectively, which were included in inventories on our condensed consolidated balance sheets.
Cash Flow Impact
The accounting standard with respect to share-based payment requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised stock options and vested restricted stock units in excess of the deferred tax asset attributable to share-based compensation expense for such share-based awards. Excess tax benefits are considered realized when the tax deductions reduce taxes that otherwise would be payable. Excess tax benefits classified as a financing cash inflow for the three months ended September 30, 2013 and 2012 were $332,000 and $428,000,
respectively, and for the six months ended September 30, 2013 and 2012 were $1.7 million and $1.1 million, respectively.
Stock Options
Prior to fiscal 2007, we granted stock option awards to employees and directors as part of our share-based compensation program. Option awards to consultants were insignificant. Options granted to employees and directors generally expire ten years from the grant date. Options granted to employees generally become exercisable over a period of four years based on cliff-vesting terms and continuous employment. Options granted to non-employee directors generally become exercisable over a period of one year based on monthly vesting terms and continuous service. We have not granted any stock options since the beginning of fiscal 2007. We have recognized compensation expense for stock options granted during the requisite service period of the stock option. As of September 30, 2013, we had no unrecognized compensation expense related to stock options granted.
Stock Option Activity
The following table summarizes information regarding options outstanding and options exercisable at September 30, 2013 and the changes during the six-month period then ended:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
Price
|
|
|
Contractual
|
|
|
Value
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Life (Years)
|
|
|
(In thousands)
|
|
Outstanding at March 31, 2013
|
|
|
72,000
|
|
|
$
|
20.50
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,000
|
)
|
|
|
10.07
|
|
|
|
|
|
|
|
Canceled or forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding at September 30, 2013
|
|
|
69,000
|
|
|
$
|
20.89
|
|
|
|
0.55
|
|
|
$
|
1,483
|
|
Vested and expected to vest at September 30, 2013
|
|
|
69,000
|
|
|
$
|
20.89
|
|
|
|
0.55
|
|
|
$
|
1,483
|
|
Exercisable at September 30, 2013
|
|
|
69,000
|
|
|
$
|
20.89
|
|
|
|
0.55
|
|
|
$
|
1,483
|
|
The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on our closing stock price as of September 30, 2013, of the shares that would have been received by the option holders had all option holders exercised their stock options as of that date. Total intrinsic value of stock options exercised during the three months ended September 30, 2013 and 2012 was $10,000 and $537,000, respectively, and during the six months ended September 30, 2013 and 2012 was $91,000 and $1.0 million, respectively. Cash proceeds from stock options exercised during the three months ended September 30, 2013 and 2012 were $9,000 and $184,000, respectively, and during the six months ended September 30, 2013 and 2012 were $26,000 and $261,000, respectively.
Restricted Stock Units
Since fiscal 2007, we have granted restricted stock unit awards to employees and directors as part of our share-based compensation program. Restricted stock unit awards to consultants have been insignificant. Awards of restricted stock units are issued at no cost to the recipient and may have time-based vesting criteria, or a combination of time-based and performance-based vesting criteria, as described below. From time to time, restricted stock unit awards granted to employees may be subject to accelerated vesting upon achieving certain performance-based milestones. Additionally, the Compensation Committee of our Board of Directors (the “Compensation Committee”) in its discretion, may provide in the event of a change in control for the acceleration of vesting and/or settlement of the restricted stock unit held by a participant upon such conditions and to such extent as determined by the Compensation Committee. Our Board of Directors has adopted an executive change in control severance plan, which it may terminate or amend at any time, that provides that awards granted to executive officers will accelerate fully on a change of control. The vesting of non-employee director and officer awards granted under the Equity Incentive Plan automatically will also accelerate in full upon a change in control.
Restricted Stock Unit Awards (Time Vesting)
Restricted stock unit awards with only time-based vesting terms, which we refer to as restricted stock unit awards (time vesting), entitle holders to receive shares of common stock at the end of a specified period of time. For restricted stock unit awards (time vesting), vesting is based on continuous employment or service of the holder. Upon vesting, the equivalent number of common shares are typically issued net of tax withholdings. If the service vesting conditions are not met, unvested restricted stock unit awards (time vesting) will be forfeited. Generally, restricted stock unit awards (time vesting) vest according to one of the following time-based vesting schedules:
·
|
Restricted stock unit awards to employees: Four-year time-based vesting as follows: five percent vesting after the first year; additional ten percent after the second year; additional 15 percent after the third year; and the remaining 70 percent after the fourth year of continuous employment with the Company.
|
·
|
Restricted stock unit awards to non-employee directors: 100 percent vesting after one year of continuous service to the Company.
|
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. Such value is recognized as an expense over the corresponding requisite service period. The share-based compensation expense is reduced for an estimate of the restricted stock unit awards that are expected to be forfeited. The forfeiture estimate is based on historical data and other factors, and compensation expense is adjusted for actual results. As of September 30, 2013, the total unrecognized compensation expense related to restricted stock unit awards (time vesting) granted amounted to $21.3 million, which is expected to be recognized over a weighted average service period of 1.9 years.
Restricted Stock Unit Awards (Performance Vesting)
We also began granting restricted stock unit awards subject to performance vesting criteria, which we refer to as restricted stock unit awards (performance vesting), to our executive officers starting in fiscal 2013. Restricted stock unit awards (performance vesting) consist of the right to receive shares of common stock, subject to achievement of time-based criteria and certain corporate performance-related goals over a specified period, as established by the Compensation Committee. For restricted stock units subject to performance vesting, we
recognize any related share-based compensation expense ratably over the service period based on the most probable outcome of the performance condition. 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. 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.
In April 2012, the Compensation Committee approved the grant of restricted stock unit awards (performance vesting) for 84,000 shares of common stock to our executive officers that contained both time-based and performance-based vesting terms (the “FY2013 Performance RSUs”). The FY2013 Performance RSUs were subject to vesting in four equal annual increments based upon: (1) achievement of certain pre-established corporate annual performance-related goals, as established by the Compensation Committee; and (2) the grantee’s satisfaction of service requirements through the vesting period. The annual financial performance goals were established at the beginning of each performance period and, accordingly, the portion (or “tranche”) of the FY2013 Performance RSU subject to each goal is treated as a separate grant for accounting purposes. The number of vested restricted stock unit awards (performance vesting) is determined at the end of each annual performance period. The fiscal 2013 performance target for the FY2013 Performance RSUs was established at the grant date following ASC 718-10-55-95 and the aggregate estimated grant date fair value of the FY2013 Performance RSUs was $752,000, or $35.62 per share, based on the closing market price of our common stock on the date of grant. Only the target for fiscal 2013 performance for the first tranche was set in April 2012, and accordingly, only 25% of the FY2013 Performance RSUs were deemed granted in fiscal 2013 in accordance with ASC 718-10-55-95. In April 2013, the remaining 75% of the FY2013 Performance RSUs, which consisted of the second, third and fourth tranches, were cancelled as described below. The remaining 75% of the FY2013 Performance RSUs were not deemed granted for accounting purposes because each annual performance target was to be set at the start of each respective single-fiscal year performance period in accordance with ASC 718-10-55-95. We have recognized compensation expense for the FY2013 Performance RSUs during the requisite service period in fiscal 2013. As of September 30, 2013, we had no unrecognized compensation expenses related to FY2013 Performance RSUs.
In April 2013, the Compensation Committee approved the grant of restricted stock unit awards (performance vesting) for 129,000 shares of common stock to our executive officers that also contained both time-based and performance-based vesting terms (the “FY2014 Performance RSUs”). The aggregate estimated grant date fair value of the FY2014 Performance RSUs was $5.5 million, or $42.43 per share, based on the closing market price of our common stock on the date of grant. The FY2014 Performance RSUs vest only if both of the following criteria are satisfied: (1) our consolidated income from operations for the fiscal year ending March 31, 2014, as certified by the Compensation Committee, is in excess of the applicable target amount set forth in the table below; and (2) the recipient remains in the Service of the Company (as defined in our Equity Incentive Plan) until the applicable vesting date set forth below:
Shares Issuable Upon
Settlement of
FY2014 Performance RSUs
|
Consolidated Income from
Operations for the
Year Ending March 31, 2014
|
Vesting Date
|
25%
|
> 90% of target
|
April 29, 2016
|
25%
|
> 90% of target
|
April 29, 2017
|
25%
|
> 100% of target
|
April 29, 2016
|
25%
|
> 100% of target
|
April 29, 2017
|
On April 29, 2013, 21,000 shares subject to the FY2013 Performance RSUs were issued to our executive officers as a result of achieving performance-related goals for the fiscal year ended March 31, 2013. In consideration of the grant of the FY2014 Performance RSUs described above, the remaining FY2013 Performance RSUs were cancelled and are no longer outstanding.
As of September 30, 2013, we reviewed each of the underlying performance targets related to the outstanding FY2014 Performance RSUs and determined that it was not probable that the FY2014 Performance RSUs will vest as to 129,000 shares. Consequently, the compensation expense related to FY2014 Performance RSUs was reversed upon our determination of non-achievement of the performance metrics. We will assess the probability of achievement of the performance targets at the end of each quarter. If it becomes probable that the performance targets will be achieved, a cumulative adjustment will be recorded as if ratable share-based compensation expense had been recorded since the grant date.
Additional
share-based
compensation of $676,000 would have been recorded during the six months ended September 30, 2013 for
FY2014 Performance RSUs
had the achievement of
performance targets
been deemed probable.
Restricted Stock Unit Activity
The following table summarizes restricted stock unit activity for the six months ended September 30, 2013:
|
|
Time-Based Restricted
|
|
|
Performance-Based Restricted
|
|
|
|
Stock Units
|
|
|
Stock Units
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value(1)
|
|
|
Shares(2)
|
|
|
Fair Value(1)
|
|
Nonvested at March 31, 2013
|
|
|
980,000
|
|
|
$
|
26.42
|
|
|
|
21,000
|
|
|
$
|
35.62
|
|
Granted
|
|
|
161,000
|
|
|
|
41.80
|
|
|
|
129,000
|
|
|
|
42.43
|
|
Vested(3)
|
|
|
(285,000
|
)
|
|
|
21.54
|
|
|
|
(21,000
|
)
|
|
|
35.62
|
|
Canceled or forfeited
|
|
|
(11,000
|
)
|
|
|
30.65
|
|
|
|
-
|
|
|
|
-
|
|
Nonvested at September 30, 2013
|
|
|
845,000
|
|
|
$
|
30.95
|
|
|
|
129,000
|
|
|
$
|
42.43
|
|
(1)
|
The weighted average grant date fair value of restricted stock units is based on the number of shares and the closing market price of our common stock on the date of grant.
|
(2)
|
Nonvested shares at March 31, 2013 include only the FY2013 Performance RSUs that were deemed granted in accordance with ASC 718-10-55-95.
|
(3)
|
The number of restricted stock units vested includes shares that we withheld on behalf of our employees to satisfy the statutory tax withholding requirements.
|
Total intrinsic value of restricted stock units vested during the three months ended September 30, 2013 and 2012 was $2.4 million and $1.8 million, respectively, and during the six months ended September 30, 2013 and 2012 was $12.9 million and $8.7 million, respectively. The total grant date fair value of restricted stock units vested during the three months ended September 30, 2013 and 2012 was $1.5 million and $1.1 million, respectively, and during the six months ended September 30, 2013 and 2012 was $6.9 million and $5.8 million, respectively.
NOTE 11. SHAREHOLDERS’ EQUITY
Share Repurchase Program
Between August 2011 and January 2012, the Board of Directors authorized the repurchase of up to a total of $55.0 million of our common stock. In July 2013, the Board of Directors approved a $12.3 million increase to its existing share repurchase program to a total of $67.3 million. As of September 30, 2013, $40.0 million was available to purchase common stock. Since the share repurchase program began, through September 30, 2013, we have repurchased 1.2 million shares of our common stock at a total cost of $27.3 million. 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 six months ended September 30, 2013, we did not repurchase any of our common stock.
Stock Purchase Rights
On April 22, 2003, our Board of Directors approved the adoption of a Shareholder Rights Plan. Under the terms of the plan, shareholders of record on May 8, 2003, received one preferred stock purchase right for each outstanding share of common stock held. Each right entitled the registered holder to purchase from us one one-thousandth of a share of our Series RP Preferred Stock, $0.001 par value, at a price of $24.00 per share and would have become exercisable if a person or group acquired 15% or more of our common stock without prior approval by the Board of Directors.
In addition, under certain conditions involving an acquisition or proposed acquisition, the rights permitted the holders (other than the acquirer) to purchase our common stock at a 50% discount from the market price at that time, and in the event of certain business combinations, the rights permitted the purchase of the common stock of an acquirer at a 50% discount from the market price at that time. Under certain conditions, the purchase rights would have been redeemed by the Board of Directors in whole, but not in part, at a price of $0.001 per right. The rights had no voting privileges and were attached to and automatically traded with our common stock.
The Shareholder Rights Plan and rights granted thereunder expired in April 2013.
Common Stock Warrants
At September 30, 2013 and March 31, 2013, there were warrants to purchase 30,000 shares of common stock outstanding, of which 14,000 shares were vested, at a weighted average exercise price of $3.00 per share, expiring in fiscal years 2016 through 2017. The fair value of the warrants issued were determined using the Black-Scholes option-pricing model and are amortized over their estimated useful life, of approximately ten years, as an intangible asset. The warrants vest at a rate of 20% annually from their issuance dates and have a term of five years.
NOTE 12. NET INCOME PER SHARE
Basic net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding using the treasury stock method. Dilutive potential common shares outstanding include outstanding stock options, restricted stock units and warrants.
The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net income per share (in thousands, except share and per share data):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,996
|
|
|
$
|
12,909
|
|
|
$
|
7,225
|
|
|
$
|
15,773
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
22,306,000
|
|
|
|
21,920,000
|
|
|
|
22,268,000
|
|
|
|
21,869,000
|
|
Weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
24,000
|
|
|
|
107,000
|
|
|
|
25,000
|
|
|
|
107,000
|
|
Restricted stock units
|
|
|
216,000
|
|
|
|
252,000
|
|
|
|
268,000
|
|
|
|
277,000
|
|
Warrants
|
|
|
28,000
|
|
|
|
27,000
|
|
|
|
28,000
|
|
|
|
27,000
|
|
Weighted average common shares outstanding - diluted
|
|
|
22,574,000
|
|
|
|
22,306,000
|
|
|
|
22,589,000
|
|
|
|
22,280,000
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.18
|
|
|
$
|
0.59
|
|
|
$
|
0.32
|
|
|
$
|
0.72
|
|
Diluted net income per share
|
|
$
|
0.18
|
|
|
$
|
0.58
|
|
|
$
|
0.32
|
|
|
$
|
0.71
|
|
Stock options and warrants are excluded from the computation of diluted weighted average shares outstanding if the exercise price of the stock options and warrants is greater than the average market price of our common stock during the period because the inclusion of these stock options and warrants would be antidilutive to net income per share. There were no stock options and warrants excluded from the computation of diluted weighted average shares outstanding during the three and six months ended September 30, 2013 and 2012.
We excluded the following restricted stock units from the computation of diluted weighted average shares outstanding because the inclusion of these awards would be antidilutive to net income per share:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Weighted average number of shares underlying antidilutive restricted stock units
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
101,000
|
|
If the performance criteria for our restricted stock unit awards (performance vesting) are achieved, these awards will be considered outstanding for the purpose of computing diluted net income per share if the effect is dilutive. Because the performance criteria for these restricted stock unit awards (performance vesting) were not achieved during the three and six months ended September 30, 2013 and 2012, these awards were not included in the diluted net income per share calculation.
NOTE 13. INCOME TAXES
During the three months ended September 30, 2013 and 2012, our income tax provision was $2.2 million, based on an effective tax rate of 36%, and $8.0 million, based on an effective tax rate of 38%, respectively. During the six months ended September 30, 2013 and 2012, our income tax provision was $4.0 million, based on an effective tax rate of 36%, and $9.7 million, based on an effective tax rate of 38%, respectively. The effective tax rates during the three and six months ended September 30, 2013, as compared to the three and six months ended September 30, 2012, decreased primarily due to (a) a discrete tax expense of approximately $6.7 million due to a gain from our legal settlement with Cepheid during the second quarter of fiscal 2013 and (b) reinstatement of federal research tax credits on January 2, 2013, partially offset by (c) an increase in non-deductible share-based compensation expense.
We did not have any unrecognized tax benefits as of September 30, 2013 and March 31, 2013. During the three and six months ended September 30, 2013 and 2012, we did not recognize any interest or penalties related to unrecognized tax benefits.
NOTE 14.
SEGMENT REPORTING INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by our chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.
Abaxis develops, manufactures, markets and sells portable blood analysis systems for use in the human or veterinary patient-care setting to provide clinicians with rapid blood constituent measurements. We 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. For the products that we manufacture and sell, each reportable segment has similar manufacturing processes, technology and shared infrastructures. The accounting policies for segment reporting are the same as for the Company as a whole. We do not segregate assets by segments since our chief operating decision maker, or decision making group, does not use assets as a basis to evaluate a segment’s performance.
Medical Market
In the medical market reportable segment, we serve a worldwide customer group 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. The products manufactured and sold in this segment primarily consist of Piccolo chemistry analyzers and medical reagent discs.
Veterinary Market
In the veterinary market reportable segment, we serve a worldwide customer group 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. The products manufactured and sold in this segment primarily consist of VetScan chemistry analyzers and veterinary reagent discs. We also sell OEM supplied products in this segment consisting of VetScan hematology instruments and related reagent kits, VetScan VS
pro
specialty analyzers and related consumables, VetScan i
‑
STAT analyzers and related VetScan i‑STAT consumables and rapid tests. Since October 2011, we have been providing veterinary reference laboratory diagnostic and consulting services for veterinarians in the United States through Abaxis Veterinary Reference Laboratories (“AVRL”), based in Olathe, Kansas.
Total Revenues, Cost of Revenues and Gross Profit by Segment
The table below summarizes revenues, cost of revenues and gross profit from our two operating segments and from certain unallocated items for the three and six months ended September 30, 2013 and 2012 (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market(1)
|
|
$
|
7,177
|
|
|
$
|
7,941
|
|
|
$
|
13,215
|
|
|
$
|
16,390
|
|
Veterinary Market(1)
|
|
|
37,915
|
|
|
|
35,186
|
|
|
|
74,286
|
|
|
|
67,777
|
|
Other(1)(2)
|
|
|
759
|
|
|
|
1,131
|
|
|
|
1,519
|
|
|
|
2,105
|
|
Total revenues
|
|
|
45,851
|
|
|
|
44,258
|
|
|
|
89,020
|
|
|
|
86,272
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market(1)
|
|
|
3,999
|
|
|
|
3,658
|
|
|
|
7,293
|
|
|
|
7,401
|
|
Veterinary Market(1)
|
|
|
19,961
|
|
|
|
17,442
|
|
|
|
38,909
|
|
|
|
32,822
|
|
Other(1)(2)
|
|
|
19
|
|
|
|
35
|
|
|
|
54
|
|
|
|
77
|
|
Total cost of revenues
|
|
|
23,979
|
|
|
|
21,135
|
|
|
|
46,256
|
|
|
|
40,300
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market(1)
|
|
|
3,178
|
|
|
|
4,283
|
|
|
|
5,922
|
|
|
|
8,989
|
|
Veterinary Market(1)
|
|
|
17,954
|
|
|
|
17,744
|
|
|
|
35,377
|
|
|
|
34,955
|
|
Other(1)(2)
|
|
|
740
|
|
|
|
1,096
|
|
|
|
1,465
|
|
|
|
2,028
|
|
Gross profit
|
|
$
|
21,872
|
|
|
$
|
23,123
|
|
|
$
|
42,764
|
|
|
$
|
45,972
|
|
(1)
|
Includes certain prior period amounts by operating segment and unallocated items that were reclassified to conform to the current period presentation.
|
(2)
|
Represents unallocated items, not specifically identified to any particular business segment.
|
NOTE 15
. REVENUES BY PRODUCT AND SERVICE CATEGORY AND GEOGRAPHIC REGION AND SIGNIFICANT CONCENTRATIONS
Revenue Information
The following is a summary of our revenues by product and service category (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Revenues by Product and Service Category
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Instruments(1)
|
|
$
|
13,537
|
|
|
$
|
11,607
|
|
|
$
|
22,212
|
|
|
$
|
21,487
|
|
Consumables(2)
|
|
|
28,699
|
|
|
|
29,412
|
|
|
|
59,298
|
|
|
|
58,894
|
|
Other products and services(3)
|
|
|
3,577
|
|
|
|
3,202
|
|
|
|
7,435
|
|
|
|
5,816
|
|
Product and service revenues, net
|
|
|
45,813
|
|
|
|
44,221
|
|
|
|
88,945
|
|
|
|
86,197
|
|
Development and licensing revenue
|
|
|
38
|
|
|
|
37
|
|
|
|
75
|
|
|
|
75
|
|
Total revenues
|
|
$
|
45,851
|
|
|
$
|
44,258
|
|
|
$
|
89,020
|
|
|
$
|
86,272
|
|
(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
specialty cartridges, i-STAT cartridges and rapid tests.
|
(3)
|
Other products and services include veterinary reference laboratory diagnostic and consulting services.
|
The following is a summary of our revenues by geographic region based on customer location (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Revenues by Geographic Region
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
North America
|
|
$
|
37,320
|
|
|
$
|
35,915
|
|
|
$
|
71,972
|
|
|
$
|
69,079
|
|
Europe
|
|
|
6,446
|
|
|
|
6,493
|
|
|
|
12,998
|
|
|
|
13,709
|
|
Asia Pacific and rest of the world
|
|
|
2,085
|
|
|
|
1,850
|
|
|
|
4,050
|
|
|
|
3,484
|
|
Total revenues
|
|
$
|
45,851
|
|
|
$
|
44,258
|
|
|
$
|
89,020
|
|
|
$
|
86,272
|
|
Significant Concentrations
During the three months ended September 30, 2013, one distributor in the United States, MWI Veterinary Supply, accounted for 22% of our total worldwide revenues. During the three months ended September 30, 2012, one distributor in the United States, Animal Health International, accounted for 13% of our total worldwide revenues. During the six months ended September 30, 2013, one distributor in the United States, MWI Veterinary Supply, accounted for 22% of our total worldwide revenues. During the six months ended September 30, 2012, one distributor in the United States, Animal Health International, accounted for 13% of our total worldwide revenues.
At September 30, 2013, two distributors in the United States accounted for 10% and 27%, respectively, of our total receivables balance. At March 31, 2013, two distributors in the United States accounted for 12% and 23%, respectively, of our total receivables balance.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements, which reflect 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 our manufacturing operations, including the vulnerability of our manufacturing operations to potential interruptions and delays and our ability to manufacture products free of defects, fluctuations in our quarterly results of operations and difficulty in predicting future results, the transition of our U.S. medical sales to Abbott Point of Care, Inc., our dependence on certain sole or limited source suppliers, the performance of our independent distributors, our ability to manage the inventory levels of our distributors effectively, market acceptance of our products and services, expansion of our sales, marketing and distribution efforts, dependence on key personnel, the ability of AVRL to compete effectively,
the
protection of Abaxis’ intellectual property and claims of infringement of intellectual property asserted by third parties, 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. Since October 2011, Abaxis also has been 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 primarily through independent distributors, supplemented by our direct sales forces. 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 second quarter of fiscal 2014, total revenues were $45.9 million, an increase of 4% over last year’s comparable quarter. The net increase in revenues was primarily due to a net increase in veterinary instrument sales and service revenues from veterinary reference laboratory diagnostic and consulting services, partially offset by a decrease in revenues from medical instrument and medical and veterinary reagent discs. Gross profit in the second quarter of fiscal 2014 was $21.9 million, a decrease of 5% over last year’s comparable quarter, primarily attributable to lower unit sales of reagent discs in our veterinary market.
Sales and marketing expenses were $9.9 million in the second quarter of fiscal 2014 and $11.5 million for the same period last year, a decrease of $1.6 million, or 14%. The decrease in sales and marketing expenses was primarily due to a decrease in personnel-related expenses and a decrease in sales and marketing spending as a result of restructuring our sales and marketing organization within the medical market due to our distribution agreement with Abbott Point of Care, Inc., which we entered into in October 2012, as described below under “Medical Market.” General and administrative expenses were $2.9 million in the second quarter of fiscal 2014 and $4.6 million for the same period last year, a decrease of 38%, primarily attributable to a decrease in legal expenses due to the settlement of our Cepheid patent infringement case in the second quarter of fiscal 2013.
Net income in the second quarter of fiscal 2014 was $4.0 million, a decrease of $8.9 million from $12.9 million for the same period last year, due primarily to the decreased expenses set forth above, a gain from our legal settlement with Cepheid of $17.3 million in the second quarter of fiscal 2013 and a decrease in our income tax provision of $5.8 million over the second quarter of fiscal 2013, resulting from such settlement. Diluted earnings per share in the second quarter of fiscal 2014 was $0.18, as compared to a diluted earnings per share of $0.58 for the same period last year.
Cash, cash equivalents and investments increased by $8.6 million during the six months ended September 30, 2013 to a total of $103.9 million at September 30, 2013. The primary source of cash and cash equivalents during the six months ended September 30, 2013 was operating cash flows of $14.2 million, partially offset by payments made for tax withholdings related to net share settlements of restricted stock units of $4.6 million.
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 multiple 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. We also began to serve the pharmaceutical clinical trial market starting in the first quarter of fiscal 2013. Our product and service offerings in the medical market are described below.
Starting in January 2013, pursuant to our Exclusive Agreement (the “Abbott Agreement”) with Abbott, Abbott obtained 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, which includes pharmacy and retail store clinics, shopping malls and contract research organizations (CROs) and cruise ship lines. Effective September 30, 2013, we amended the Abbott Agreement to limit Abbott’s territory under such agreement to the United States. We will continue to sell and distribute these products outside of the market segments as to which Abbott has exclusive rights. 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.
Point-of-Care Blood Chemistry Analyzers
. 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 veterinary market 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 VetScan hematology instruments and related hematology reagent kits. Our VetScan HM5 is a fully automated five-part cell counter offering a comprehensive 22-parameter complete blood count analysis, including direct eosinophil counts and eosinophil percentage, specifically designed for veterinary applications.
VS
pro
Specialty
. We offer two tests, coagulation and fibrinogen testing, which are used with the VetScan 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
. AVRL is a full-service laboratory testing facility, based in Olathe, Kansas. Since October 2011, we provide 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.
We depend on a number of distributors in North America that distribute our VetScan products. In September 2012, we entered into a distribution agreement with MWI Veterinary Supply, Inc. (“MWI”) to purchase, market and sell the full line of Abaxis veterinary products throughout the United States. In the United States veterinary market segment, we also rely on various independent regional distributors. We depend on our distributors to assist us in promoting our VetScan products, and accordingly, if one or more of our distributors were to stop selling our products in the future, we may experience a temporary sharp decline or delay in our sales revenues until our customers identify another distributor or purchase products directly from us.
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 and transitioning the majority of our medical sales to Abbott, as discussed above. In the United States, we rely on Abbott as our exclusive distributor in the medical market. In the United States veterinary market segment, we rely on MWI, a national distributor, and on various independent regional distributors. As such, we do not have control over the marketing and sale of our products into these markets and are dependent upon the efforts and priorities of our distributors in promoting and creating a demand for our products. Should these efforts be unsuccessful, or should we fail to maintain this relationship, our business, financial condition and results of operations are likely to be adversely affected.
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 products, to achieve profitability in AVRL, the sales performances of our products by our independent distributors, 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, 2013.
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
.
Our sales arrangements may 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. 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. Judgments as to the allocation of consideration from an arrangement to the multiple elements of the arrangement, and the appropriate timing of revenue recognition are critical with respect to these 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. 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.
Revenues from our multiple element arrangements 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 extended maintenance contract, generally one to three years. Incentives in the form of extended maintenance agreements are our most significant multiple element arrangement.
For our selling arrangements in the veterinary market that include multiple deliverables, such as instruments, consumables and service agreements associated with our veterinary reference laboratory, revenue is recognized 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, are 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 consisting 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 six months ended September 30, 2013 and 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 September 30, 2013, our investments in cash equivalents, which we classified as available-for-sale, totaled $20.1 million, using Level 1 inputs since these investments 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 September 30, 2013, our available-for-sale investments in certificates of deposit and corporate bonds, totaled $7.1 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 September 30, 2013, 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 September 30, 2013, we also had $25.3 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 because we do not control it, but have the ability to exercise significant influence over it. 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 September 30, 2013, 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 September 30, 2013, our current portion of warranty reserves for instruments and reagent discs totaled $872,000 and our non-current portion of warranty reserves for instruments totaled $741,000, 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. The increase in warranty reserve during the three and six months ended September 30, 2013 is primarily due to an increase in instruments sold during the period.
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 and six months ended September 30, 2013 and 2012.
Intangible Assets.
Intangible assets, consisting of purchased patents, licenses and other rights acquired from third parties, are presented at cost, net of accumulated amortization. The intangible assets are amortized using the straight-line method over their estimated useful life, which approximates the economic benefit. If our underlying assumptions regarding the estimated useful life of an intangible asset change, then the amortization period, would be adjusted accordingly, and could result in a material change in the amortization expense and the carrying value for such asset.
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 September 30, 2013 and March 31, 2013, 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 six months ended September 30, 2013 and 2012, we did not recognize any interest or penalties related to uncertain tax positions in the consolidated statements of income, and at September 30, 2013 and March 31, 2013, we had no accrued interest or penalties.
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.
Prior to fiscal 2007, we granted stock option awards to employees and directors as part of our share-based compensation program. We have not granted any stock options since the beginning of fiscal 2007. We have recognized compensation expense for stock options granted during the requisite service period of the stock option. As of September 30, 2013, we had no unrecognized compensation expense related to stock options granted.
Since fiscal 2007, we have granted restricted stock unit awards to employees and directors as part of our share-based compensation program. Restricted stock unit awards to consultants have been insignificant. Awards of restricted stock units are issued at no cost to the recipient and may have time-based vesting criteria, or a combination of time-based and performance-based vesting criteria, as described below.
The fair value of restricted stock unit awards with only time-based vesting terms, which we refer to as 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 also began granting restricted stock unit awards subject to performance vesting criteria, which we refer to as restricted stock unit awards (performance vesting), to our executive officers starting in fiscal 2013. Restricted stock unit awards (performance vesting) consist of the right to receive shares of common stock, subject to achievement of time-based criteria and certain corporate performance-related goals over a specified period, as established by the Compensation Committee. For restricted stock units subject to performance vesting, we recognize any related share-based compensation expense ratably over the service period based on the most probable outcome of the performance condition. 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. 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.
In April 2012, the Compensation Committee approved the grant of restricted stock unit awards (performance vesting) for 84,000 shares of common stock to our executive officers
that contained both time-based and performance-based vesting terms
(the “FY2013 Performance RSUs”). The FY2013 Performance RSUs were subject to vesting in four equal annual increments based upon: (1) achievement of certain pre-established corporate annual performance-related goals, as established by the Compensation Committee; and (2) the grantee’s
satisfaction of
service requirements through the vesting period. The annual financial performance goals were established at the beginning of each performance period and, accordingly, the portion (or “tranche”) of the FY2013 Performance RSU subject to each goal is treated as a separate grant for accounting purposes. The number of vested restricted stock unit awards (performance vesting) is determined at the end of each annual performance period.
The fiscal 2013 performance target for the FY2013 Performance RSUs
was established at the grant date following ASC 718-10-55-95 and the aggregate estimated grant date fair value of the FY2013 Performance RSUs was $752,000, or $35.62 per share, based on the closing market price of our common stock on the date of grant. Only the target for fiscal 2013 performance for the first tranche was set in April 2012, and accordingly, only 25% of the FY2013 Performance RSUs were deemed granted in fiscal 2013 in accordance with ASC 718-10-55-95. In April 2013, the remaining 75% of the FY2013 Performance RSUs,
which consisted of the
second, third and fourth tranches, were cancelled, as described below. The remaining 75% of the FY2013 Performance RSUs were not deemed granted for accounting purposes because each annual performance target was to be set at the start of each respective single-fiscal year performance period in accordance with ASC 718-10-55-95. We have recognized compensation expense for the FY2013 Performance RSUs during the requisite service period in fiscal 2013.
As of September 30, 2013, we had no unrecognized compensation expenses related to FY2013 Performance RSUs.
In April 2013, the Compensation Committee approved the grant of restricted stock unit awards (performance vesting) for 129,000 shares of common stock to our executive officers that also contained both time-based and performance-based vesting terms (the “FY2014 Performance RSUs”). The aggregate estimated grant date fair value of the FY2014 Performance RSUs was $5.5 million, or $42.43 per share, based on the closing market price of our common stock on the date of grant. The FY2014 Performance RSUs vest only if both of the following criteria are satisfied: (1) our consolidated income from operations for the fiscal year ending March 31, 2014, as certified by the Compensation Committee, is in excess of the applicable target amount set forth in the table below; and (2) the recipient remains in the Service of the Company (as defined in our Equity Incentive Plan) until the applicable vesting date set forth below:
Shares Issuable Upon
Settlement of
FY2014 Performance RSUs
|
|
Consolidated Income from
Operations for the
Year Ending March 31, 2014
|
|
Vesting Date
|
25%
|
|
> 90% of target
|
|
April 29, 2016
|
25%
|
|
> 90% of target
|
|
April 29, 2017
|
25%
|
|
> 100% of target
|
|
April 29, 2016
|
25%
|
|
> 100% of target
|
|
April 29, 2017
|
On April 29, 2013, 21,000 shares subject to the FY2013 Performance RSUs were issued to our executive officers as a result of achieving performance-related goals for the fiscal year ended March 31, 2013. In consideration of the grant of the FY2014 Performance RSUs described above, the remaining FY2013 Performance RSUs were cancelled and are no longer outstanding.
As of September 30, 2013, we reviewed each of the underlying performance targets related to the outstanding FY2014 Performance RSUs and determined that it was not probable that the FY2014 Performance RSUs will vest as to 129,000 shares. Consequently, the compensation expense related to FY2014 Performance RSUs was reversed upon our determination of non-achievement of the performance metrics. We will assess the probability of achievement of the performance targets at the end of each quarter. If it becomes probable that the performance targets will be achieved, a cumulative adjustment will be recorded as if ratable share-based compensation expense had been recorded since the grant date. Additional share-based compensation of $676,000 would have been recorded during the six months ended September 30, 2013 for FY2014 Performance RSUs had the achievement of performance targets been deemed probable.
Share-based compensation expense resulted in a material impact on our earnings per share and on our condensed consolidated financial statements for fiscal 2013 and during the three and six months ended September 30, 2013. 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. Since October 2011, Abaxis also has been providing veterinary reference laboratory diagnostic and consulting services for veterinarians through AVRL. 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 six months ended September 30, 2013 and 2012 were as follows
(in thousands, except percentages):
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
September 30,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
Revenues by Geographic Region
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
North America
|
|
$
|
37,320
|
|
|
$
|
35,915
|
|
|
$
|
1,405
|
|
|
|
4
|
%
|
|
$
|
71,972
|
|
|
$
|
69,079
|
|
|
$
|
2,893
|
|
|
|
4
|
%
|
Percentage of total revenues
|
|
|
81
|
%
|
|
|
81
|
%
|
|
|
|
|
|
|
|
|
|
|
81
|
%
|
|
|
80
|
%
|
|
|
|
|
|
|
|
|
Europe
|
|
|
6,446
|
|
|
|
6,493
|
|
|
|
(47
|
)
|
|
|
(1
|
)%
|
|
|
12,998
|
|
|
|
13,709
|
|
|
|
(711
|
)
|
|
|
(5
|
)%
|
Percentage of total revenues
|
|
|
14
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
15
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
Asia Pacific and rest of the world
|
|
|
2,085
|
|
|
|
1,850
|
|
|
|
235
|
|
|
|
13
|
%
|
|
|
4,050
|
|
|
|
3,484
|
|
|
|
566
|
|
|
|
16
|
%
|
Percentage of total revenues
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
45,851
|
|
|
$
|
44,258
|
|
|
$
|
1,593
|
|
|
|
4
|
%
|
|
$
|
89,020
|
|
|
$
|
86,272
|
|
|
$
|
2,748
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
September 30,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
Revenues by Product and Service Category
|
|
|
2013
|
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
2013
|
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
Instruments(1)
|
|
$
|
13,537
|
|
|
$
|
11,607
|
|
|
$
|
1,930
|
|
|
|
17
|
%
|
|
$
|
22,212
|
|
|
$
|
21,487
|
|
|
$
|
725
|
|
|
|
3
|
%
|
Percentage of total revenues
|
|
|
29
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
Consumables(2)
|
|
|
28,699
|
|
|
|
29,412
|
|
|
|
(713
|
)
|
|
|
(2
|
)%
|
|
|
59,298
|
|
|
|
58,894
|
|
|
|
404
|
|
|
|
1
|
%
|
Percentage of total revenues
|
|
|
63
|
%
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
67
|
%
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
Other products and services(3)
|
|
|
3,577
|
|
|
|
3,202
|
|
|
|
375
|
|
|
|
12
|
%
|
|
|
7,435
|
|
|
|
5,816
|
|
|
|
1,619
|
|
|
|
28
|
%
|
Percentage of total revenues
|
|
|
8
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
8
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
Product and service revenues, net
|
|
|
45,813
|
|
|
|
44,221
|
|
|
|
1,592
|
|
|
|
4
|
%
|
|
|
88,945
|
|
|
|
86,197
|
|
|
|
2,748
|
|
|
|
3
|
%
|
Percentage of total revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Development and licensing revenue
|
|
|
38
|
|
|
|
37
|
|
|
|
1
|
|
|
|
3
|
%
|
|
|
75
|
|
|
|
75
|
|
|
|
-
|
|
|
|
-
|
%
|
Percentage of total revenues
|
|
<1%
|
|
|
<1%
|
|
|
|
|
|
|
|
|
|
|
<1%
|
|
|
<1%
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
45,851
|
|
|
$
|
44,258
|
|
|
$
|
1,593
|
|
|
|
4
|
%
|
|
$
|
89,020
|
|
|
$
|
86,272
|
|
|
$
|
2,748
|
|
|
|
3
|
%
|
(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
specialty cartridges, i-STAT cartridges and rapid tests.
|
(3)
|
Other products and services include veterinary reference laboratory diagnostic and consulting services.
|
Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012
North America
.
During the three months ended September 30, 2013, total revenues in North America increased by 4%, or $1.4 million, as compared to the same period in fiscal 2013. 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 (including sales to the U.S. government) decreased by 8%, or $458,000, primarily due to a decrease in average selling prices of Piccolo chemistry analyzers and medical reagent discs sold to our distributor, Abbott, partially offset by an increase in the sales volume of Piccolo chemistry analyzers and medical reagent discs to Abbott. We entered into the Abbott Agreement in October 2012.
|
·
|
Total sales of our VetScan chemistry analyzers and veterinary reagent discs in North America decreased by 5%, or $885,000, primarily due to a decrease in the sales volume of veterinary reagent discs, partially offset by an increase in the sales volume of VetScan chemistry analyzers to MWI
, both
resulting primarily from our addition of MWI as a nationwide distributor
in September 2012
.
|
·
|
Total sales of our VetScan hematology instruments and hematology reagent kits in North America increased by 25%, or $1.3 million, primarily due to
higher average selling prices of
VetScan hematology instruments and an increase in the sales volume of VetScan hematology instruments to MWI
.
|
·
|
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 17%, or $988,000, primarily due to an increase in the sales volume of VetScan i-STAT analyzers to MWI.
|
·
|
Other products and services revenue in North America increased by 15%, or $434,000, primarily due to an increase in service revenues from veterinary reference laboratory diagnostic and consulting services provided by AVRL to new customers and increased business with current customers, 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 September 30, 2013, total revenues in Europe decreased by 1%, or $47,000, as compared to the same period in fiscal 2013. Revenues from Piccolo chemistry analyzers and medical reagent discs decreased by 22%, or $422,000, primarily due to higher sales of Piccolo chemistry analyzers in the second quarter of fiscal 2013 to an international medical supplies sourcing and support company to support a pharmaceutical clinical trial conducted by a biotechnology company, partially offset by an increase in the sales volume of medical reagent discs to various distributors. Revenues from VetScan chemistry analyzers and veterinary reagent discs increased by 8%, or $297,000, primarily due to an increase in the sales volume of veterinary reagent discs to a distributor, partially offset by a decrease in the sales volume of VetScan chemistry analyzers to a distributor.
Asia Pacific and rest of the world
.
During the three months ended September 30, 2013, total revenues in Asia Pacific and rest of the world increased by 13%, or $235,000, as compared to the same period in fiscal 2013. Revenues from veterinary instruments increased by 11%, or $79,000, primarily due to an increase in the sales volume of VetScan hematology instruments to various distributors, partially offset by a decrease in VetScan chemistry analyzers to various distributors. Revenues from veterinary consumables increased by 14%, or $124,000, primarily due to an increase in the sales volume of veterinary reagent discs to a distributor.
Significant concentrations
.
During the three months ended September 30, 2013, one distributor in the United States, MWI, accounted for 22% of our total worldwide revenues. During the three months ended September 30, 2012, one distributor in the United States, Animal Health International, accounted for 13% of our total worldwide revenues.
Six Months Ended September 30, 2013 Compared to Six Months Ended September 30, 2012
North America
.
During the six months ended September 30, 2013, total revenues in North America increased by 4%, or $2.9 million, as compared to the same period in fiscal 2013. 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 (including sales to the U.S. government) decreased by 17%, or $1.8 million, primarily due to a decrease in average selling prices of Piccolo chemistry analyzers and medical reagent discs sold to our distributor, Abbott, since we entered into the Abbott Agreement in October 2012.
|
·
|
Total sales of our VetScan chemistry analyzers and veterinary reagent discs in North America decreased by 5%, or $1.6 million, primarily due to a decrease in the sales volume of veterinary reagent discs, partially offset by an increase in the sales volume of VetScan chemistry analyzers to MWI,
both
resulting from our addition of MWI as a nationwide distributor
in September 2012
.
|
·
|
Total sales of our VetScan hematology instruments and hematology reagent kits in North America increased by 28%, or $2.3 million, primarily due to
higher average selling prices of
VetScan hematology instruments and an increase in the sales volume of VetScan hematology instruments to MWI
.
|
·
|
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 22%, or $2.4 million, primarily due to an increase in the sales volume of VetScan i-STAT analyzers and VetScan rapid tests to MWI.
|
·
|
Other products and services revenue in North America increased by 30%, or $1.6 million, primarily due to an increase in service revenues from veterinary reference laboratory diagnostic and consulting services provided by AVRL to new customers and increased business with current customers, 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 six months ended September 30, 2013, total revenues in Europe decreased by 5%, or $711,000, as compared to the same period in fiscal 2013. Revenues from Piccolo chemistry analyzers and medical reagent discs decreased by 34%, or $1.6 million, primarily due to higher sales of Piccolo chemistry analyzers in the six months period ended September 30, 2012 to an international medical supplies sourcing and support company to support a pharmaceutical clinical trial conducted by a biotechnology company, partially offset by an increase in the sales volume of medical reagent discs to various distributors. Revenues from VetScan chemistry analyzers and veterinary reagent discs increased by 8%, or $609,000, primarily due to an increase in the sales volume of veterinary reagent discs to a distributor, partially offset by a decrease in the sales volume of VetScan chemistry analyzers to a distributor.
Asia Pacific and rest of the world
.
During the six months ended September 30, 2013, total revenues in Asia Pacific and rest of the world increased by 16%, or $566,000, as compared to the same period in fiscal 2013. Revenues from veterinary instruments increased by 16%, or $192,000, primarily due to an increase in the sales volume of VetScan hematology instruments to two distributors. Revenues from veterinary consumables increased by 14%, or $258,000, primarily due to an increase in the sales volume of veterinary reagent discs to two distributors.
Significant concentrations
.
During the six months ended September 30, 2013, one distributor in the United States, MWI, accounted for 22% of our total worldwide revenues. During the six months ended September 30, 2012, one distributor in the United States, Animal Health International, accounted for 13% 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.
Certain reclassifications have been made to prior fiscal period amounts to conform to the current fiscal period presentation in the segment categories. These reclassifications did not result in any change on our consolidated revenues, cost of revenues or gross profit. Effective in the fourth quarter of fiscal 2013, we reclassified certain revenues related to extended maintenance contracts and costs related to instrument repair and support, from our unallocated category to its respective business segment, either medical market or veterinary market. The Company made changes to the presentation of reportable segments to reflect changes in the way its decision maker evaluates the performance of its operations and allocates resources.
Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012
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 September 30, 2013 and 2012 (in thousands, except percentages):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2013
|
|
|
Revenues(1)
|
|
|
2012
|
|
|
Revenues(1)
|
|
|
(Decrease)
|
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market(2)
|
|
$
|
7,177
|
|
|
|
100
|
%
|
|
$
|
7,941
|
|
|
|
100
|
%
|
|
$
|
(764
|
)
|
|
|
(10
|
)%
|
Percentage of total revenues
|
|
|
16
|
%
|
|
|
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Veterinary Market(2)
|
|
|
37,915
|
|
|
|
100
|
%
|
|
|
35,186
|
|
|
|
100
|
%
|
|
|
2,729
|
|
|
|
8
|
%
|
Percentage of total revenues
|
|
|
83
|
%
|
|
|
|
|
|
|
79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other(2)(3)
|
|
|
759
|
|
|
|
|
|
|
|
1,131
|
|
|
|
|
|
|
|
(372
|
)
|
|
|
(33
|
)%
|
Percentage of total revenues
|
|
|
1
|
%
|
|
|
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
45,851
|
|
|
|
|
|
|
|
44,258
|
|
|
|
|
|
|
|
1,593
|
|
|
|
4
|
%
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market(2)
|
|
|
3,999
|
|
|
|
56
|
%
|
|
|
3,658
|
|
|
|
46
|
%
|
|
|
341
|
|
|
|
9
|
%
|
Veterinary Market(2)
|
|
|
19,961
|
|
|
|
53
|
%
|
|
|
17,442
|
|
|
|
50
|
%
|
|
|
2,519
|
|
|
|
14
|
%
|
Other(2)(3)
|
|
|
19
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
(46
|
)%
|
Total cost of revenues
|
|
|
23,979
|
|
|
|
|
|
|
|
21,135
|
|
|
|
|
|
|
|
2,844
|
|
|
|
13
|
%
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market(2)
|
|
|
3,178
|
|
|
|
44
|
%
|
|
|
4,283
|
|
|
|
54
|
%
|
|
|
(1,105
|
)
|
|
|
(26
|
)%
|
Veterinary Market(2)
|
|
|
17,954
|
|
|
|
47
|
%
|
|
|
17,744
|
|
|
|
50
|
%
|
|
|
210
|
|
|
|
1
|
%
|
Other(2)(3)
|
|
|
740
|
|
|
|
|
|
|
|
1,096
|
|
|
|
|
|
|
|
(356
|
)
|
|
|
(32
|
)%
|
Gross profit
|
|
$
|
21,872
|
|
|
|
|
|
|
$
|
23,123
|
|
|
|
|
|
|
$
|
(1,251
|
)
|
|
|
(5
|
)%
|
(1)
|
The percentage reported is based on revenues by operating segment.
|
(2)
|
Includes certain prior period amounts by operating segment and unallocated items that were reclassified to conform to the current period presentation.
|
(3)
|
Represents unallocated items, not specifically identified to any particular business segment.
|
Medical Market
Revenues for Medical Market Segment
During the three months ended September 30, 2013, total revenues in the medical market decreased by 10%, or $764,000, as compared to the same period in fiscal 2013. Total revenues from Piccolo chemistry analyzers decreased by 27%, or $704,000, during the three months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily attributable to (a) a decrease in average selling prices of Piccolo chemistry analyzers sold to our distributor, Abbott, and (b) higher sales of Piccolo chemistry analyzers in the second quarter of fiscal 2013 to an international medical supplies sourcing and support company in Europe to support a pharmaceutical clinical trial conducted by a biotechnology company. These decreases were partially offset by an increase in the sales volume of Piccolo chemistry analyzers to Abbott in North America.
Total revenues from medical reagent discs decreased by 3%, or $142,000, during the three months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily attributable to a decrease in the average selling prices of medical reagent discs sold to Abbott, partially offset by an increase in the sales volume of medical reagent discs to Abbott in North America and various distributors in Europe.
Gross Profit for Medical Market Segment
Gross profit for the medical market segment decreased by 26%, or $1.1 million, during the three months ended September 30, 2013, as compared to the same period in fiscal 2013. Gross profit percentages for the medical market segment during the three months ended September 30, 2013 and 2012 were 44% and 54%, respectively. In absolute dollars, the decrease in gross profit was primarily due to (a) higher unit sales of Piccolo chemistry analyzers in the second quarter of fiscal 2013 to an international medical supplies sourcing and support company in Europe to support a pharmaceutical clinical trial conducted by a biotechnology company and (b) lower average selling prices of Piccolo chemistry analyzers and medical reagent discs sold to Abbott. The decrease in gross profit percentage was primarily attributable to lower average selling prices of Piccolo chemistry analyzers and medical reagent discs.
Veterinary Market
Revenues for Veterinary Market Segment
During the three months ended September 30, 2013, total revenues in the veterinary market increased by 8%, or $2.7 million, as compared to the same period in fiscal 2013. Total revenues from veterinary instruments increased by 29%, or $2.6 million, during the three months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily attributable to (a) an increase in the sales volume of VetScan chemistry analyzers, VetScan hematology instruments and VetScan i-STAT analyzers in North America to our distributor, MWI, (b) an increase in the sales volume of VetScan hematology instruments to various distributors in Asia Pacific and rest of the world, and (c)
higher average selling prices of
VetScan hematology instruments in North America. These increases were partially offset by a decrease in the sales volume of VetScan chemistry analyzers to a distributor in Europe and various distributors in Asia Pacific and rest of the world.
Total revenues from consumables in the veterinary market decreased by 2%, or $571,000, during the three months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily attributable to a decrease in the sales volume of veterinary reagent discs in North America resulting primarily from our addition of MWI as a nationwide distributor in September 2012. These decreases were partially offset by an increase in the sales volume of veterinary reagent discs to a distributor in Europe and a distributor in Asia Pacific and rest of the world.
Total revenues from other products and services in the veterinary market increased by 38%, or $666,000, during the three months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily attributable to an increase in service revenues from veterinary reference laboratory diagnostic and consulting services provided by AVRL in North America from sales to new customers and increased business with current customers, 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.
Gross Profit for Veterinary Market Segment
Gross profit for the veterinary market segment increased by 1%, or $210,000, during the three months ended September 30, 2013, as compared to the same period in fiscal 2013. Gross profit percentages for the veterinary market segment during the three months ended September 30, 2013 and 2012 were 47% and 50%, respectively. In absolute dollars, the increase in gross profit was due to (a) higher unit sales of VetScan hematology instruments, (b) higher average selling prices of VetScan hematology instruments, and (c) higher service revenues provided by AVRL, partially offset by (d) lower unit sales of veterinary reagent discs. The decrease in gross profit percentage was primarily attributable to product mix changes which included lower unit sales of veterinary reagent discs and higher relative sales of VetScan i‑STAT products, which have a lower margin contribution.
Other
Gross profit in our other category decreased by 32%, or $356,000, during the three months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily attributable to a decrease in revenues from Becton, Dickinson and Company for products using the Orbos Discrete Lyophilization Process.
Six Months Ended September 30, 2013 Compared to Six Months Ended September 30, 2012
The following table presents revenues, cost of revenues, gross profit and percentage of revenues by operating segments and from certain unallocated items for the six months ended September 30, 2013 and 2012 (in thousands, except percentages):
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2013
|
|
|
Revenues(1)
|
|
|
2012
|
|
|
Revenues(1)
|
|
|
(Decrease)
|
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market(2)
|
|
$
|
13,215
|
|
|
|
100
|
%
|
|
$
|
16,390
|
|
|
|
100
|
%
|
|
$
|
(3,175
|
)
|
|
|
(19
|
)%
|
Percentage of total revenues
|
|
|
15
|
%
|
|
|
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Veterinary Market(2)
|
|
|
74,286
|
|
|
|
100
|
%
|
|
|
67,777
|
|
|
|
100
|
%
|
|
|
6,509
|
|
|
|
10
|
%
|
Percentage of total revenues
|
|
|
83
|
%
|
|
|
|
|
|
|
79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other(2)(3)
|
|
|
1,519
|
|
|
|
|
|
|
|
2,105
|
|
|
|
|
|
|
|
(586
|
)
|
|
|
(28
|
)%
|
Percentage of total revenues
|
|
|
2
|
%
|
|
|
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
89,020
|
|
|
|
|
|
|
|
86,272
|
|
|
|
|
|
|
|
2,748
|
|
|
|
3
|
%
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market(2)
|
|
|
7,293
|
|
|
|
55
|
%
|
|
|
7,401
|
|
|
|
45
|
%
|
|
|
(108
|
)
|
|
|
(1
|
)%
|
Veterinary Market(2)
|
|
|
38,909
|
|
|
|
52
|
%
|
|
|
32,822
|
|
|
|
48
|
%
|
|
|
6,087
|
|
|
|
19
|
%
|
Other(2)(3)
|
|
|
54
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
(30
|
)%
|
Total cost of revenues
|
|
|
46,256
|
|
|
|
|
|
|
|
40,300
|
|
|
|
|
|
|
|
5,956
|
|
|
|
15
|
%
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market(2)
|
|
|
5,922
|
|
|
|
45
|
%
|
|
|
8,989
|
|
|
|
55
|
%
|
|
|
(3,067
|
)
|
|
|
(34
|
)%
|
Veterinary Market(2)
|
|
|
35,377
|
|
|
|
48
|
%
|
|
|
34,955
|
|
|
|
52
|
%
|
|
|
422
|
|
|
|
1
|
%
|
Other(2)(3)
|
|
|
1,465
|
|
|
|
|
|
|
|
2,028
|
|
|
|
|
|
|
|
(563
|
)
|
|
|
(28
|
)%
|
Gross profit
|
|
$
|
42,764
|
|
|
|
|
|
|
$
|
45,972
|
|
|
|
|
|
|
$
|
(3,208
|
)
|
|
|
(7
|
)%
|
(1)
|
The percentage reported is based on revenues by operating segment.
|
(2)
|
Includes certain prior period amounts by operating segment and unallocated items that were reclassified to conform to the current period presentation.
|
(3)
|
Represents unallocated items, not specifically identified to any particular business segment.
|
Medical Market
Revenues for Medical Market Segment
During the six months ended September 30, 2013, total revenues in the medical market decreased by 19%, or $3.2 million, as compared to the same period in fiscal 2013. Total revenues from Piccolo chemistry analyzers decreased by 49%, or $2.8 million, during the six months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily attributable to (a) a decrease in average selling prices of Piccolo chemistry analyzers sold to Abbott and (b) higher sales of Piccolo chemistry analyzers in the six months period ended September 30, 2012 to an international medical supplies sourcing and support company in Europe to support a pharmaceutical clinical trial conducted by a biotechnology company.
Total revenues from medical reagent discs decreased by 5%, or $477,000, during the six months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily attributable to a decrease in the average selling prices of medical reagent discs sold to Abbott, partially offset by an increase in the sales volume of medical reagent discs to various distributors in Europe.
Gross Profit for Medical Market Segment
Gross profit for the medical market segment decreased by 34%, or $3.1 million, during the six months ended September 30, 2013, as compared to the same period in fiscal 2013. Gross profit percentages for the medical market segment during the six months ended September 30, 2013 and 2012 were 45% and 55%, respectively. In absolute dollars, the decrease in gross profit was primarily due to (a) higher unit sales of Piccolo chemistry analyzers in the six month period ended September 30, 2012 to an international medical supplies sourcing and support company in Europe to support a pharmaceutical clinical trial conducted by a biotechnology company and (b) lower average selling prices of Piccolo chemistry analyzers and medical reagent discs sold to Abbott. The decrease in gross profit percentage was primarily attributable to lower average selling prices of Piccolo chemistry analyzers and medical reagent discs.
Veterinary Market
Revenues for Veterinary Market Segment
During the six months ended September 30, 2013, total revenues in the veterinary market increased by 10%, or $6.5 million, as compared to the same period in fiscal 2013. Total revenues from veterinary instruments increased by 23%, or $3.6 million, during the six months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily attributable to (a) an increase in the sales volume of VetScan chemistry analyzers, VetScan hematology instruments and VetScan i-STAT analyzers in North America to MWI, (b) an increase in the sales volume of VetScan hematology instruments to two distributors in Asia Pacific and rest of the world, and (c)
higher average selling prices of
VetScan hematology instruments in North America. These increases were partially offset by a decrease in the sales volume of VetScan chemistry analyzers to a distributor in Europe.
Total revenues from consumables in the veterinary market increased by 2%, or $881,000, during the six months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily attributable to (a) an increase in the sales volume of veterinary reagent discs to a distributor in Europe and two distributors in Asia Pacific and rest of the world and (b) an increase in the sales volume of VetScan rapid tests to MWI. These increases were partially offset by a decrease in the sales volume of veterinary reagent discs in North America resulting primarily from our addition of MWI as a nationwide distributor in September 2012.
Total revenues from other products and services in the veterinary market increased by 67%, or $2.1 million, during the six months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily attributable to an increase in service revenues from veterinary reference laboratory diagnostic and consulting services provided by AVRL in North America from sales to new customers and increased business with current customers, 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.
Gross Profit for Veterinary Market Segment
Gross profit for the veterinary market segment increased by 1%, or $422,000, during the six months ended September 30, 2013, as compared to the same period in fiscal 2013. Gross profit percentages for the veterinary market segment during the six months ended September 30, 2013 and 2012 were 48% and 52%, respectively. In absolute dollars, the increase in gross profit was due to (a) higher unit sales of VetScan hematology instruments, (b) higher average selling prices of VetScan hematology instruments, and (c) higher service revenues provided by AVRL. These increases in gross profit were partially offset by (a) lower unit sales of veterinary reagent discs and (b) higher manufacturing costs of VetScan chemistry analyzers and veterinary reagent discs. The decrease in gross profit percentage was primarily attributable to product mix changes which included lower unit sales of veterinary reagent discs and higher relative sales of our VetScan i‑STAT products, which have a lower margin contribution.
Other
Gross profit in our other category decreased by 28%, or $563,000, during the six months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily attributable to a decrease in revenues from Becton, Dickinson and Company for products using the Orbos Discrete Lyophilization Process.
Three and Six Months Ended September 30, 2013 Compared to Three and Six Months Ended September 30, 2012
Cost of Revenues
The following sets forth our
cost of revenues
for the periods indicated (in thousands, except percentages):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
September 30,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
Cost of revenues
|
|
$
|
23,979
|
|
|
$
|
21,135
|
|
|
$
|
2,844
|
|
|
|
13
|
%
|
|
$
|
46,256
|
|
|
$
|
40,300
|
|
|
$
|
5,956
|
|
|
|
15
|
%
|
Percentage of total revenues
|
|
|
52
|
%
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
52
|
%
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
Cost of revenues includes the cost of materials, direct labor costs, 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. Additionally, cost of revenues includes cost of services for veterinary reference laboratory diagnostic and consulting services provided by AVRL.
The increase in cost of revenues, in absolute dollars and as a percentage of total revenues, during the three months ended September 30, 2013, as compared to the same period in fiscal 2013, was primarily due to (a) higher unit sales of VetScan hematology instruments and VetScan i-STAT analyzers, and (b) higher cost of services associated with the growth in service revenues provided by AVRL.
The increase in cost of revenues, in absolute dollars and as a percentage of total revenues, during the six months ended September 30, 2013, as compared to the same period in fiscal 2013, was primarily due to (a) higher manufacturing costs of chemistry analyzers and veterinary reagent discs, (b) higher unit sales of VetScan hematology instruments, VetScan i-STAT analyzers and VetScan rapid tests, and (c) higher cost of services associated with the growth in service revenues provided by AVRL. These increases in cost of revenues were partially offset by lower unit sales of Piccolo chemistry analyzers.
The following sets forth our gross profit for the periods indicated (in thousands, except percentages):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
September 30,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
Gross profit
|
|
$
|
21,872
|
|
|
$
|
23,123
|
|
|
$
|
(1,251
|
)
|
|
|
(5
|
)%
|
|
$
|
42,764
|
|
|
$
|
45,972
|
|
|
$
|
(3,208
|
)
|
|
|
(7
|
)%
|
Gross profit percentage
|
|
|
48
|
%
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
48
|
%
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
Gross profit during the three months ended September 30, 2013 decreased by 5%, or $1.3 million, as compared to the same period in fiscal 2013, primarily attributable to the following: (a) higher unit sales of Piccolo chemistry analyzers in the second quarter of fiscal 2013 to an international medical supplies sourcing and support company in Europe to support a pharmaceutical clinical trial conducted by a biotechnology company, (b) lower average selling prices of Piccolo chemistry analyzers and medical reagent discs sold to Abbott, and (c) lower unit sales of veterinary reagent discs. These decreases in gross profit were partially offset by (a) higher unit sales of VetScan hematology instruments, (b) higher average selling prices of VetScan hematology instruments, and (c) higher service revenues provided by AVRL. The decrease in gross profit percentage was primarily attributable to (a) lower average selling prices of Piccolo chemistry analyzers and medical reagent discs and (b) product mix changes in our veterinary market, which included lower unit sales of veterinary reagent discs and higher relative sales of VetScan i‑STAT products, which have a lower margin contribution.
Gross profit during the six months ended September 30, 2013 decreased by 7%, or $3.2 million, as compared to the same period in fiscal 2013, primarily attributable to the following: (a) higher unit sales of Piccolo chemistry analyzers in the six months period ended September 30, 2012 to an international medical supplies sourcing and support company in Europe to support a pharmaceutical clinical trial conducted by a biotechnology company, (b) lower average selling prices of Piccolo chemistry analyzers and medical reagent discs sold to Abbott, (c) lower unit sales of veterinary reagent discs, and (d) higher manufacturing costs of VetScan chemistry analyzers and veterinary reagent discs. These decreases in gross profit were partially offset by (a) higher unit sales of VetScan hematology instruments, (b) higher average selling prices of VetScan hematology instruments, and (c) higher service revenues provided by AVRL. The decrease in gross profit percentage was primarily attributable to (a) lower average selling prices of Piccolo chemistry analyzers and medical reagent discs and (b) product mix changes in our veterinary market, which included lower unit sales of veterinary reagent discs and higher relative sales of VetScan i‑STAT products, which have a lower margin contribution.
The following sets forth our research and development expenses for the periods indicated (in thousands, except percentages):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
September 30,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
Research and development expenses
|
|
$
|
3,418
|
|
|
$
|
3,581
|
|
|
$
|
(163
|
)
|
|
|
(5
|
)%
|
|
$
|
6,591
|
|
|
$
|
6,546
|
|
|
$
|
45
|
|
|
|
1
|
%
|
Percentage of total revenues
|
|
|
7
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
7
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
Research and development expenses consist of personnel costs (including salaries, benefits and share-based compensation expense), consulting expenses and materials and related expenses associated with the development of new tests and test methods, 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.
Research and development expenses decreased by 5%, or $163,000, during the three months ended September 30, 2013 as compared to the same period in fiscal 2013, and was flat during the six months ended September 30, 2013 as compared to the same period in fiscal 2013. Research and development expenses related primarily 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 September 30, 2013 and 2012 was $215,000 and $254,000, respectively, and during the six months ended September 30, 2013 and 2012 was $582,000 and $554,000, respectively.
We anticipate research and development expenses for fiscal 2014 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
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
September 30,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
Sales and marketing expenses
|
|
$
|
9,902
|
|
|
$
|
11,505
|
|
|
$
|
(1,603
|
)
|
|
|
(14
|
)%
|
|
$
|
19,930
|
|
|
$
|
23,274
|
|
|
$
|
(3,344
|
)
|
|
|
(14
|
)%
|
Percentage of total revenues
|
|
|
22
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
22
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
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.
Sales and marketing expenses decreased during the three and six months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily as a result of the restructuring of our sales and marketing organization within the medical market segment as a result of our distribution partnership with Abbott, which we entered into in October 2012. The restructuring resulted in a decrease in personnel costs due to a sales force reduction and a decrease in sales and marketing spending in the United States medical market segment. Share-based compensation expense included in sales and marketing expenses during the three months ended September 30, 2013 and 2012 was $595,000 and $584,000, respectively, and during the six months ended September 30, 2013 and 2012 was $1.3 million and $1.3 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
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
September 30,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
Percent
|
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
Change
|
|
General and administrative expenses
|
|
$
|
2,853
|
|
|
$
|
4,621
|
|
|
$
|
(1,768
|
)
|
|
|
(38
|
)%
|
|
$
|
5,908
|
|
|
$
|
7,943
|
|
|
$
|
(2,035
|
)
|
|
|
(26
|
)%
|
Percentage of total revenues
|
|
|
6
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
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.
General and administrative expenses decreased during the three and six months ended September 30, 2013, as compared to the same period in fiscal 2013, primarily attributable to a decrease in legal expenses due to the settlement of our Cepheid patent infringement case in the second quarter of fiscal 2013. Share-based compensation expense included in general and administrative expenses during the three months ended September 30, 2013 and 2012 was $745,000 and $649,000, respectively, and during the six months ended September 30, 2013 and 2012 was $1.7 million and $1.2 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
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
September 30,
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
|
2013
|
|
|
2012
|
|
|
(Decrease)
|
|
Interest and other income (expense), net
|
|
$
|
507
|
|
|
$
|
255
|
|
|
$
|
252
|
|
|
$
|
911
|
|
|
$
|
25
|
|
|
$
|
886
|
|
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.
Interest and other income (expense), net increased during the three and six months ended September 30, 2013, as compared to the same period in fiscal 2013, 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
|
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Income tax provision
|
|
$
|
2,210
|
|
|
$
|
8,012
|
|
|
$
|
4,021
|
|
|
$
|
9,711
|
|
Effective tax rate
|
|
|
36
|
%
|
|
|
38
|
%
|
|
|
36
|
%
|
|
|
38
|
%
|
During the three months ended September 30, 2013 and 2012, our income tax provision was $2.2 million, based on an effective tax rate of 36%, and $8.0 million, based on an effective tax rate of 38%, respectively. During the six months ended September 30, 2013 and 2012, our income tax provision was $4.0 million, based on an effective tax rate of 36%, and $9.7 million, based on an effective tax rate of 38%, respectively. The effective tax rates during the three and six months ended September 30, 2013, as compared to the three and six months ended September 30, 2012, decreased primarily due to (a) a discrete tax expense of approximately $6.7 million due to a gain from our legal settlement with Cepheid during the second quarter of fiscal 2013 and (b) reinstatement of federal research tax credits on January 2, 2013, partially offset by (c) an increase in non-deductible share-based compensation expense.
We did not have any unrecognized tax benefits as of September 30, 2013 and March 31, 2013. During the three and six months ended September 30, 2013 and 2012, 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 September 30, 2013 and March 31, 2013 (in thousands, except percentages):
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2013
|
|
Cash and cash equivalents
|
|
$
|
71,446
|
|
|
$
|
54,910
|
|
Short-term investments
|
|
|
14,447
|
|
|
|
23,354
|
|
Long-term investments
|
|
|
17,969
|
|
|
|
17,000
|
|
Total cash, cash equivalents and investments
|
|
$
|
103,862
|
|
|
$
|
95,264
|
|
Percentage of total assets
|
|
|
50
|
%
|
|
|
47
|
%
|
At September 30, 2013, we had net working capital of $141.7 million compared to $132.9 million at March 31, 2013.
Cash Flow Changes
Cash provided by (used in) operating, investing and financing activities for the six months ended September 30, 2013 and 2012 were as follows (in thousands):
|
|
Six Months Ended
|
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
Net cash provided by operating activities
|
|
$
|
14,176
|
|
|
$
|
13,375
|
|
Net cash provided by (used in) investing activities
|
|
|
4,850
|
|
|
|
(4,706
|
)
|
Net cash used in financing activities
|
|
|
(2,836
|
)
|
|
|
(89
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
346
|
|
|
|
(314
|
)
|
Net increase in cash and cash equivalents
|
|
$
|
16,536
|
|
|
$
|
8,266
|
|
Cash and cash equivalents at September 30, 2013 were $71.4 million compared to $54.9 million at March 31, 2013. The increase in cash and cash equivalents during the six months ended September 30, 2013 was primarily due to net cash provided by operating activities of $14.2 million and proceeds from maturities and redemptions of investments of $15.6 million. The increase was partially offset by purchases of investments of $8.0 million and payments made for tax withholdings related to net share settlements of restricted stock units of $4.6 million during the six months ended September 30, 2013.
Cash Flows from Operating Activities
During the six months ended September 30, 2013, we generated $14.2 million in cash from operating activities, compared to $13.4 million during the six months ended September 30, 2012. The cash provided by operating activities during the six months ended September 30, 2013 was primarily the result of net income of $7.2 million, adjusted for the effects of non-cash adjustments including depreciation and amortization of $3.6 million and share-based compensation expense of $4.1 million, partially offset by a decrease of $1.7 million related to excess tax benefits from share-based awards.
Other changes in operating activities during the six months ended September 30, 2013 were as follows:
·
|
Receivables, net decreased by $4.9 million, from $40.0 million at March 31, 2013 to $35.1 million as of September 30, 2013, primarily due to higher sales in the last month of the quarter ended March 31, 2013.
|
·
|
Inventories increased by $582,000, from $26.8 million at March 31, 2013 to $27.4 million as of September 30, 2013, primarily due to lower sales
during the six month period ended September 30, 2013.
|
·
|
Prepaid expenses and other current assets increased by $2.5 million, from $3.3 million at March 31, 2013 to $5.8 million as of September 30, 2013, primarily due to (a) an increase in prepayments to Diatron MI PLC due to the timing of purchases of hematology instruments and reagents and (b) an increase in prepaid taxes due to the timing of estimated income tax payments.
|
·
|
Accounts payable decreased by $1.1 million, from $8.1 million at March 31, 2013 to $7.0 million as of September 30, 2013, primarily due to the timing and payment of services and inventory purchases.
|
·
|
Accrued payroll and related expenses decreased by $754,000, from $6.3 million at March 31, 2013 to $5.5 million as of September 30, 2013, primarily due to a reduction in accrued bonus at September 30, 2013 because qualifiers for bonus payments were not met in the second quarter of fiscal 2014.
|
·
|
As of September 30, 2013 and March 31, 2013, the current portion of deferred revenue was $1.2 million and $1.4 million, respectively, and the non-current portion of deferred revenue was $4.4 million and $3.8 million, respectively. Net current and non-current deferred revenue increased by $535,000. The changes in deferred revenue balances were due to 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 six months ended September 30, 2013, partially offset by deferred revenue recognized ratably over the life of the maintenance contracts.
|
·
|
As of September 30, 2013 and March 31, 2013, the current portion of warranty reserve was $872,000 and $995,000, respectively, and the non-current portion of warranty reserve was $741,000 and $389,000, respectively. Net current and non-current warranty reserve increased by $229,000. Our warranty reserve 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
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 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.
Cash Flows from Investing Activities
Net cash provided by investing activities during the six months ended September 30, 2013 totaled $4.9 million, compared to net cash used in investing activities of $4.7 million during the six months ended September 30, 2012. Changes in investing activities were as follows:
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Cash provided by proceeds from maturities and redemptions of investments in certificates of deposit, corporate bonds and municipal bonds totaled $15.6 million during the six months ended September 30, 2013. Cash used to purchase investments in certificates of deposit and corporate bonds totaled $8.0 million during the six months ended September 30, 2013.
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Our capital expenditures totaled $2.8 million during the six months ended September 30, 2013, primarily to increase our manufacturing capacity and support our AVRL operations and growth in our veterinary business in North America. We expect to continue to make significant capital expenditures as necessary in the normal course of our business.
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Cash Flows from Financing Activities
Net cash used in financing activities during the six months ended September 30, 2013 totaled $2.8 million, compared to net cash used in financing activities of $89,000 during the six months ended September 30, 2012. The changes during the six months ended September 30, 2013 were primarily due to payments made for tax withholdings related to net share settlements of restricted stock units of $4.6 million, partially offset by excess tax benefits from share-based awards of $1.7 million. During the six months ended September 30, 2013, we did not purchase any shares pursuant to our share repurchase program described below.
Share Repurchase Program
Between August 2011 and January 2012, the Board of Directors authorized the repurchase of up to a total of $55.0 million of our common stock. In July 2013, the Board of Directors approved a $12.3 million increase to its existing share repurchase program to a total of $67.3 million. As of September 30, 2013, $40.0 million was available to purchase common stock. Since the share repurchase program began, through September 30, 2013, we have repurchased 1.2 million shares of our common stock at a total cost of $27.3 million. 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 six months ended September 30, 2013, we did not repurchase any of our common stock.
We believe that our 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 customer demand and 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.
We have purchase commitments, comprising of supply and inventory related agreements, totaling approximately $14.6 million as of September 30, 2013. These purchase order commitments include our purchase obligations with SMB of Denmark to purchase VS
pro
specialty analyzers and related cartridges and Diatron MI PLC of Hungary to purchase Diatron hematology instruments.
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 September 30, 2013, our short-term and long-term notes payable balances were $100,000 and $632,000, respectively, and we recorded the short-term balance in “Other accrued liabilities” on the condensed consolidated balance sheets. The entire outstanding balance of the note is 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 September 30, 2013.
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 condensed 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 may 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 are payable 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. On October 1, 2013, before the court ruled on the motions to dismiss, the parties notified the court that they had reached a settlement of the lawsuit. The parties are in the process of formalizing the settlement agreement. Among other things, the proposed settlement terms provide for the claims against the defendants to be dismissed with prejudice and for the release of certain known or unknown claims that have been or could have been brought later in the court arising out of the same allegations. Abaxis has agreed that if the proposed settlement terms are approved by the court, it will adopt certain corporate governance measures, such measures to be in effect for at least five years. If the parties are not able to agree on the amount of an attorney’s fee award to be paid to the plaintiff’s counsel, subject to approval by the court, Abaxis anticipates that plaintiff will petition the court for an attorney’s fee award. The settlement is not contingent on the payment of any attorney’s fee award. We believe that any attorney’s fees that would be awarded to plaintiff’s counsel would not have a material adverse effect on Abaxis, our consolidated financial position and results of operations.
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 September 30, 2013, 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.