Recent Filings: Jun 1997 (Annual Rpt) | Aug 1997 (Qtrly Rpt) | Nov 1997 (Qtrly Rpt) | Feb 1998 (Qtrly Rpt)
More filings for ABAX available from EDGAR Online
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February 12, 1998
ABAXIS INC (ABAX)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including but not limited to those discussed below, that could cause actual results to differ materially from historical results or those anticipated. Such risks and uncertainties include market acceptance of the Company's products and continuing development of its products, including obtaining required Food and Drug Administration ("FDA") clearance and other government approvals, risks associated with manufacturing and distributing products on a commercial scale, including complying with Federal and state food and drug regulations and general market conditions and competition. In this report, the words "anticipates", "believes", "expects", "future", "intends", "plans", and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.
Abaxis develops, manufactures and markets portable blood analysis systems for use in any patient-care setting to provide clinicians with rapid blood constituent measurements. The Company's products consist of a compact 6.9 kilogram analyzer and a series of single-use plastic disks called reagent discs that contain all the chemicals required to perform a panel of up to 12 tests. The system can be operated with minimal training and performs multiple routine tests on whole blood using either venous or fingerstick samples. The system provides test results in less than 15 minutes with the precision and accuracy equivalent to a clinical laboratory. The Company currently markets this system for veterinary use under the name VetScan(R) and in the human market under the name Piccolo(R).
During the quarter ended December 31, 1997, the Company achieved record results in terms of unit sales, placing 282 Point-of-Care Blood Analyzers worldwide, of which 256 were VetScan systems and 26 were Piccolo systems. Reagent disc shipments for the quarter ended December 31, 1997 were approximately 124,000 discs. Ninety-six percent (96%) of these reagent disc shipments were for veterinary applications. The quarter ended December 31, 1997 was the second consecutive quarter for the Company of revenue in excess of $3,000,000. Product sales in the US accounted for 60%, international sales accounted for 38% and Orbos contract revenue accounted for the remaining 2% of total revenues for the third fiscal quarter.
Domestically, 96% of the sales in the US were to the veterinary market and 4% were to the human medical market. The change in product mix to 4% of total revenues from Piccolo products from 42% during the second quarter of fiscal 1998 is the result of the Company completing, during the second fiscal quarter, the initial shipments of Piccolo systems to the US Navy and Marines. Through December 31, 1997, the Company has shipped approximately 50% of the maximum number of analyzers covered by the March 1997 contract with the US Navy. There can be no assurances that the US Navy will place purchase orders against the balance of the contract.
Internationally, sales to Japan constituted 68% and sales to Europe constituted 20% of the total international shipments during the quarter. Of the total Japanese revenue, 98% was for veterinary applications, including sales of 118 VetScan systems. The increase in Japanese veterinary sales activities relative to prior periods is the result of the approval in July 1997 from the Japanese Ministry of Agriculture, Forestry and Fishery to distribute VetScan systems in Japan. There can be no assurance that the increases in Japanese sales will continue.
The increase in reagent disc shipments in the third fiscal quarter is consistent with the Company's belief that there will be recurring reagent disc revenue as the Company's product lines mature. This growth is mostly attributable to the expanded installed base of VetScan systems and higher consumption rates of institutional users. There can be no assurance this growth will continue.
Through December 31, 1997, the Company has placed a total of 1,928 units of the Point-of-Care Blood Analyzer worldwide, of which 1,479 were VetScan systems and 449 were Piccolo systems. In the United States the Company has placed 1,025 VetScan systems and 192 Piccolo systems. Internationally, the Company has placed 454 VetScan systems and 257 Piccolo systems.
The Company continues to develop new products that the Company believes will provide further opportunities for market penetration. The Company is working on development of four electrolyte test methods: total carbon dioxide, chloride, potassium and sodium. Clinical trials of these test methods are expected to begin in the first quarter of fiscal 1999. For the human market, the Company plans on incorporating these tests into new panels consistent with the codes in the 1998 version of the Current Procedures Terminology manual published by the American Medical Association. The Company intends to develop additional reagent products utilizing these electrolyte methods for the veterinary market. While the Company believes that its technology will allow it to develop reagent disc products in the future to provide a variety of additional blood tests such as the electrolyte test methods, there can be no assurance that such future products will be developed, that such products will receive required regulatory clearance, or that the Company will be able to manufacture or market such products successfully.
Sales for any future periods are not predictable with a significant degree of certainty. The Company generally operates with limited order backlog because its products typically are shipped shortly after orders are received. As a result, product sales in any quarter are generally dependent on orders booked and shipped in that quarter. The Company's expense levels, which are to a large extent fixed, are based in part on its expectations as to future revenues. Accordingly the Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, any such shortfall would have an immediate materially adverse impact on the Company's operating results and financial condition. Until sales volume of the Company's products, particularly its reagent discs, increases significantly so as to offset associated fixed costs and the Company begins to realize certain manufacturing economies of scale, sales of the Company's products may result in further losses and adversely affect the Company's results of operations and financial condition. The Company believes that period to period comparisons of its results of operations are not necessarily meaningful.
The Company's periodic operating results have in the past varied and in the future may vary significantly depending on, but not limited to, a number of factors, including the level of competition; the size and timing of sales orders; market acceptance of the current and new products; new product announcements by the Company or its competitors; changes in pricing by the Company or its competitors; the ability of the Company to develop, introduce and market new products on a timely basis; component costs and supply constraints; manufacturing capacities and ability to scale up production; the mix of product sales between the analyzers and the reagent discs; the mix of product sales between distributor and direct sales and human medical and veterinary applications; mix in sales channels; levels of expenditure on research and development; changes in Company strategy; personnel changes; regulatory changes; and general economic trends.
The Company continues to explore the application of its proprietary technology used to produce the dry reagents used in the reagent discs, called the Orbos(R) Discrete Lyophilzation Process, to other companies' products. This process allows the production of an accurate, precise amount of active chemical ingredients in the form of a soluble bead. The Company believes that the Orbos process has broad applications in products where delivery of active ingredients in a stable, pre-metered format is desired. The Company has contracts with Becton Dickinson Immunocytometry Systems and Pharmacia Biotech, Inc. to either supply products or license Orbos technology. The Company is currently working with other companies to determine potential suitability of the Orbos technology to these companies' products. As resources permit, the Company will pursue other development, licensing or manufacturing agreement opportunities for its Orbos technology with other companies. There can be no assurances, however, that other applications will be identified or that additional agreements with the Company will result.
RESULTS OF OPERATIONS
REVENUE
During the three-month period ended December 31, 1997, the Company reported total revenues of approximately $3,030,000, a $1,139,000 or 60% increase as compared to total revenues of approximately $1,891,000 for the same period in fiscal 1997. The increase in revenue for the quarter ended December 31, 1997 compared to the quarter ended December 31, 1996 was due primarily to increased unit sales of VetScan systems to the Japanese market and increased reagent disc sales in the domestic and international markets.
For the nine months ended December 31, 1997, total revenues were approximately $9,071,000, a $4,156,000 or 85% increase as compared to total revenues of approximately $4,915,000 for the same period in fiscal 1997. The increase in revenue for the nine-month period ended December 31, 1997 compared to the nine-month period ended December 31, 1996 was due to increased unit sales of VetScan analyzers in the US, sales of Piccolo analyzers to the US military on a direct basis without any distributor discounts, which yield higher net revenues, increased sales of VetScan systems to the Japanese market and higher reagent disc sales in the domestic and international markets.
Revenues from Orbos contracts during the three and nine-month periods ended December 31, 1997 were $35,000 and $191,000 respectively. Revenues from Orbos contracts during the three and nine-month periods ended December 31, 1996 were $49,000 and $456,000 respectively. Orbos revenue is primarily dependent upon sales of products using the Orbos technology by other parties, which is out of the control of the Company and, therefore, may vary significantly from quarter to quarter.
COST OF PRODUCT SALES
Cost of product sales during the quarter ended December 31, 1997 was approximately $2,600,000 or 86% of total revenues, as compared to approximately $1,860,000, or 98% of total revenues for the quarter ended December 31, 1996. For the nine-month period ended December 31, 1997, cost of sales was $8,061,000 or 89% of total revenues as compared to $5,471,000, or 111% of total revenues for the same period in fiscal 1997. The increase in cost of product sales for the quarter and nine-month periods ending December 31, 1997 as compared to the same periods ending December 31, 1996 was primarily a function of the increase in sales volume. The decrease in cost of product sales as a percentage of total revenues for the quarter and nine-month periods ended December 31, 1997 as compared to the same periods ended December 31, 1996 is due to lower unit costs resulting from better standardized manufacturing processes and economies of scale related to increased manufacturing volume.
RESEARCH AND DEVELOPMENT
Research and development expenses during the third quarter of fiscal 1998 were approximately $428,000, or 14% of total revenues. Third quarter fiscal 1998 research and development expenses increased $101,000 from approximately $327,000, or 17% of total revenues, for the same period in fiscal 1997. For the first nine months of fiscal 1998, research and development expenses were $1,171,000, or 13% of total revenues, a $135,000 increase from $1,036,000, or 21% of total revenues, in the first nine months of fiscal 1997. The increase for the three-month and nine-month period ended December 31, 1997 compared to the same periods in fiscal 1997 is the result of increased spending in the development of new test methods offset by reallocation of a portion of the development resources to support product manufacturing activities such as manufacturing process development. The Company expects research and development expenses will increase as the Company continues the development of new test methods to expand its test menus as well as other development projects.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses totaled approximately $1,089,000, or 36% of total revenues, for the three-month period ended December 31, 1997. This is a $1,000 increase from selling, general and administrative expenses of approximately $1,088,000, or 58% of total revenues, for the three-month period ended December 31, 1996. Selling, general and administrative expenses for the first nine months of fiscal 1998 were $3,477,000, or 38% of total revenues. This is a $205,000, or 6% decrease from selling, general and administrative expenses of $3,682,000, or 75% of total revenues, for the first nine months of fiscal 1997. Selling, general and administrative expenses for the three-month period ended December 31, 1997 compared to the same period ended December 31, 1996 remained relatively constant as the result of the Company's cost and spending control programs. The Company's effective utilization of resources is reflected in a reduction of total selling, general and administrative expenses as a percentage of revenue in the periods in fiscal 1998 as compared with comparable periods in fiscal 1997. The decrease in selling, general and administrative expenses for the nine-month period ended December 31, 1997 compared to the same period ended December 31, 1996 is primarily the result of certain non-recurring costs associated with the launch of the Piccolo product line in fiscal 1997 and the Company's cost containment efforts in fiscal 1998. The Company expects selling, general and administrative expenses to remain at comparable levels for the remainder of fiscal 1998.
NET INTEREST INCOME
Net interest income totaled approximately $82,000 or 3% of total revenues for the quarter ended December 31, 1997, compared to $112,000 or 6% of total revenues in the comparable quarter of fiscal 1997. The decrease in net interest income was the result of decreased investment levels and interest expense related to an equipment loan during the period ended December 31, 1997. The Company incurred interest expense of approximately $21,000 on an equipment loan during the three-month period ended December 31, 1997. The Company incurred no interest expense during the three-month period ended December 31, 1996.
Net interest income totaled approximately $225,000 or 2% of total revenues for the nine-month period ended December 31, 1997, compared to $254,000 or 5% of total revenues in the comparable period of fiscal 1997. The Company incurred interest expense of approximately $54,000 on an equipment loan during the nine-month period ended December 31, 1997. The Company incurred no interest expense during the nine-month period ended December 31, 1996. The increase in interest expense was offset by an increase in interest income of approximately $25,000 for the period ended December 31, 1997 compared to interest income for the period ended December 31, 1996. This increase in interest income was primarily the result of increased investment levels.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had total cash, cash equivalents and short term investments of $7,157,000. The Company expects to incur substantial additional costs to support its future operations, including further commercialization of its products and development of new test methods that will allow the Company to further penetrate the human diagnostic market; acquisition of capital equipment for the Company's manufacturing facilities, which includes the ongoing costs related to continuing development of its current and future products; development and implementation of an automated manufacturing line to provide capacity for commercial volumes; and additional pre-clinical testing and clinical trials for its current and future products. The Company is currently contracting with a vendor to build an automated disc assembly line to provide additional capacity and to improve production efficiency. The Company estimates the cost of this new assembly line will be approximately $1,500,000 of which approximately $992,000 was paid through December 31, 1997. The Company expects to pay the balance upon acceptance of the equipment which is currently scheduled to occur before the end of fiscal 1998. In April 1997, in anticipation of taking delivery of the automated assembly line, the Company arranged for an equipment financing loan of up to $2,000,000, with 36 monthly payments, and a final balloon payment equal to 10% of the original principal amount. The equipment financing loan is collateralized by the Company's equipment and bears interest at approximately 16%. As of December 31, 1997, the Company has
drawn $600,000 against this equipment financing loan of which $125,000 has been repaid to date. The Company plans on drawing down the balance of the loan once the new automated assembly line is delivered to its facility. Additional manufacturing equipment will also need to be added during fiscal 1998 to provide sufficient production capabilities. Additionally, inventories and receivables related to increased sales levels of the VetScan and Piccolo systems could increase significantly in future periods, which would require significant capital resources.
Net cash used in operating activities during the nine months ended December 31, 1997 was approximately $920,000 compared to net cash used in operating activities of approximately $5,014,000 for the same period ended December 31, 1996. The decrease in net cash used in operating activities was due to a lower net loss, a decrease in inventories and increases in accounts payable, accrued payroll, other accrued liabilities and warranty reserve, offset by increases in trade and other receivables and prepaid expenses and deposits. Net inventories at March 31, 1997, compared to the balance at December 31, 1997, were higher due to preparation for shipment against orders from the Navy and VetSmart contracts beginning in April 1997. The increase in accounts payable is due to the timing of payments over the holidays and increases in payable levels associated with revenue growth. Increases in liabilities in the first nine months of fiscal 1998 were mainly due to increased warranty reserves and an accrual of severance payment for a former executive officer.
Net cash used in investing activities during the nine months ended December 31, 1997 was approximately $2,503,000, compared to net cash provided by investing activities of approximately $945,000 during the nine months ended December 31, 1996. The change from net cash provided by investing activities in the nine months ended December 31, 1996 to net cash used in investing activities in the nine months ended December 31, 1997 was primarily the result of an increase in purchases of short-term investments offset by a decrease in the purchase of property and equipment.
Net cash provided by financing activities for the nine month period ended December 31, 1997 was approximately $3,209,000 compared to net cash provided of approximately $4,821,000 for the same period in fiscal 1997. Cash provided by financing activities for the nine month period ended December 31, 1997 is primarily the result of proceeds from issuance of preferred stock of $2,732,000 and net proceeds from equipment financing of $475,000. Cash provided by financing activities for the nine month period ended December 31, 1996 is primarily the result of proceeds from issuance of preferred stock of $4,780,000 and proceeds from employee stock option exercises of $67,000. Cash provided by financing activities during this period was decreased by a $26,000 payment of a preferred stock dividend.
The Company anticipates that its existing capital resources, equipment financing loan and anticipated revenue from the sales of its products will be adequate to satisfy its currently planned operating and financial requirements through the next twelve months. The Company's future capital requirements will largely depend upon the increased market acceptance of its Point-of-Care Blood Analyzer System products. However, the Company's sales are not predictable due to its limited market experience with its products. In the event the sales are significantly below the anticipated level, the Company may need to obtain additional equity or debt financing. There can be no assurance that any such financing will be available, and any additional equity financing may be dilutive to shareholders, while debt financing may involve restrictive covenants.
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Recent Filings: Jun 1997 (Annual Rpt) | Aug 1997 (Qtrly Rpt) | Nov 1997 (Qtrly Rpt) | Feb 1998 (Qtrly Rpt)
More filings for ABAX available from EDGAR Online |
