##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended December 31, 2009
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission File Number 000-19720
 ABAXIS, INC.
 (Exact name of registrant as specified in its charter)
 California(State of Incorporation)
    
    77-0213001(I.R.S. Employer Identification No.)
 3240 Whipple Road
 Union City, California 94587  (Address of principal executive offices)
 (510) 675-6500  (Registrants telephone number including area code)
  þ o
  o o
 Rule 12b-2
 Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ




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##### 



ABAXIS, INC.
Form 10-Q
 For the Quarter Ended December 31, 2009
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2009 and 2008
    
    
    3Condensed Consolidated Balance Sheets as of December 31, 2009 and March 31, 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2009 and 2008
    
    
    5Notes to the Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34Item 4T. Controls and Procedures
    
    
    34PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 3. Defaults Upon Senior Securities
    
    
    45Item 4. Submission of Matters to a Vote of Security Holders
    
    
    45Item 5. Other Information
    
    
    45Item 6. Exhibits
    
    
    46SIGNATURES
    
    
    47Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements (Unaudited)
 ABAXIS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (In thousands, except share and per share data)
 Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues
    
    $
    31,005
    
    
    $
    26,964
    
    
    $
    90,892
    
    
    $
    79,224Cost of revenues
    
    
    12,709
    
    
    
    11,859
    
    
    
    37,590
    
    
    
    35,274Gross profit
    
    
    18,296
    
    
    
    15,105
    
    
    
    53,302
    
    
    
    43,950Operating expenses:Research and development
    
    
    2,835
    
    
    
    2,037
    
    
    
    8,002
    
    
    
    6,116Sales and marketing
    
    
    7,486
    
    
    
    6,061
    
    
    
    21,428
    
    
    
    18,382General and administrative
    
    
    2,552
    
    
    
    2,241
    
    
    
    7,739
    
    
    
    5,855Total operating expenses
    
    
    12,873
    
    
    
    10,339
    
    
    
    37,169
    
    
    
    30,353Income from operations
    
    
    5,423
    
    
    
    4,766
    
    
    
    16,133
    
    
    
    13,597Interest and other income (expense), net
    
    
    (11
    )
    
    
    352
    
    
    
    795
    
    
    
    1,140Income before income tax provision
    
    
    5,412
    
    
    
    5,118
    
    
    
    16,928
    
    
    
    14,737Income tax provision
    
    
    1,982
    
    
    
    1,762
    
    
    
    6,545
    
    
    
    5,308Net income
    
    $
    3,430
    
    
    $
    3,356
    
    
    $
    10,383
    
    
    $
    9,429Net income per share:Basic net income per share
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.47
    
    
    $
    0.43Diluted net income per share
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.46
    
    
    $
    0.42Shares used in the calculation of net income per share:Weighted average common shares outstanding  basic
    
    
    22,035,000
    
    
    
    21,879,000
    
    
    
    22,002,000
    
    
    
    21,798,000Weighted average common shares outstanding  diluted
    
    
    22,617,000
    
    
    
    22,264,000
    
    
    
    22,549,000
    
    
    
    22,325,000Share-based compensation expense by function:Cost of revenues
    
    $
    107
    
    
    $
    33
    
    
    $
    243
    
    
    $
    108Research and development
    
    
    235
    
    
    
    64
    
    
    
    589
    
    
    
    178Sales and marketing
    
    
    335
    
    
    
    143
    
    
    
    884
    
    
    
    401General and administrative
    
    
    771
    
    
    
    225
    
    
    
    1,997
    
    
    
    613Total share-based compensation expense
    
    $
    1,448
    
    
    $
    465
    
    
    $
    3,713
    
    
    $
    1,300
   3




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ABAXIS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (In thousands, except share data)
 December 31,
    
    
    March 31,2009
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    48,282
    
    
    $
    49,237Short-term investments
    
    
    21,284
    
    
    
    20,776Receivables (net of allowances of $450 at December 31, 2009 and $388 at March 31, 2009)
    
    
    21,951
    
    
    
    21,983Inventories
    
    
    17,551
    
    
    
    15,735Prepaid expenses
    
    
    1,600
    
    
    
    957Net deferred tax asset, current
    
    
    3,576
    
    
    
    4,676Total current assets
    
    
    114,244
    
    
    
    113,364Long-term investments
    
    
    23,605
    
    
    
    4,886Property and equipment, net
    
    
    14,571
    
    
    
    14,798Intangible assets, net
    
    
    4,744
    
    
    
    5,175Other assets
    
    
    76
    
    
    
    24Net deferred tax asset, non-current
    
    
    2,653
    
    
    
    2,464Total assets
    
    $
    159,893
    
    
    $
    140,711LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    7,634
    
    
    $
    3,963Accrued payroll and related expenses
    
    
    4,678
    
    
    
    3,698Accrued taxes
    
    
    481
    
    
    
    34Other accrued liabilities
    
    
    1,275
    
    
    
    1,116Deferred revenue
    
    
    1,128
    
    
    
    1,024Warranty reserve
    
    
    1,373
    
    
    
    1,714Total current liabilities
    
    
    16,569
    
    
    
    11,549Non-current liabilities:Deferred rent
    
    
    
    
    
    
    137Deferred revenue
    
    
    1,402
    
    
    
    1,550Warranty reserve
    
    
    245
    
    
    
    583Total non-current liabilities
    
    
    1,647
    
    
    
    2,270Commitments and contingencies (Note 8)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; 22,047,000
and 21,933,000 shares issued and outstanding
at December 31, 2009 and at March 31, 2009, respectively
    
    
    122,248
    
    
    
    117,846Retained earnings
    
    
    19,429
    
    
    
    9,046Total shareholders equity
    
    
    141,677
    
    
    
    126,892Total liabilities and shareholders equity
    
    $
    159,893
    
    
    $
    140,711
   4




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##### Table of Contents



ABAXIS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (In thousands)
 Nine Months EndedDecember 31,2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    10,383
    
    
    $
    9,429Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    3,768
    
    
    
    3,179Investment premium amortization
    
    
    118
    
    
    
    (Gain) loss on disposals of property and equipment
    
    
    32
    
    
    
    (8
    )(Gain) loss on foreign exchange translation
    
    
    (60
    )
    
    
    81Share-based compensation expense
    
    
    3,713
    
    
    
    1,300Excess tax benefits from share-based awards
    
    
    (838
    )
    
    
    (5,120
    )Provision for deferred income taxes
    
    
    1,698
    
    
    
    4,051Changes in assets and liabilities:Receivables, net
    
    
    80
    
    
    
    (753
    )Inventories
    
    
    (3,079
    )
    
    
    (114
    )Prepaid expenses
    
    
    (643
    )
    
    
    (814
    )Other assets
    
    
    (52
    )
    
    
    (24
    )Accounts payable
    
    
    3,670
    
    
    
    (487
    )Accrued payroll and related expenses
    
    
    980
    
    
    
    (1,455
    )Accrued taxes
    
    
    264
    
    
    
    109Other accrued liabilities
    
    
    159
    
    
    
    (84
    )Deferred rent
    
    
    (137
    )
    
    
    (103
    )Deferred revenue
    
    
    (44
    )
    
    
    485Warranty reserve
    
    
    (679
    )
    
    
    437Net cash provided by operating activities
    
    
    19,333
    
    
    
    10,109Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (3,030
    )
    
    
    Purchases of held-to-maturity investments
    
    
    (41,212
    )
    
    
    (21,579
    )Proceeds from redemptions of available-for-sale investments
    
    
    3,000
    
    
    
    36,975Proceeds from maturities of held-to-maturity investments
    
    
    21,897
    
    
    
    14,081Purchases of property and equipment
    
    
    (1,819
    )
    
    
    (1,992
    )Proceeds from disposals of property and equipment
    
    
    
    
    
    
    20Net cash (used in) provided by investing activities
    
    
    (21,164
    )
    
    
    27,505Cash flows from financing activities:Proceeds from issuance of common stock under stock plans, net
    
    
    14
    
    
    
    242Excess tax benefits from share-based awards
    
    
    838
    
    
    
    5,120Net cash provided by financing activities
    
    
    852
    
    
    
    5,362Effect of exchange rate changes on cash and cash equivalents
    
    
    24
    
    
    
    (37
    )Net (decrease) increase in cash and cash equivalents
    
    
    (955
    )
    
    
    42,939Cash and cash equivalents at beginning of period
    
    
    49,237
    
    
    
    17,219Cash and cash equivalents at end of period
    
    $
    48,282
    
    
    $
    60,158Supplemental disclosure of cash flow information:Cash paid for income taxes, net of refunds
    
    $
    4,874
    
    
    $
    1,147Supplemental disclosure of non-cash flow information:Change in unrealized gain (loss) on investments, net of tax
    
    $
    
    
    
    $
    1,415Transfers of equipment between inventory and property and equipment, net
    
    $
    1,323
    
    
    $
    1,674Net change in capitalized share-based compensation
    
    $
    60
    
    
    $
    7Common stock withheld for employee taxes in connection with share-based compensation
    
    $
    441
    
    
    $
    280
   5




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ABAXIS, INC.
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
 Description of Business.
  Principles of Consolidation.
 Basis of Presentation.
   Reclassifications.
 Use of Estimates in Preparation of Financial Statements.
 Significant Accounting Policies.
  6




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NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
           7




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NOTE 3. INVESTMENTS
  December 31, 2009Cost or
    
    
    Gross Unrealized
    
    
    FairAmortized Cost
    
    
    Gain (Loss)
    
    
    ValueShort-term investmentsHeld-to-maturity:Certificates of deposits
    
    $
    13,214
    
    
    $
    
    
    
    $
    13,214Corporate bonds
    
    
    2,015
    
    
    
    
    
    
    
    2,015Municipal bonds
    
    
    6,055
    
    
    
    
    
    
    
    6,055Total short-term investments in held-to-maturity
    
    $
    21,284
    
    
    $
    
    
    
    $
    21,284Long-term investmentsHeld-to-maturity:Certificates of deposits
    
    $
    6,562
    
    
    $
    
    
    
    $
    6,562Corporate bonds
    
    
    11,110
    
    
    
    
    
    
    
    11,110Municipal bonds
    
    
    3,433
    
    
    
    
    
    
    
    3,433U.S. agency securities
    
    
    2,500
    
    
    
    
    
    
    
    2,500Total long-term investments in held-to-maturity
    
    $
    23,605
    
    
    $
    
    
    
    $
    23,605
 March 31, 2009Cost or
    
    
    Gross Unrealized
    
    
    FairAmortized Cost
    
    
    Gain (Loss)
    
    
    ValueShort-term investmentsHeld-to-maturity:Certificates of deposits
    
    $
    20,776
    
    
    $
    
    
    
    $
    20,776Total short-term investments in held-to-maturity
    
    $
    20,776
    
    
    $
    
    
    
    $
    20,776Long-term investmentsHeld-to-maturity:Certificates of deposits
    
    $
    2,376
    
    
    $
    
    
    
    $
    2,376Corporate bonds
    
    
    2,510
    
    
    
    
    
    
    
    2,510Total long-term investments in held-to-maturity
    
    $
    4,886
    
    
    $
    
    
    
    $
    4,886
   Investments
    
    Fair ValueDue in less than one year
    
    $
    21,284Due in 1 to 4 years
    
    
    23,605Total investments
    
    $
    44,889
 NOTE 4. FAIR VALUE MEASUREMENTS
     8




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As of December 31, 2009Quoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableIdentical Assets
    
    
    Observable Inputs
    
    
    InputsLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssetsCash equivalents
    
    $
    30,318
    
    
    $
    
    
    
    $
    
    
    
    $
    30,318Total assets at fair value
    
    $
    30,318
    
    
    $
    
    
    
    $
    
    
    
    $
    30,318
  NOTE 5. INVENTORIES
  December 31,
    
    
    March 31,2009
    
    
    2009Raw materials
    
    $
    8,407
    
    
    $
    8,539Work-in-process
    
    
    3,030
    
    
    
    2,592Finished goods
    
    
    6,114
    
    
    
    4,604Total Inventories
    
    $
    17,551
    
    
    $
    15,735
 NOTE 6. WARRANTY RESERVES
  Instruments.
 Reagent Discs.
   9




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Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Balance at beginning of period
    
    $
    2,228
    
    
    $
    2,242
    
    
    $
    2,297
    
    
    $
    1,948Provision for warranty expense
    
    
    198
    
    
    
    387
    
    
    
    599
    
    
    
    1,406Warranty costs incurred
    
    
    (140
    )
    
    
    (244
    )
    
    
    (610
    )
    
    
    (969
    )Adjustment to pre-existing warranties
    
    
    (668
    )
    
    
    
    
    
    
    (668
    )
    
    
    Balance at end of period
    
    
    1,618
    
    
    
    2,385
    
    
    
    1,618
    
    
    
    2,385Non-current portion of warranty reserve
    
    
    245
    
    
    
    748
    
    
    
    245
    
    
    
    748Current portion of warranty reserve
    
    $
    1,373
    
    
    $
    1,637
    
    
    $
    1,373
    
    
    $
    1,637
 NOTE 7. LINE OF CREDIT
   
    
    We must have a minimum net income of $25,000 before preferred stock dividends and accretion
on preferred stock in any three quarters of a fiscal year, provided that any loss before
preferred stock dividends and accretion on preferred stock incurred in the remaining quarter
is not to exceed $250,000.
 
    
    We are required to be profitable, as defined, on a fiscal year to date basis beginning,
with respect to the current fiscal year, with the six month period ended September 30, 2009
and to have net income before preferred stock dividends and accretion on preferred stock of at
least $1.2 million for the fiscal year ending March 31, 2010.
 
    
    We are required to comply with certain financial covenants as follows:
 Financial Covenants
    
    RequirementsQuick ratio, as defined
    
    Not less than 2.00 to 1.00Cash flow coverage, as defined
    
    Not less than 1.25 to 1.00Debt to net worth ratio, as defined
    
    Not greater than 1.00 to 1.00Tangible effective net worth, as defined
    
    Not less than $25.7 million
  NOTE 8. COMMITMENTS AND CONTINGENCIES
 Purchase Commitments.
 Patent License Agreement.
  10




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##### Table of Contents



Litigation.
 NOTE 9. SHARE-BASED COMPENSATION
  Cash Flow Impact
  Equity Compensation Plans
  2005 Equity Incentive Plan.
   1992 Outside Directors Stock Option Plan.
  11




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##### Table of Contents



Stock Options
   Stock Option Activity
  Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    AggregateExercise
    
    
    Remaining
    
    
    IntrinsicNumber of
    
    
    Price
    
    
    Contractual
    
    
    ValueShares
    
    
    Per Share
    
    
    Life (Years)
    
    
    (In thousands)Outstanding at March 31, 2009
    
    
    848,000
    
    
    $
    8.86Granted
    
    
    
    
    
    
    Exercised
    
    
    (63,000
    )
    
    
    7.18Canceled or forfeited
    
    
    
    
    
    
    Outstanding at December 31, 2009
    
    
    785,000
    
    
    $
    8.99
    
    
    
    2.58
    
    
    $
    12,995Vested and expected to vest at December 31, 2009
    
    
    785,000
    
    
    $
    8.99
    
    
    
    2.58
    
    
    $
    12,995Exercisable at December 31, 2009
    
    
    785,000
    
    
    $
    8.99
    
    
    
    2.58
    
    
    $
    12,995
  Restricted Stock Units
  
    
    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.
  12




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Restricted Stock Unit Activity
  WeightedAverageNumber of
    
    
    Grant DateShares
    
    
    Fair Value(1)Unvested at March 31, 2009
    
    
    690,000
    
    
    $
    23.43Granted
    
    
    308,000
    
    
    
    18.32Vested(2)
    
    
    (75,000
    )
    
    
    23.70Canceled or forfeited
    
    
    (59,000
    )
    
    
    23.54Unvested at December 31, 2009
    
    
    864,000
    
    
    $
    21.57
 
 (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)
    
    The number of restricted stock units vested includes shares that we withheld on behalf of our
employees to satisfy the statutory tax withholding requirements.  NOTE 10. NET INCOME PER SHARE
   13




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Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Numerator:Net income
    
    $
    3,430
    
    
    $
    3,356
    
    
    $
    10,383
    
    
    $
    9,429Denominator:Weighted average common shares outstanding  basic
    
    
    22,035,000
    
    
    
    21,879,000
    
    
    
    22,002,000
    
    
    
    21,798,000Weighted average effect of dilutive securities:Stock options
    
    
    404,000
    
    
    
    381,000
    
    
    
    399,000
    
    
    
    493,000Restricted stock units
    
    
    178,000
    
    
    
    4,000
    
    
    
    148,000
    
    
    
    34,000Weighted average common shares outstanding  diluted
    
    
    22,617,000
    
    
    
    22,264,000
    
    
    
    22,549,000
    
    
    
    22,325,000Net income per share:Basic net income per share
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.47
    
    
    $
    0.43Diluted net income per share
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.46
    
    
    $
    0.42
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Weighted average number of shares underlying antidilutive stock options
    
    
    
    
    
    
    185,000
    
    
    
    
    
    
    
    159,000Weighted average exercise price per share underlying antidilutive stock options
    
    
    N/A
    
    
    $
    21.02
    
    
    
    N/A
    
    
    $
    21.65
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Weighted average number of shares underlying antidilutive restricted stock units
    
    
    68,000
    
    
    
    679,000
    
    
    
    64,000
    
    
    
    190,000
 NOTE 11. INCOME TAXES
    NOTE 12. COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    3,430
    
    
    $
    3,356
    
    
    $
    10,383
    
    
    $
    9,429Other comprehensive income:Change in unrealized
gain (loss) on
investments, net of tax
    
    
    3
    
    
    
    393
    
    
    
    
    
    
    
    1,415Comprehensive income
    
    $
    3,433
    
    
    $
    3,749
    
    
    $
    10,383
    
    
    $
    10,844
  14




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##### Table of Contents



NOTE 13. SEGMENT REPORTING INFORMATION
   Medical Market
  Veterinary Market
 pro
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Medical Market
    
    $
    5,172
    
    
    $
    7,175
    
    
    $
    17,280
    
    
    $
    19,719Veterinary Market
    
    
    23,889
    
    
    
    17,907
    
    
    
    67,396
    
    
    
    54,465Other(1)
    
    
    1,944
    
    
    
    1,882
    
    
    
    6,216
    
    
    
    5,040Total revenues
    
    
    31,005
    
    
    
    26,964
    
    
    
    90,892
    
    
    
    79,224Cost of revenues:Medical Market
    
    
    2,198
    
    
    
    3,548
    
    
    
    7,552
    
    
    
    9,772Veterinary Market
    
    
    9,955
    
    
    
    7,389
    
    
    
    26,993
    
    
    
    22,672Other(1)
    
    
    556
    
    
    
    922
    
    
    
    3,045
    
    
    
    2,830Total cost of revenues
    
    
    12,709
    
    
    
    11,859
    
    
    
    37,590
    
    
    
    35,274Gross profit:Medical Market
    
    
    2,974
    
    
    
    3,627
    
    
    
    9,728
    
    
    
    9,947Veterinary Market
    
    
    13,934
    
    
    
    10,518
    
    
    
    40,403
    
    
    
    31,793Other(1)
    
    
    1,388
    
    
    
    960
    
    
    
    3,171
    
    
    
    2,210Gross profit
    
    $
    18,296
    
    
    $
    15,105
    
    
    $
    53,302
    
    
    $
    43,950
 
   15




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##### Table of Contents



NOTE 14. REVENUES BY PRODUCT CATEGORY AND GEOGRAPHIC REGION AND SIGNIFICANT CONCENTRATIONS
 Revenue Information
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,Revenues by Product Category
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Instruments(1)
    
    $
    8,461
    
    
    $
    7,976
    
    
    $
    21,291
    
    
    $
    22,670Consumables(2)
    
    
    20,105
    
    
    
    16,751
    
    
    
    61,993
    
    
    
    50,378Other products
    
    
    1,569
    
    
    
    1,340
    
    
    
    5,015
    
    
    
    3,767Product sales, net
    
    
    30,135
    
    
    
    26,067
    
    
    
    88,299
    
    
    
    76,815Development and licensing revenue
    
    
    870
    
    
    
    897
    
    
    
    2,593
    
    
    
    2,409Total revenues
    
    $
    31,005
    
    
    $
    26,964
    
    
    $
    90,892
    
    
    $
    79,224
 
 (1)
    
    Instruments include chemistry analyzers, hematology instruments, coagulation analyzers and i-STAT analyzers.(2)
    
    Consumables include reagent discs, hematology reagent kits, coagulation cartridges, i-STAT
cartridges and canine heartworm rapid tests.  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,Revenues by Geographic Region
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008North America
    
    $
    24,907
    
    
    $
    22,852
    
    
    $
    73,792
    
    
    $
    65,560Europe
    
    
    4,855
    
    
    
    3,040
    
    
    
    13,704
    
    
    
    10,835Asia Pacific and rest of the world
    
    
    1,243
    
    
    
    1,072
    
    
    
    3,396
    
    
    
    2,829Total revenues
    
    $
    31,005
    
    
    $
    26,964
    
    
    $
    90,892
    
    
    $
    79,224
 Significant Concentrations
  Three Months Ended
    
    
    Nine Months EndedGeographical
    
    December 31,
    
    
    December 31,Distributor
    
    Location
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Walco International, Inc., d/b/a DVM Resources
    
    United States
    
    
    12
    %
    
    
    <10
    %
    
    
    11
    %
    
    
    <10
    %
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD-LOOKING STATEMENTS
   16




---



##### Table of Contents



BUSINESS OVERVIEW
 
  
    
    Medical Market: We currently market the blood analysis system in the medical market under
the name Piccolo® xpress. Through October 2006, we marketed the blood analysis
system in the medical market as the Piccolo®, now referred to as the Piccolo
Classic. We continue to support and service our current population of Piccolo xpress and
Piccolo Classic chemistry analyzers.
 
    
    Veterinary Market: We currently market the blood analysis system in the veterinary market
under the name VetScan VS2®. Through March 2006, we marketed the blood analysis
system in the veterinary market as the VetScan®, now referred to as the VetScan
Classic. We continue to support and service our current population of VetScan VS2 and VetScan
Classic chemistry analyzers.
   pro pro
 Dirofilaria immitis
 ®
  17




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
   Revenue Recognition and Deferred Revenue.
   Distributor and Customer Rebates.
 Sales and Other Allowances.
  18




---



##### Table of Contents



Allowance for Doubtful Accounts.
 Fair Value Measurements.
 Level 1:
 Level 2:
 Level 3:
  Warranty Reserves.
    19




---



##### Table of Contents



Inventories.
 Valuation of Long-Lived Assets.
 Income Taxes.
  Share-Based Compensation Expense .
  
    
    Risk-free interest rate:The risk-free interest rate is based on U.S. Treasury yields in
effect at the time of grant for the expected term of the option.
 
    
    Expected stock price volatility:We estimate the volatility of our common stock at the
date of grant based on the historical volatility of our common stock.
 
    
    Expected term:We estimate the expected term of stock options granted based on historical
exercise and post-vesting termination patterns, which we believe are representative of future
behavior.
 
    
    Expected dividends:We have not paid cash dividends on our common stock and we do not
anticipate paying cash dividends in the foreseeable future; consequently, we use an expected
dividend yield of zero.
    20




---



##### Table of Contents



RESULTS OF OPERATIONS
  Total Revenues
 Revenues by Geographic Region and by Product Category.
 Three Months Ended
    
    
    
    
    
    Nine Months EndedDecember 31,
    
    
    Change
    
    
    December 31,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    Increase/
    
    
    PercentRevenues by Geographic Region
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    ChangeNorth America
    
    $
    24,907
    
    
    $
    22,852
    
    
    $
    2,055
    
    
    
    9
    %
    
    $
    73,792
    
    
    $
    65,560
    
    
    $
    8,232
    
    
    
    13
    %Percentage of total revenues
    
    
    80
    %
    
    
    85
    %
    
    
    
    
    
    
    
    
    
    
    81
    %
    
    
    83
    %Europe
    
    
    4,855
    
    
    
    3,040
    
    
    
    1,815
    
    
    
    60
    %
    
    
    13,704
    
    
    
    10,835
    
    
    
    2,869
    
    
    
    26
    %Percentage of total revenues
    
    
    16
    %
    
    
    11
    %
    
    
    
    
    
    
    
    
    
    
    15
    %
    
    
    14
    %Asia Pacific and rest of the world
    
    
    1,243
    
    
    
    1,072
    
    
    
    171
    
    
    
    16
    %
    
    
    3,396
    
    
    
    2,829
    
    
    
    567
    
    
    
    20
    %Percentage of total revenues
    
    
    4
    %
    
    
    4
    %
    
    
    
    
    
    
    
    
    
    
    4
    %
    
    
    3
    %Total revenues
    
    $
    31,005
    
    
    $
    26,964
    
    
    $
    4,041
    
    
    
    15
    %
    
    $
    90,892
    
    
    $
    79,224
    
    
    $
    11,668
    
    
    
    15
    %
 Three Months Ended
    
    
    
    
    
    Nine Months EndedDecember 31,
    
    
    Change
    
    
    December 31,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    Increase/
    
    
    PercentRevenues by Product Category
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    ChangeInstruments(1)
    
    $
    8,461
    
    
    $
    7,976
    
    
    $
    485
    
    
    
    6
    %
    
    $
    21,291
    
    
    $
    22,670
    
    
    $
    (1,379
    )
    
    
    (6
    %)Percentage of total revenues
    
    
    27
    %
    
    
    30
    %
    
    
    
    
    
    
    
    
    
    
    23
    %
    
    
    29
    %Consumables(2)
    
    
    20,105
    
    
    
    16,751
    
    
    
    3,354
    
    
    
    20
    %
    
    
    61,993
    
    
    
    50,378
    
    
    
    11,615
    
    
    
    23
    %Percentage of total revenues
    
    
    65
    %
    
    
    62
    %
    
    
    
    
    
    
    
    
    
    
    68
    %
    
    
    63
    %Other products
    
    
    1,569
    
    
    
    1,340
    
    
    
    229
    
    
    
    17
    %
    
    
    5,015
    
    
    
    3,767
    
    
    
    1,248
    
    
    
    33
    %Percentage of total revenues
    
    
    5
    %
    
    
    5
    %
    
    
    
    
    
    
    
    
    
    
    6
    %
    
    
    5
    %Product sales, net
    
    
    30,135
    
    
    
    26,067
    
    
    
    4,068
    
    
    
    16
    %
    
    
    88,299
    
    
    
    76,815
    
    
    
    11,484
    
    
    
    15
    %Percentage of total revenues
    
    
    97
    %
    
    
    97
    %
    
    
    
    
    
    
    
    
    
    
    97
    %
    
    
    97
    %Development and licensing revenue
    
    
    870
    
    
    
    897
    
    
    
    (27
    )
    
    
    (3
    %)
    
    
    2,593
    
    
    
    2,409
    
    
    
    184
    
    
    
    8
    %Percentage of total revenues
    
    
    3
    %
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    3
    %
    
    
    3
    %Total revenues
    
    $
    31,005
    
    
    $
    26,964
    
    
    $
    4,041
    
    
    
    15
    %
    
    $
    90,892
    
    
    $
    79,224
    
    
    $
    11,668
    
    
    
    15
    %
 
 (1)
    
    Instruments include chemistry analyzers, hematology instruments, coagulation analyzers and i-STAT analyzers.(2)
    
    Consumables include reagent discs, hematology reagent kits, coagulation cartridges, i-STAT cartridges and canine heartworm rapid tests. Three Months Ended December 31, 2009 Compared to Three Months Ended December 31, 2008
 North America .
 
    
    Sales of our VetScan chemistry analyzers in North America increased 26%, or $577,000,
primarily due to the timing of inventory purchases by a distributor during the three months
ended December 31, 2009.
 
    
    Total sales from our original equipment manufacturing (OEM) supplied products, which
include our VetScan VSprocoagulation analyzers and related consumables (launched in the
fourth quarter of fiscal 2009), i-STAT analyzers and related consumables (launched in fiscal
2010), and canine heartworm rapid tests (launched in the fourth quarter of fiscal 2009), were
$3.3 million in North America during the three months ended December 31, 2009.
 The net increase in total revenues in North America was partially offset by the following:
 
    
    Sales of our Piccolo chemistry analyzers in North America (excluding the U.S. government)
decreased 47%, or $679,000, primarily due to inventory stock adjustments by distributors
during the three months ended December 31, 2009.
  21




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##### Table of Contents




    
    Sales of our Piccolo chemistry analyzers to the U.S. government decreased 92%, or $708,000,
primarily due to a decrease in the U.S. Militarys needs for our products in the third quarter
of fiscal 2010, which were not predictable.
 
    
    Medical reagent discs sales in North America (excluding the U.S. government) decreased 14%,
or $428,000, primarily due to inventory stock adjustments by distributors during the three
months ended December 31, 2009.
 Europe .
 
    
    Sales of our VetScan chemistry analyzers in Europe increased 56%, or $357,000, primarily
due to the timing of inventory purchases by our distributors and higher average selling prices
during the three months ended December 31, 2009.
 
    
    Veterinary reagent discs sales in Europe increased 182%, or $1.6 million, primarily due to
an increase in units sold resulting from an expanded installed base of our VetScan chemistry
analyzers and higher average selling prices.
  Significant concentration.
 Nine Months Ended December 31, 2009 Compared to Nine Months Ended December 31, 2008
 North America .
 
    
    Veterinary reagent discs sales in North America increased 15%, or $4.2 million, primarily
due to an increase in units sold resulting from an expanded installed base of our VetScan
chemistry analyzers.
 
    
    Sales of our hematology reagent kits in North America increased 12%, or $373,000, primarily
due to an increase in units sold resulting from an expanded installed base of our VetScan
hematology instruments.
 
    
    Total sales from our OEM supplied products, which include our VetScan VSprocoagulation
analyzers and related consumables (launched in the fourth quarter of fiscal 2009), i-STAT
analyzers and related consumables (launched in fiscal 2010), and canine heartworm rapid tests
(launched in the fourth quarter of fiscal 2009), were $6.3 million in North America during the
nine months ended December 31, 2009.
 
    
    Revenues from other products sold in North America increased 31%, or $1.1 million. The net
increase was primarily due to (a) a decrease in maintenance contracts offered to customers
from time to time as incentives in the form of free goods in connection with the sale of our
products, for which revenue is deferred and recognized ratably over the life of the
maintenance contract and (b) an increase in demand for products using the Orbos Discrete
Lyophilization Process, which is strongly affected by seasonal demands.
  
    
    Sales of our Piccolo chemistry analyzers in North America (excluding the U.S. government)
decreased 49%, or $2.1 million, primarily due to inventory stock adjustments by distributors
during the nine months ended December 31, 2009.
 
    
    Sales of our Piccolo chemistry analyzers to the U.S. government decreased 42%, or $814,000,
primarily due to a decrease in the U.S. Militarys needs for our products in the third quarter
of fiscal 2010, which were not predictable.
 
    
    Sales of our VetScan chemistry analyzers in North America decreased 10%, or $685,000,
primarily due to lower average selling prices, and partially offset by an increase in units
sold, primarily in the third quarter of fiscal 2010.
 
    
    Sales of our hematology instruments in North America
decreased 5%, or $283,000.
  22




---



##### Table of Contents



Europe .
 
    
    Sales of our VetScan chemistry analyzers in Europe increased 38%, or $732,000, primarily
due to the timing of inventory purchases by our distributors and higher average selling prices
during the nine months ended December 31, 2009.
 
    
    Total sales of our VetScan hematology instruments and hematology reagent kits in Europe
increased 60%, or $321,000, primarily due to an increase in units sold resulting from our
promotion strategy for our VetScan hematology instruments.
 
    
    Medical reagent discs sales in Europe increased 9%, or $131,000, primarily due to the
expanded installed base of our Piccolo chemistry analyzers and higher average selling prices
during the nine months ended December 31, 2009.
 
    
    Veterinary reagent discs sales in Europe increased 25%, or $1.4 million, primarily due to
an increase in units sold resulting from an expanded installed base of our VetScan chemistry
analyzers and higher average selling prices.
 Significant concentration.
 Segment Results
 Three Months Ended December 31, 2009 Compared to Three Months Ended December 31, 2008
  Three Months EndedDecember 31,
    
    
    ChangePercent of
    
    
    
    
    
    
    Percent of
    
    
    Increase/
    
    
    Percent2009
    
    
    Revenues(1)
    
    
    2008
    
    
    Revenues(1)
    
    
    (Decrease)
    
    
    ChangeRevenues:Medical Market
    
    $
    5,172
    
    
    
    100
    %
    
    $
    7,175
    
    
    
    100
    %
    
    $
    (2,003
    )
    
    
    (28
    %)Percentage of total revenues
    
    
    17
    %
    
    
    
    
    
    
    27
    %Veterinary Market
    
    
    23,889
    
    
    
    100
    %
    
    
    17,907
    
    
    
    100
    %
    
    
    5,982
    
    
    
    33
    %Percentage of total revenues
    
    
    77
    %
    
    
    
    
    
    
    66
    %Other(2)
    
    
    1,944
    
    
    
    
    
    
    
    1,882
    
    
    
    
    
    
    
    62
    
    
    
    3
    %Percentage of total revenues
    
    
    6
    %
    
    
    
    
    
    
    7
    %Total revenues
    
    
    31,005
    
    
    
    
    
    
    
    26,964
    
    
    
    
    
    
    
    4,041
    
    
    
    15
    %Cost of revenues:Medical Market
    
    
    2,198
    
    
    
    42
    %
    
    
    3,548
    
    
    
    49
    %
    
    
    (1,350
    )
    
    
    (38
    %)Veterinary Market
    
    
    9,955
    
    
    
    42
    %
    
    
    7,389
    
    
    
    41
    %
    
    
    2,566
    
    
    
    35
    %Other(2)
    
    
    556
    
    
    
    
    
    
    
    922
    
    
    
    
    
    
    
    (366
    )
    
    
    (40
    %)Total cost of revenues
    
    
    12,709
    
    
    
    
    
    
    
    11,859
    
    
    
    
    
    
    
    850
    
    
    
    7
    %Gross profit:Medical Market
    
    
    2,974
    
    
    
    58
    %
    
    
    3,627
    
    
    
    51
    %
    
    
    (653
    )
    
    
    (18
    %)Veterinary Market
    
    
    13,934
    
    
    
    58
    %
    
    
    10,518
    
    
    
    59
    %
    
    
    3,416
    
    
    
    32
    %Other(2)
    
    
    1,388
    
    
    
    
    
    
    
    960
    
    
    
    
    
    
    
    428
    
    
    
    45
    %Gross profit
    
    $
    18,296
    
    
    
    
    
    
    $
    15,105
    
    
    
    
    
    
    $
    3,191
    
    
    
    21
    %
 
 (1)
    
    The percentages reported are based on our revenues by operating segment.(2)
    
    Represents unallocated items, not specifically identified to any particular business segment.  23




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##### Table of Contents



Medical Market
 Revenues for Medical Market Segment
  Instruments.
 Consumables.
 Gross Profit for Medical Market Segment
  Veterinary Market
 Revenues for Veterinary Market Segment
  
    
    Sales of our VetScan chemistry analyzers increased 33%, or $998,000, during the three
months ended December 31, 2009, as compared to the three months ended December 31, 2008. The
increase in revenues was primarily attributed to (a) an increase in revenues in North America
of 26%, or $577,000, primarily due to the timing of inventory purchases by a distributor
during the three months ended December 31, 2009, and (b) an increase in revenues in Europe of
56%, or $357,000, primarily due to the timing of inventory purchases by our distributors and
higher average selling prices during the three months ended December 31, 2009.
 
    
    Total revenues from veterinary reagent discs increased 13%, or $1.5 million, during the
three months ended December 31, 2009, as compared to the three months ended December 31, 2008.
The increase in revenues was primarily attributed to an increase in revenues in Europe of
182%, or $1.6 million, primarily due to an increase in units sold resulting from an expanded
installed base of our VetScan chemistry analyzers and higher average selling prices.
 
    
    Total sales from our OEM supplied products, which include our VetScan VSprocoagulation
analyzers and related consumables (launched in the fourth quarter of fiscal 2009), i-STAT
analyzers and related consumables (launched in fiscal 2010), and canine heartworm rapid tests
(launched in the fourth quarter of fiscal 2009), were $3.4 million during the three months
ended December 31, 2009, primarily in North America.
  24




---



##### Table of Contents



Gross Profit for Veterinary Market Segment
  Nine Months Ended December 31, 2009 Compared to Nine Months Ended December 31, 2008
  Nine Months EndedDecember 31,
    
    
    ChangePercent of
    
    
    
    
    
    
    Percent of
    
    
    Increase/
    
    
    Percent2009
    
    
    Revenues(1)
    
    
    2008
    
    
    Revenues(1)
    
    
    (Decrease)
    
    
    ChangeRevenues:Medical Market
    
    $
    17,280
    
    
    
    100
    %
    
    $
    19,719
    
    
    
    100
    %
    
    $
    (2,439
    )
    
    
    (12
    %)Percentage of total revenues
    
    
    19
    %
    
    
    
    
    
    
    25
    %Veterinary Market
    
    
    67,396
    
    
    
    100
    %
    
    
    54,465
    
    
    
    100
    %
    
    
    12,931
    
    
    
    24
    %Percentage of total revenues
    
    
    74
    %
    
    
    
    
    
    
    69
    %Other(2)
    
    
    6,216
    
    
    
    
    
    
    
    5,040
    
    
    
    
    
    
    
    1,176
    
    
    
    23
    %Percentage of total revenues
    
    
    7
    %
    
    
    
    
    
    
    6
    %Total revenues
    
    
    90,892
    
    
    
    
    
    
    
    79,224
    
    
    
    
    
    
    
    11,668
    
    
    
    15
    %Cost of revenues:Medical Market
    
    
    7,552
    
    
    
    44
    %
    
    
    9,772
    
    
    
    50
    %
    
    
    (2,220
    )
    
    
    (23
    %)Veterinary Market
    
    
    26,993
    
    
    
    40
    %
    
    
    22,672
    
    
    
    42
    %
    
    
    4,321
    
    
    
    19
    %Other(2)
    
    
    3,045
    
    
    
    
    
    
    
    2,830
    
    
    
    
    
    
    
    215
    
    
    
    8
    %Total cost of revenues
    
    
    37,590
    
    
    
    
    
    
    
    35,274
    
    
    
    
    
    
    
    2,316
    
    
    
    7
    %Gross profit:Medical Market
    
    
    9,728
    
    
    
    56
    %
    
    
    9,947
    
    
    
    50
    %
    
    
    (219
    )
    
    
    (2
    %)Veterinary Market
    
    
    40,403
    
    
    
    60
    %
    
    
    31,793
    
    
    
    58
    %
    
    
    8,610
    
    
    
    27
    %Other(2)
    
    
    3,171
    
    
    
    
    
    
    
    2,210
    
    
    
    
    
    
    
    961
    
    
    
    43
    %Gross profit
    
    $
    53,302
    
    
    
    
    
    
    $
    43,950
    
    
    
    
    
    
    $
    9,352
    
    
    
    21
    %
 
 (1)
    
    The percentages reported are based on our revenues by operating segment.(2)
    
    Represents unallocated items, not specifically identified to any particular business segment. Medical Market
 Revenues for Medical Market Segment
  Instruments.
 Consumables.
  25




---



##### Table of Contents



Gross Profit for Medical Market Segment
  Veterinary Market
 Revenues for Veterinary Market Segment
  
    
    Sales of our VetScan chemistry analyzers increased 2%, or $147,000, during the nine months
ended December 31, 2009, as compared to the nine months ended December 31, 2008. The changes
were primarily attributed to an increase in revenues in Europe of 38%, or $732,000, primarily
due to the timing of inventory purchases by our distributors and higher average selling prices
during the nine months ended December 31, 2009. The net increase in total revenues was
partially offset by a decrease in revenues in North America of 10%, or $685,000, primarily due
to lower average selling prices, and partially offset by an increase in units sold, primarily
in the third quarter of fiscal 2010.
 
    
    Total sales of our VetScan hematology instruments and hematology reagent kits increased 5%,
or $475,000, primarily attributed to an increase in revenues in Europe of 60%, or $321,000,
primarily due to an increase in units sold resulting from our promotion strategy for our
VetScan hematology instruments.
 
    
    Total revenues from veterinary reagent discs increased 16%, or $5.7 million, during the
nine months ended December 31, 2009, as compared to the nine months ended December 31, 2008.
The increase in revenues was primarily attributed to (a) an increase in revenues in North America
of 15%, or $4.2 million, primarily due to an increase in units sold resulting from an
expanded installed base of our VetScan chemistry analyzers, and (b) an increase in revenues in
Europe of 25%, or $1.4 million, primarily due to an increase in units sold resulting from an
expanded installed base of our VetScan chemistry analyzers and higher average selling prices.
 
    
    Total sales from our OEM supplied products, which include our VetScan VSprocoagulation
analyzers and related consumables (launched in the fourth quarter of fiscal 2009), i-STAT
analyzers and related consumables (launched in fiscal 2010), and canine heartworm rapid tests
(launched in the fourth quarter of fiscal 2009), were $6.4 million during the nine months
ended December 31, 2009, primarily in North America.
 Gross Profit for Veterinary Market Segment
   26




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##### Table of Contents



Cost of Revenues
  Three Months Ended
    
    
    
    
    
    Nine Months EndedDecember 31,
    
    
    Change
    
    
    December 31,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    Increase/
    
    
    Percent2009
    
    
    2008
    
    
    (Decrease)
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    ChangeCost of revenues
    
    $
    12,709
    
    
    $
    11,859
    
    
    $
    850
    
    
    
    7
    %
    
    $
    37,590
    
    
    $
    35,274
    
    
    $
    2,316
    
    
    
    7
    %Percentage of total revenues
    
    
    41
    %
    
    
    44
    %
    
    
    
    
    
    
    
    
    
    
    41
    %
    
    
    45
    %
  Three and Nine Months Ended December 31, 2009 Compared to Three and Nine Months Ended December 31,
2008
 pro
 pro
 Gross Profit
  Three Months Ended
    
    
    
    
    
    Nine Months EndedDecember 31,
    
    
    Change
    
    
    December 31,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    Increase/
    
    
    Percent2009
    
    
    2008
    
    
    (Decrease)
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    ChangeTotal gross profit
    
    $
    18,296
    
    
    $
    15,105
    
    
    $
    3,191
    
    
    
    21
    %
    
    $
    53,302
    
    
    $
    43,950
    
    
    $
    9,352
    
    
    
    21
    %Total gross margin
    
    
    59
    %
    
    
    56
    %
    
    
    
    
    
    
    
    
    
    
    59
    %
    
    
    55
    %
 Three and Nine Months Ended December 31, 2009 Compared to Three and Nine Months Ended December 31,
2008
   27




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##### Table of Contents



Operating Expenses
 Research and Development
  Three Months Ended
    
    
    
    
    
    Nine Months EndedDecember 31,
    
    
    Change
    
    
    December 31,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    Increase/
    
    
    Percent2009
    
    
    2008
    
    
    (Decrease)
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    ChangeResearch and development expenses
    
    $
    2,835
    
    
    $
    2,037
    
    
    $
    798
    
    
    
    39
    %
    
    $
    8,002
    
    
    $
    6,116
    
    
    $
    1,886
    
    
    
    31
    %Percentage of total revenues
    
    
    9
    %
    
    
    8
    %
    
    
    
    
    
    
    
    
    
    
    9
    %
    
    
    8
    %
  Three and Nine Months Ended December 31, 2009 Compared to Three and Nine Months Ended December 31,
2008
   Sales and Marketing
  Three Months Ended
    
    
    
    
    
    Nine Months EndedDecember 31,
    
    
    Change
    
    
    December 31,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    Increase/
    
    
    Percent2009
    
    
    2008
    
    
    (Decrease)
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    ChangeSales and marketing expenses
    
    $
    7,486
    
    
    $
    6,061
    
    
    $
    1,425
    
    
    
    24
    %
    
    $
    21,428
    
    
    $
    18,382
    
    
    $
    3,046
    
    
    
    17
    %Percentage of total revenues
    
    
    24
    %
    
    
    22
    %
    
    
    
    
    
    
    
    
    
    
    24
    %
    
    
    23
    %
   28




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##### Table of Contents



Three and Nine Months Ended December 31, 2009 Compared to Three and Nine Months Ended December 31,
2008
  General and Administrative
  Three Months Ended
    
    
    
    
    
    Nine Months EndedDecember 31,
    
    
    Change
    
    
    December 31,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    Increase/
    
    
    Percent2009
    
    
    2008
    
    
    (Decrease)
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    ChangeGeneral and administrative expenses
    
    $
    2,552
    
    
    $
    2,241
    
    
    $
    311
    
    
    
    14
    %
    
    $
    7,739
    
    
    $
    5,855
    
    
    $
    1,884
    
    
    
    32
    %Percentage of total revenues
    
    
    8
    %
    
    
    8
    %
    
    
    
    
    
    
    
    
    
    
    9
    %
    
    
    7
    %
  Three and Nine Months Ended December 31, 2009 Compared to Three and Nine Months Ended December 31,
2008
  Interest and Other Income (Expense), Net
  Three Months Ended
    
    
    
    
    
    Nine Months EndedDecember 31,
    
    
    Change
    
    
    December 31,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    Increase/
    
    
    Percent2009
    
    
    2008
    
    
    (Decrease)
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    ChangeInterest and other income (expense), net
    
    $
    (11
    )
    
    $
    352
    
    
    $
    (363
    )
    
    
    (103
    %)
    
    $
    795
    
    
    $
    1,140
    
    
    $
    (345
    )
    
    
    (30
    %)
  Three and Nine Months Ended December 31, 2009 Compared to Three and Nine Months Ended December 31,
2008
    29




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##### Table of Contents



Income Tax Provision
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Income tax provision
    
    $
    1,982
    
    
    $
    1,762
    
    
    $
    6,545
    
    
    $
    5,308Effective tax rate
    
    
    37
    %
    
    
    34
    %
    
    
    39
    %
    
    
    36
    %
 Three and Nine Months Ended December 31, 2009 Compared to Three and Nine Months Ended December 31,
2008
    LIQUIDITY AND CAPITAL RESOURCES
  December 31,
    
    
    March 31,2009
    
    
    2009Cash and cash equivalents
    
    $
    48,282
    
    
    $
    49,237Short-term investments
    
    
    21,284
    
    
    
    20,776Long-term investments
    
    
    23,605
    
    
    
    4,886Total cash, cash equivalents and investments
    
    $
    93,171
    
    
    $
    74,899Percentage of total assets
    
    
    58
    %
    
    
    53
    %
 Cash Flow Changes
  Nine Months EndedDecember 31,2009
    
    
    2008Net cash provided by operating activities
    
    $
    19,333
    
    
    $
    10,109Net cash (used in) provided by investing activities
    
    
    (21,164
    )
    
    
    27,505Net cash provided by financing activities
    
    
    852
    
    
    
    5,362Effect of exchange rate changes on cash and cash equivalents
    
    
    24
    
    
    
    (37
    )Net (decrease) increase in cash and cash equivalents
    
    $
    (955
    )
    
    $
    42,939
  Operating Activities
   30




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##### Table of Contents



Investing Activities
  Investments.
 Property and Equipment.
 Financing Activities
   31




---



##### Table of Contents



Contractual Obligations
 Purchase Commitments.
 Patent License Agreement.
  Line of Credit.
 Contingencies
  Off-Balance Sheet Arrangements
  Financial Condition
  RECENT ACCOUNTING PRONOUNCEMENTS
   32




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
       Foreign Currency Rate Fluctuations
      33




---



##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  Inherent Limitations on Controls and Procedures
  
 Item 4T. Controls and Procedures
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 RISK FACTORS THAT MAY AFFECT OUR PERFORMANCE
    We are not able to predict sales in future quarters and a number of factors affect our periodic
results, which makes our quarterly operating results less predictable.
   34




---



##### Table of Contents




    
    new product announcements made by us or our competitors;
 
    
    changes in our pricing structures or the pricing structures of our competitors;
 
    
    our ability to develop, introduce and market new products on a timely basis;
 
    
    our manufacturing capacities and our ability to increase the scale of these capacities;
 
    
    the mix of product sales between our blood chemistry analyzers and our reagent disc
products;
 
    
    the amount we spend on research and development; and
 
    
    changes in our strategy.
 We would fail to achieve anticipated revenue if the market does not accept our products.
    We rely on patents and other proprietary information, the loss of which would negatively affect our
business.
   35




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##### Table of Contents



We must increase sales of our Piccolo and VetScan products or we may not be able to increase
profitability.
  
    
    continue to improve our existing products and develop new and innovative products;
 
    
    increase our sales and marketing activities;
 
    
    effectively manage our manufacturing activities; and
 
    
    effectively compete against current and future competitors.
  We must continue to develop our sales, marketing and distribution experience in the human
diagnostic market or our business will not grow.
  
    
    we will be able to establish and maintain effective distribution arrangements in the human
diagnostic market;
 
    
    any distribution arrangements that we are able to establish will be successful in marketing
our products; or
 
    
    the costs associated with sales, marketing and distributing our products will not be
excessive.
  We could fail to achieve anticipated revenue if we experience problems related to the manufacture
of our blood chemistry analyzers.
   36




---



##### Table of Contents



We may inadvertently produce defective products, which may subject us to significant warranty
liabilities or product liability claims and we may have insufficient product liability insurance to
pay material uninsured claims.
   We must effectively train and integrate the members of our sales team in order to achieve our
anticipated revenue or expand our business.
  We need to successfully manufacture and market additional reagent discs for the human diagnostic
market if we are to compete in that market.
  We rely primarily on distributors to sell our products and we rely on sole distributor arrangements
in a number of countries. Our failure to successfully develop and maintain these relationships
could adversely affect our business.
    37




---



##### Table of Contents



We depend on limited or sole suppliers for several key components in our products, many of whom we
have not entered into contractual relationships with and failure of our suppliers to provide the
components to us could harm our business.
  
    
    Reagent Discs:Two injection-molding manufacturers, C. Brewer & Co. and Nypro, Inc.,
currently make the molded plastic discs which, when loaded with reagents and welded together,
form our reagent disc products. We believe that only a few manufacturers are capable of
producing these discs to the narrow tolerances that we require. To date, we have only
qualified these two manufacturers to manufacture the molded plastic discs.
 
    
    Reagent Chemicals:We currently depend on the following single source vendors for some of
the chemicals that we use to produce the dry reagent chemistry beads that are either inserted
in our reagent discs or sold as stand-alone products: Amano Enzyme USA Co., Ltd., Genzyme
Corporation, Kikkoman Corporation Biochemical Division, Microgenics Corporation, Roche
Molecular Biochemicals of Roche Diagnostics Corporation, a division of F. Hoffmann-La Roche,
Ltd., SA Scientific Co., Sigma Aldrich Inc. and Toyobo Specialties (formerly Shinko American
Inc.).
 
    
    Blood Chemistry Analyzer Components:Our blood analyzer products use several
technologically-advanced components that we currently purchase from a limited number of
vendors, including certain components from a single-source supplier, UDT Sensors (a division
of OSI Optoelectronics). Our analyzers also use a printer that is primarily made by Seiko
North America Corporation. The loss of the supply of any of these components could force us
to redesign our blood chemistry analyzers.
 
    
    Hematology Instruments and Reagents:Our hematology instruments are manufactured by
Diatron Medical Instruments PLC. in Hungary and are purchased by us as a completed instrument.
In addition, to date, we have qualified only three suppliers to produce the reagents for our
hematology instruments: Clinical Diagnostic Solutions, Inc., Diatron Medical Instruments PLC.
and Mallinckrodt Baker BV.
 
    
    Coagulation Analyzers and Cartridges:Our coagulation analyzers and cartridges are
manufactured by Scandinavian MicroBiodevices APS in Denmark and are purchased by us as
completed products.
 
    
    i-STAT Analyzers and Cartridges:Our i-STAT 1 analyzers and cartridges are manufactured by
Abbott Point of Care Inc. in North America and are purchased by us as completed products.
  38




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##### Table of Contents



We may not be able to compete effectively with larger, more established entities or their products,
or with future organizations or future products, which could cause our sales to decline.
  
    
    commercial clinical laboratories;
 
    
    hospitals clinical laboratories; and
 
    
    manufacturers of bench top multi-test blood analyzers and other testing systems that health
care providers can use on-site (a listing of our competitors is listed below).
  
    
    range of tests offered;
 
    
    immediacy of results;
 
    
    cost effectiveness;
 
    
    ease of use; and
 
    
    reliability of results.
   Changes in third-party payor reimbursement regulations can negatively affect our business.
   39




---



##### Table of Contents



We are subject to numerous governmental regulations and regulatory changes are difficult to predict
and may be damaging to our business.
 Need for Government Regulation for Our Products
     APHIS Licensure of Veterinary Biologics
    40




---



##### Table of Contents



Need to Comply with Manufacturing Regulations
  
    
    In April 2001, the State of California Food and Drug Branch granted our manufacturing facility
in compliance status, based on the regulations for Good Manufacturing Practices for medical
devices.
 
    
    In May 2001, the State of California Food and Drug Branch granted licensing for our
manufacturing facility in Union City, California.
 
    
    In May 2002, we received our ISO 9001 certification, expanding our compliance with
international quality standards.
 
    
    In December 2003, we received ISO 13485 Quality System certification as required by the
2003 European In Vitro Device Directive. This certified our quality system specifically to
medical devices.
 
    
    In both March 2003 and September 2005, the FDA conducted a facility inspection and verified
our compliance with the 21 CFR 820 Regulation.
 
    
    In October 2009 and November 2006, we received our recertification to the ISO 13485:2003
Quality System Standard for medical devices.
 
    
    In August 2008, the FDA conducted an additional facility inspection to verify our
compliance with 21 CFR 820 Regulation.
  Effects of the Clinical Laboratory Improvement Amendments on Our Products
  
    
    waived;
 
    
    moderately complex; and
 
    
    highly complex.
    41




---



##### Table of Contents



Need to Comply with Various Federal, State, Local and International Regulations
  
    
    In December 2003, we received certification from the British Standards Institute to the ISO
13485:1996 Quality System standard for medical devices. This quality system certification,
along with successful completion of product testing to 2003 European standards and the
translation of Piccolo product documentation into the required languages, enabled us to meet the
compliance requirements of the CE Mark and the 2003 European In Vitro Device Directive.
 
    
    In September 2005, we received the Canadian Medical Device Conformity Assessment System
stamp on our ISO 13485 certificate to signify compliance with Health Canada regulations.
 
    
    In March 2006, we received our certification to the 2003 version of the ISO 13485 Quality
System Standard for medical devices.
 
    
    In October 2009 and November 2006, we received our recertification to the ISO 13485:2003
Quality System Standard for medical devices.
   We have incurred and may continue to incur, in future periods, significant share-based compensation
charges which may adversely affect our reported financial results.
  We depend on key members of our management and scientific staff and, if we fail to retain and
recruit qualified individuals, our ability to execute our business strategy and generate sales
would be harmed.
  We are subject to increasingly complex requirements from recent legislation requiring companies to
evaluate internal control over financial reporting.
   42




---



##### Table of Contents



We may need additional funding in the future and these funds may not be available to us.
   
    
    further commercialization of our products and development of new test methods to allow us
to further penetrate the human diagnostic market and the veterinary diagnostic market;
 
    
    our need to acquire capital equipment for our manufacturing facilities, which includes the
ongoing costs related to the continuing development of our current and future products;
 
    
    research and design costs related to the continuing development of our current and future
products; and
 
    
    additional pre-clinical testing and clinical trials for our current and future products.
  We must comply with strict and potentially costly environmental regulations or we could pay
significant fines.
  Our facilities and manufacturing operations are vulnerable to natural disasters and other
unexpected losses. Any such losses or system failures or delays may harm our business.
   43




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##### Table of Contents



Fluctuations in foreign exchange rates and the possible lack of financial stability in foreign
countries could prevent overseas sales growth.
  Our operating results could be materially affected by unanticipated changes in our tax provisions
or exposure to additional income tax liabilities.
  Our stock price is highly volatile and investing in our stock involves a high degree of risk, which
could result in substantial losses for investors.
  
    
    fluctuation in our operating results;
 
    
    announcements of technological innovations or new commercial products by us or our
competitors;
 
    
    changes in governmental regulation in the United States and internationally;
 
    
    prospects and proposals for health care reform;
 
    
    governmental or third-party payors controls on prices that our customers may pay for our
products;
 
    
    developments or disputes concerning our patents or our other proprietary rights;
 
    
    product liability claims and public concern as to the safety of our devices or similar
devices developed by our competitors; and
 
    
    general market conditions.
   44




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##### Table of Contents



Our shareholders rights plan and our ability to issue preferred stock may delay or prevent a change
of control of Abaxis.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  (a)
    
    The election of five (5) directors to hold office until the next annual meeting
of shareholders. The votes cast and withheld for such nominees were as follows:
 Nominee
    
    FOR
    
    
    WITHHELDClinton H. Severson
    
    
    20,333,246
    
    
    
    304,034Richard J. Bastiani, Ph.D.
    
    
    20,420,562
    
    
    
    216,718Henk J. Evenhuis
    
    
    20,408,597
    
    
    
    228,683Prithipal Singh, Ph.D.
    
    
    17,885,853
    
    
    
    2,751,427Ernest S. Tucker III, M.D.
    
    
    20,417,073
    
    
    
    220,207
 (b)
    
    The results of voting on the ratification of the appointment of Burr Pilger
Mayer, Inc. (formerly known as Burr, Pilger & Mayer LLP) as our independent registered
public accounting firm for the fiscal year ending March 31, 2010, were as follows:
 FOR
    
    AGAINST
    
    
    ABSTAIN20,575,510
    
    
    16,569
    
    
    
    45,201
 
 Item 5. Other Information
   45




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##### Table of Contents



Item 6. Exhibits
 Exhibit No.
    
    Description of Document3.1
    
    
    Restated Articles of Incorporation (Filed with the Securities and Exchange Commission as an
exhibit with our Annual Report on Form 10-K for the fiscal year ended March 31, 1993 and
incorporated herein by reference.)3.2
    
    
    Certificate of Amendment of Amended and Restated Articles of Incorporation (Filed with the
Securities and Exchange Commission as an exhibit with our Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1996 and incorporated herein by reference.)3.3
    
    
    By-laws (Filed with the Securities and Exchange Commission in our Registration Statement No.
33-44326 on December 11, 1991 and incorporated herein by reference.)3.4
    
    
    Amendment to the By-laws (Filed with the Securities and Exchange Commission as an exhibit with
our Current Report on Form 8-K on July 30, 2007 and incorporated herein by reference.)4.1
    
    
    Registration Rights Agreement, dated as of March 29, 2002 (Filed with the Securities and Exchange
Commission as an exhibit with our Current Report on Form 8-K on May 13, 2002 and incorporated
herein by reference.)4.2
    
    
    Reference is made to Exhibit 3.1, Exhibit 3.2, Exhibit 3.3 and Exhibit 3.4.31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    #
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    #
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 #
    
    This certification accompanies this Quarterly Report on Form 10-Q. The certification is not deemed filed with the
Securities and Exchange Commission and is not to be incorporated by reference into any filing of Abaxis, Inc. under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the
date of this Quarterly Report on Form 10-Q and irrespective of any general incorporation language contained in any such
filing.  46




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##### Table of Contents



SIGNATURES
  ABAXIS, INC.(Registrant)Date: February 9, 2010
    BY:
    /s/ Clinton H. SeversonClinton H. SeversonPresident, Chief Executive Officer and Director
(Principal Executive Officer)Date: February 9, 2010
    BY:
    /s/ Alberto R. Santa InesAlberto R. Santa InesChief Financial Officer and Vice President of Finance
(Principal Financial and Accounting Officer)  47