##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ

    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 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.
  California
    
    77-0213001(State of Incorporation)
    
    (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
  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 September 30, 2009
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended September
30, 2009 and 2008
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2009 and March 31, 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 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
    
    
    32Item 4. Controls and Procedures
    
    
    33Item 4T. Controls and Procedures
    
    
    33PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 3. Defaults Upon Senior Securities
    
    
    43Item 4. Submission of Matters to a Vote of Security Holders
    
    
    43Item 5. Other Information
    
    
    43Item 6. Exhibits
    
    
    43SIGNATURES
    
    
    45Exhibit 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
    
    Six Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Revenues
    
    $
    30,262
    
    
    $
    27,688
    
    
    $
    59,887
    
    
    $
    52,260Cost of revenues
    
    
    12,411
    
    
    
    12,346
    
    
    
    24,881
    
    
    
    23,415Gross profit
    
    
    17,851
    
    
    
    15,342
    
    
    
    35,006
    
    
    
    28,845Operating expenses:Research and development
    
    
    2,594
    
    
    
    2,082
    
    
    
    5,167
    
    
    
    4,079Sales and marketing
    
    
    7,582
    
    
    
    6,494
    
    
    
    13,942
    
    
    
    12,321General and administrative
    
    
    2,689
    
    
    
    1,952
    
    
    
    5,187
    
    
    
    3,614Total operating expenses
    
    
    12,865
    
    
    
    10,528
    
    
    
    24,296
    
    
    
    20,014Income from operations
    
    
    4,986
    
    
    
    4,814
    
    
    
    10,710
    
    
    
    8,831Interest and other income (expense), net
    
    
    292
    
    
    
    326
    
    
    
    806
    
    
    
    788Income before income tax provision
    
    
    5,278
    
    
    
    5,140
    
    
    
    11,516
    
    
    
    9,619Income tax provision
    
    
    2,081
    
    
    
    1,843
    
    
    
    4,563
    
    
    
    3,546Net income
    
    $
    3,197
    
    
    $
    3,297
    
    
    $
    6,953
    
    
    $
    6,073Net income per share:Basic net income per share
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.32
    
    
    $
    0.28Diluted net income per share
    
    $
    0.14
    
    
    $
    0.15
    
    
    $
    0.31
    
    
    $
    0.27Shares used in the calculation of net income per share:Weighted average common shares outstanding  basic
    
    
    22,005,000
    
    
    
    21,779,000
    
    
    
    21,985,000
    
    
    
    21,757,000Weighted average common shares outstanding  diluted
    
    
    22,574,000
    
    
    
    22,304,000
    
    
    
    22,492,000
    
    
    
    22,363,000Share-based compensation expense by function:Cost of revenues
    
    $
    87
    
    
    $
    40
    
    
    $
    136
    
    
    $
    75Research and development
    
    
    214
    
    
    
    53
    
    
    
    354
    
    
    
    114Sales and marketing
    
    
    304
    
    
    
    121
    
    
    
    549
    
    
    
    258General and administrative
    
    
    764
    
    
    
    220
    
    
    
    1,226
    
    
    
    388Total share-based compensation expense
    
    $
    1,369
    
    
    $
    434
    
    
    $
    2,265
    
    
    $
    835
  3




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ABAXIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 September 30,
    
    March 31,2009
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    51,579
    
    
    $
    49,237Short-term investments
    
    
    17,068
    
    
    
    20,776Accounts receivables (net of allowances of $479 at September 30, 2009 and $388 at March 31, 2009)
    
    
    22,412
    
    
    
    21,983Inventories
    
    
    16,312
    
    
    
    15,735Prepaid expenses
    
    
    1,467
    
    
    
    957Net deferred tax asset, current
    
    
    4,652
    
    
    
    4,676Total current assets
    
    
    113,490
    
    
    
    113,364Long-term investments
    
    
    18,926
    
    
    
    4,886Property and equipment, net
    
    
    14,106
    
    
    
    14,798Intangible assets, net
    
    
    4,887
    
    
    
    5,175Other assets
    
    
    45
    
    
    
    24Net deferred tax asset, non-current
    
    
    2,464
    
    
    
    2,464Total assets
    
    $
    153,918
    
    
    $
    140,711LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,432
    
    
    $
    3,963Accrued payroll and related expenses
    
    
    5,677
    
    
    
    3,698Accrued taxes
    
    
    700
    
    
    
    34Other accrued liabilities
    
    
    1,314
    
    
    
    1,116Deferred revenue
    
    
    1,066
    
    
    
    1,024Warranty reserve
    
    
    1,498
    
    
    
    1,714Total current liabilities
    
    
    15,687
    
    
    
    11,549Non-current liabilities:Deferred rent
    
    
    46
    
    
    
    137Deferred revenue
    
    
    1,399
    
    
    
    1,550Warranty reserve
    
    
    730
    
    
    
    583Total non-current liabilities
    
    
    2,175
    
    
    
    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; 22,019,000 and 21,933,000 shares issued and outstanding
at September 30, 2009 and at March 31, 2009, respectively
    
    
    120,060
    
    
    
    117,846Retained earnings
    
    
    15,999
    
    
    
    9,046Accumulated other comprehensive loss
    
    
    (3
    )
    
    
    Total shareholders equity
    
    
    136,056
    
    
    
    126,892Total liabilities and shareholders equity
    
    $
    153,918
    
    
    $
    140,711
  4




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ABAXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 Six Months EndedSeptember 30,2009
    
    2008Cash flows from operating activities:Net income
    
    $
    6,953
    
    
    $
    6,073Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,574
    
    
    
    2,066Investment premium amortization
    
    
    51
    
    
    
    (Gain) loss on disposal of property and equipment
    
    
    21
    
    
    
    (8
    )(Gain) loss on foreign exchange translation
    
    
    (209
    )
    
    
    77Share-based compensation expense
    
    
    2,265
    
    
    
    835Excess tax benefits from share-based awards
    
    
    (351
    )
    
    
    (3,085
    )Provision for deferred income taxes
    
    
    377
    
    
    
    2,332Changes in assets and liabilities:Accounts receivables, net
    
    
    (304
    )
    
    
    (802
    )Inventories
    
    
    (1,415
    )
    
    
    (160
    )Prepaid expenses
    
    
    (510
    )
    
    
    (666
    )Other assets
    
    
    (21
    )
    
    
    (18
    )Accounts payable
    
    
    1,468
    
    
    
    (1,457
    )Accrued payroll and related expenses
    
    
    1,979
    
    
    
    (44
    )Accrued taxes
    
    
    429
    
    
    
    736Other accrued liabilities
    
    
    198
    
    
    
    207Deferred rent
    
    
    (91
    )
    
    
    (69
    )Deferred revenue
    
    
    (109
    )
    
    
    420Warranty reserve
    
    
    (69
    )
    
    
    294Net cash provided by operating activities
    
    
    13,236
    
    
    
    6,731Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (3,030
    )
    
    
    Purchases of held-to-maturity investments
    
    
    (20,565
    )
    
    
    (7,090
    )Proceeds from redemptions and principal payments of available-for-sale investments
    
    
    2,374
    
    
    
    8,550Proceeds from maturities of held-to-maturity investments
    
    
    10,833
    
    
    
    7,090Purchases of property and equipment
    
    
    (739
    )
    
    
    (1,074
    )Proceeds from disposal of property and equipment
    
    
    
    
    
    
    20Net cash (used in) provided by investing activities
    
    
    (11,127
    )
    
    
    7,496Cash flows from financing activities:Proceeds from issuance of common stock under stock plans, net
    
    
    (217
    )
    
    
    66Excess tax benefits from share-based awards
    
    
    351
    
    
    
    3,085Net cash provided by financing activities
    
    
    134
    
    
    
    3,151Effect of exchange rate changes on cash and cash equivalents
    
    
    99
    
    
    
    (25
    )Net increase in cash and cash equivalents
    
    
    2,342
    
    
    
    17,353Cash and cash equivalents at beginning of period
    
    
    49,237
    
    
    
    17,219Cash and cash equivalents at end of period
    
    $
    51,579
    
    
    $
    34,572Supplemental disclosure of cash flow information:Cash paid for income taxes, net of refunds
    
    $
    3,502
    
    
    $
    478Supplemental disclosure of non-cash flow information:Change in unrealized gain (loss) on investments, net of tax
    
    $
    (3
    )
    
    $
    1,022Transfers of equipment between inventory and property and equipment, net
    
    $
    876
    
    
    $
    1,233Net change in capitalized share-based compensation
    
    $
    38
    
    
    $
    (4
    )Common stock withheld for employee taxes in connection with share-based compensation
    
    $
    422
    
    
    $
    275
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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
  September 30, 2009Cost or
    
    Gross Unrealized
    
    FairAmortized Cost
    
    Gain (Loss)
    
    ValueShort-term investmentsAvailable-for-sale:Asset-backed securities
    
    $
    632
    
    
    $
    (5
    )
    
    $
    627Total short-term investments in available-for-sale
    
    $
    632
    
    
    $
    (5
    )
    
    $
    627Held-to-maturity:Certificates of deposits
    
    $
    16,441
    
    
    $
    
    
    
    $
    16,441Total short-term investments in held-to-maturity
    
    $
    16,441
    
    
    $
    
    
    
    $
    16,441Total short-term investments
    
    $
    17,073
    
    
    $
    (5
    )
    
    $
    17,068Long-term investmentsHeld-to-maturity:Certificates of deposits
    
    $
    4,416
    
    
    $
    
    
    
    $
    4,416Corporate bonds
    
    
    13,145
    
    
    
    
    
    
    
    13,145U.S. agency securities
    
    
    1,365
    
    
    
    
    
    
    
    1,365Total long-term investments in held-to-maturity
    
    $
    18,926
    
    
    $
    
    
    
    $
    18,926
 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 excluding asset-backed securities
    
    Fair ValueDue in less than one year
    
    $
    16,441Due in 1 to 4 years
    
    
    18,926Asset-backed securities(1)Weighted average maturity less than 1 year
    
    
    399Weighted average maturity 1 to 2 years
    
    
    228Total investments
    
    $
    35,994
 
 (1)
    
    Asset-backed securities are separately disclosed as they are not due at a single maturity date. NOTE 4. FAIR VALUE MEASUREMENTS
  8




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As of September 30, 2009Quoted Prices inActive Markets for
    
    Significant Other
    
    SignificantIdentical Assets
    
    Observable Inputs
    
    Unobservable InputsLevel 1
    
    Level 2
    
    Level 3
    
    TotalAssetsCash equivalents
    
    $
    34,596
    
    
    $
    
    
    
    $
    
    
    
    $
    34,596Short-term investments:Asset-backed securities
    
    
    
    
    
    
    627
    
    
    
    
    
    
    
    627Total assets at fair value
    
    $
    34,596
    
    
    $
    627
    
    
    $
    
    
    
    $
    35,223
  NOTE 5. INVENTORIES
  September 30,
    
    March 31,2009
    
    2009Raw materials
    
    $
    8,620
    
    
    $
    8,539Work-in-process
    
    
    2,694
    
    
    
    2,592Finished goods
    
    
    4,998
    
    
    
    4,604Total Inventories
    
    $
    16,312
    
    
    $
    15,735
 NOTE 6. WARRANTY RESERVES
  Instruments.
 Reagent Discs.
  9




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Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Balance at beginning of period
    
    $
    2,385
    
    
    $
    2,115
    
    
    $
    2,297
    
    
    $
    1,948Provision for warranty expense
    
    
    144
    
    
    
    512
    
    
    
    401
    
    
    
    1,019Warranty costs incurred
    
    
    (301
    )
    
    
    (385
    )
    
    
    (470
    )
    
    
    (725
    )Balance at end of period
    
    
    2,228
    
    
    
    2,242
    
    
    
    2,228
    
    
    
    2,242Non-current portion of warranty reserve
    
    
    730
    
    
    
    625
    
    
    
    730
    
    
    
    625Current portion of warranty reserve
    
    $
    1,498
    
    
    $
    1,617
    
    
    $
    1,498
    
    
    $
    1,617
 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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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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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
    
    
    (37,000
    )
    
    
    5.57Canceled or forfeited
    
    
    
    
    
    
    Outstanding at September 30, 2009
    
    
    811,000
    
    
    $
    9.01
    
    
    
    2.77
    
    
    $
    14,398Vested and expected to vest at September 30, 2009
    
    
    811,000
    
    
    $
    9.01
    
    
    
    2.77
    
    
    $
    14,398Exercisable at September 30, 2009
    
    
    811,000
    
    
    $
    9.01
    
    
    
    2.77
    
    
    $
    14,398
  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
    
    
    285,000
    
    
    
    17.90Vested(2)
    
    
    (73,000
    )
    
    
    23.57Canceled or forfeited
    
    
    (59,000
    )
    
    
    23.57Unvested at September 30, 2009
    
    
    843,000
    
    
    $
    21.54
 
 (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
   Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Numerator:Net income
    
    $
    3,197
    
    
    $
    3,297
    
    
    $
    6,953
    
    
    $
    6,073Denominator:Weighted average common shares outstanding  basic
    
    
    22,005,000
    
    
    
    21,779,000
    
    
    
    21,985,000
    
    
    
    21,757,000Weighted average effect of dilutive securities:Stock options
    
    
    427,000
    
    
    
    509,000
    
    
    
    397,000
    
    
    
    549,000Restricted stock units
    
    
    142,000
    
    
    
    16,000
    
    
    
    110,000
    
    
    
    57,000Weighted average common shares outstanding  diluted
    
    
    22,574,000
    
    
    
    22,304,000
    
    
    
    22,492,000
    
    
    
    22,363,000Net income per share:Basic net income per share
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.32
    
    
    $
    0.28Diluted net income per share
    
    $
    0.14
    
    
    $
    0.15
    
    
    $
    0.31
    
    
    $
    0.27
 13




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Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Weighted average number of shares underlying antidilutive stock options
    
    
    
    
    
    
    159,000
    
    
    
    159,000
    
    
    
    Weighted average exercise price per share underlying antidilutive stock options
    
    
    N/A
    
    
    $
    21.65
    
    
    $
    21.65
    
    
    
    N/A
  Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Weighted average number of shares underlying antidilutive restricted stock units
    
    
    64,000
    
    
    
    375,000
    
    
    
    206,000
    
    
    
    178,000
 NOTE 11. INCOME TAXES
    NOTE 12. COMPREHENSIVE INCOME
  Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Net income
    
    $
    3,197
    
    
    $
    3,297
    
    
    $
    6,953
    
    
    $
    6,073Other comprehensive income:Change in unrealized gain (loss) on investments, net of tax
    
    
    8
    
    
    
    939
    
    
    
    (3
    )
    
    
    1,022Comprehensive income
    
    $
    3,205
    
    
    $
    4,236
    
    
    $
    6,950
    
    
    $
    7,095
 NOTE 13. SEGMENT REPORTING INFORMATION
   Medical Market
  14




---



##### Table of Contents



Veterinary Market
   Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Revenues:Medical Market
    
    $
    6,345
    
    
    $
    6,015
    
    
    $
    12,108
    
    
    $
    12,544Veterinary Market
    
    
    21,684
    
    
    
    19,945
    
    
    
    43,507
    
    
    
    36,558Other(1)
    
    
    2,233
    
    
    
    1,728
    
    
    
    4,272
    
    
    
    3,158Total revenues
    
    
    30,262
    
    
    
    27,688
    
    
    
    59,887
    
    
    
    52,260Cost of revenues:Medical Market
    
    
    2,723
    
    
    
    2,998
    
    
    
    5,354
    
    
    
    6,224Veterinary Market
    
    
    8,321
    
    
    
    8,240
    
    
    
    17,038
    
    
    
    15,283Other(1)
    
    
    1,367
    
    
    
    1,108
    
    
    
    2,489
    
    
    
    1,908Total cost of revenues
    
    
    12,411
    
    
    
    12,346
    
    
    
    24,881
    
    
    
    23,415Gross profit:Medical Market
    
    
    3,622
    
    
    
    3,017
    
    
    
    6,754
    
    
    
    6,320Veterinary Market
    
    
    13,363
    
    
    
    11,705
    
    
    
    26,469
    
    
    
    21,275Other(1)
    
    
    866
    
    
    
    620
    
    
    
    1,783
    
    
    
    1,250Gross profit
    
    $
    17,851
    
    
    $
    15,342
    
    
    $
    35,006
    
    
    $
    28,845
 
 (1)
    
    Represents unallocated items, not specifically identified to any particular business segment. NOTE 14. REVENUES BY PRODUCT CATEGORY AND GEOGRAPHIC REGION AND SIGNIFICANT CONCENTRATIONS
 Revenue Information
  Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,Revenues by Product Category
    
    2009
    
    2008
    
    2009
    
    2008Instruments(1)
    
    $
    6,553
    
    
    $
    6,892
    
    
    $
    12,830
    
    
    $
    14,694Consumables(2)
    
    
    20,983
    
    
    
    18,734
    
    
    
    41,888
    
    
    
    33,627Other products
    
    
    1,807
    
    
    
    1,317
    
    
    
    3,446
    
    
    
    2,427Product sales, net
    
    
    29,343
    
    
    
    26,943
    
    
    
    58,164
    
    
    
    50,748Development and licensing revenue
    
    
    919
    
    
    
    745
    
    
    
    1,723
    
    
    
    1,512Total revenues
    
    $
    30,262
    
    
    $
    27,688
    
    
    $
    59,887
    
    
    $
    52,260
 
 (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. 15




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,Revenues by Geographic Region
    
    2009
    
    2008
    
    2009
    
    2008North America
    
    $
    24,774
    
    
    $
    22,413
    
    
    $
    48,885
    
    
    $
    42,708Europe
    
    
    4,454
    
    
    
    4,410
    
    
    
    8,849
    
    
    
    7,795Asia Pacific and rest of the world
    
    
    1,034
    
    
    
    865
    
    
    
    2,153
    
    
    
    1,757Total revenues
    
    $
    30,262
    
    
    $
    27,688
    
    
    $
    59,887
    
    
    $
    52,260
 Significant Concentrations
  Three Months Ended
    
    Six Months EndedGeographical
    
    September 30,
    
    September 30,Distributor
    
    Location
    
    2009
    
    2008
    
    2009
    
    2008Walco International, Inc., d/b/a DVM Resources
    
    United States
    
    
    10
    %
    
    
    11
    %
    
    
    10
    %
    
    
    <10
    %
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD-LOOKING STATEMENTS
  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.
 16




---



##### Table of Contents




    
    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
 ®
  CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
  17




---



##### Table of Contents



Revenue Recognition and Deferred Revenue.
   Distributor and Customer Rebates.
 Sales and Other Allowances.
 Allowance for Doubtful Accounts.
 Fair Value Measurements.
 Level 1:
 18




---



##### Table of Contents



Level 2:
 Level 3:
  Warranty Reserves.
   Inventories.
 Valuation of Long-Lived Assets.
 Income Taxes.
  19




---



##### Table of Contents



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.
   RESULTS OF OPERATIONS
  20




---



##### Table of Contents



Total Revenues
 Revenues by Geographic Region and by Product Category.
 Three Months Ended
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    Change
    
    September 30,
    
    ChangeIncrease/
    
    Percent
    
    
    
    
    
    
    
    
    
    Increase/
    
    PercentRevenues by Geographic Region
    
    2009
    
    2008
    
    (Decrease)
    
    Change
    
    2009
    
    2008
    
    (Decrease)
    
    ChangeNorth America
    
    $
    24,774
    
    
    $
    22,413
    
    
    $
    2,361
    
    
    
    11
    %
    
    $
    48,885
    
    
    $
    42,708
    
    
    $
    6,177
    
    
    
    14
    %Percentage of total revenues
    
    
    82
    %
    
    
    81
    %
    
    
    
    
    
    
    
    
    
    
    82
    %
    
    
    82
    %Europe
    
    
    4,454
    
    
    
    4,410
    
    
    
    44
    
    
    
    1
    %
    
    
    8,849
    
    
    
    7,795
    
    
    
    1,054
    
    
    
    14
    %Percentage of total revenues
    
    
    15
    %
    
    
    16
    %
    
    
    
    
    
    
    
    
    
    
    15
    %
    
    
    15
    %Asia Pacific and rest of the world
    
    
    1,034
    
    
    
    865
    
    
    
    169
    
    
    
    20
    %
    
    
    2,153
    
    
    
    1,757
    
    
    
    396
    
    
    
    23
    %Percentage of total revenues
    
    
    3
    %
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    3
    %
    
    
    3
    %Total revenues
    
    $
    30,262
    
    
    $
    27,688
    
    
    $
    2,574
    
    
    
    9
    %
    
    $
    59,887
    
    
    $
    52,260
    
    
    $
    7,627
    
    
    
    15
    %
 Three Months Ended
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    Change
    
    September 30,
    
    ChangeIncrease/
    
    Percent
    
    
    
    
    
    
    
    
    
    Increase/
    
    PercentRevenues by Product Category
    
    2009
    
    2008
    
    (Decrease)
    
    Change
    
    2009
    
    2008
    
    (Decrease)
    
    ChangeInstruments(1)
    
    $
    6,553
    
    
    $
    6,892
    
    
    $
    (339
    )
    
    
    (5
    %)
    
    $
    12,830
    
    
    $
    14,694
    
    
    $
    (1,864
    )
    
    
    (13
    %)Percentage of total revenues
    
    
    22
    %
    
    
    25
    %
    
    
    
    
    
    
    
    
    
    
    21
    %
    
    
    28
    %Consumables(2)
    
    
    20,983
    
    
    
    18,734
    
    
    
    2,249
    
    
    
    12
    %
    
    
    41,888
    
    
    
    33,627
    
    
    
    8,261
    
    
    
    25
    %Percentage of total revenues
    
    
    69
    %
    
    
    68
    %
    
    
    
    
    
    
    
    
    
    
    70
    %
    
    
    64
    %Other products
    
    
    1,807
    
    
    
    1,317
    
    
    
    490
    
    
    
    37
    %
    
    
    3,446
    
    
    
    2,427
    
    
    
    1,019
    
    
    
    42
    %Percentage of total revenues
    
    
    6
    %
    
    
    4
    %
    
    
    
    
    
    
    
    
    
    
    6
    %
    
    
    5
    %Product sales, net
    
    
    29,343
    
    
    
    26,943
    
    
    
    2,400
    
    
    
    9
    %
    
    
    58,164
    
    
    
    50,748
    
    
    
    7,416
    
    
    
    15
    %Percentage of total revenues
    
    
    97
    %
    
    
    97
    %
    
    
    
    
    
    
    
    
    
    
    97
    %
    
    
    97
    %Development and licensing revenue
    
    
    919
    
    
    
    745
    
    
    
    174
    
    
    
    23
    %
    
    
    1,723
    
    
    
    1,512
    
    
    
    211
    
    
    
    14
    %Percentage of total revenues
    
    
    3
    %
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    3
    %
    
    
    3
    %Total revenues
    
    $
    30,262
    
    
    $
    27,688
    
    
    $
    2,574
    
    
    
    9
    %
    
    $
    59,887
    
    
    $
    52,260
    
    
    $
    7,627
    
    
    
    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 September 30, 2009 Compared to Three Months Ended September 30, 2008
 North America .
 
    
    Medical reagent discs sales in North America (excluding the U.S. government) increased 9%,
or $270,000, primarily due to an increase in units sold resulting from an expanded installed
base of our Piccolo chemistry analyzers.
 
    
    Veterinary reagent discs sales in North America increased 9%, or $884,000, primarily due to
higher average selling prices.
 
    
    Total sales from our original equipment manufacturing (OEM) supplied products, which
include our (a) VetScan VSprocoagulation analyzers and related consumables, which we launched
in our fourth quarter of fiscal 2009, (b) i-STAT analyzers and related consumables, which we
launched in our fiscal 2010, and (c) canine heartworm rapid tests, which we launched in our
fourth quarter of fiscal 2009, were $1.5 million in North America during the three months
ended September 30, 2009.
 
    
    Revenues from other products in North America increased 37%, or $455,000. 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.
 
    
    Revenues from development and licensing in North America increased 23%, or $174,000,
primarily due to royalties from a licensing agreement related to our proprietary technology,
the Orbos Discrete Lyophilization Process.
  
    
    Sales of our Piccolo chemistry analyzers in North America (excluding the U.S. government)
decreased 35%, or $483,000,
primarily due to inventory stock adjustments by distributors during the three months ended
September 30, 2009.
 21




---



##### Table of Contents




    
    Sales of our VetScan chemistry analyzers in North America decreased 19%, or $427,000,
primarily due to unfavorable economic conditions and the resulting impact of reduced capital
spending at the veterinary clinic level as a result of the reduced availability of credit to
customers.
 Europe .
 
    
    Medical reagent discs sales in Europe increased 154%, or $407,000, primarily due to an
increase in units sold to two distributors, which is based on the timing of inventory
purchases during the three months ended September 30, 2009.
 
    
    Sales of our VetScan chemistry analyzers in Europe increased 58%, or $297,000, primarily
due to the timing of inventory purchases by a distributor during the three months ended
September 30, 2009.
 
    
    Total sales of our VetScan hematology instruments and hematology reagent kits in Europe
increased 35%, or $70,000, during the three months ended September 30, 2009.
  Significant concentration.
 Six Months Ended September 30, 2009 Compared to Six Months Ended September 30, 2008
 North America .
 
    
    Medical reagent discs sales in North America (excluding the U.S. government) increased 10%,
or $573,000, primarily due to an increase in units sold resulting from an expanded installed
base of our Piccolo chemistry analyzers.
 
    
    Veterinary reagent discs sales in North America increased 23%, or $4.3 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 24%, or $474,000, 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 (a) VetScan VSprocoagulation
analyzers and related consumables, which we launched in our fourth quarter of fiscal 2009, (b)
i-STAT analyzers and related consumables, which we launched in our fiscal 2010, and (c) canine
heartworm rapid tests, which we launched in our fourth quarter of fiscal 2009, were $3.0
million in North America during the six months ended September 30, 2009.
 
    
    Revenues from other products sold in North America increased 39%, or $901,000. 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 $1.5 million, primarily due to inventory stock adjustments by distributors
during the six months ended September 30, 2009.
 
    
    Sales of our VetScan chemistry analyzers in North America decreased 27%, or $1.3 million,
primarily due to unfavorable economic conditions and the resulting impact of reduced capital
spending at the veterinary clinic level as a result of the reduced availability of credit to
customers.
 
    
    Sales of our hematology instruments in North America decreased 10%, or $311,000, primarily
due to unfavorable economic conditions and the resulting impact of reduced capital spending at
the veterinary clinic level as a result of the reduced availability of credit to customers.
 22




---



##### Table of Contents



Europe .
 
    
    Medical reagent discs sales in Europe increased 70%, or $456,000, primarily due to an
increase in units sold to two distributors, which is based on the timing of inventory
purchases during the six months ended September 30, 2009.
 
    
    Sales of our VetScan chemistry analyzers in Europe increased 29%, or $375,000, primarily
due to the timing of inventory purchases by a distributor during the six months ended
September 30, 2009.
 
    
    Total sales our VetScan hematology instruments and hematology reagent kits in Europe
increased 51%, or $190,000, during the six months ended September 30, 2009.
  Significant concentration.
 Segment Results
 Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
  Three Months EndedSeptember 30,
    
    
    ChangePercent of
    
    
    
    
    
    
    Percent of
    
    
    Increase/
    
    
    Percent2009
    
    
    Revenues(1)
    
    
    2008
    
    
    Revenues(1)
    
    
    (Decrease)
    
    
    ChangeRevenues:Medical Market
    
    $
    6,345
    
    
    
    100
    %
    
    $
    6,015
    
    
    
    100
    %
    
    $
    330
    
    
    
    5
    %Percentage of total revenues
    
    
    21
    %
    
    
    
    
    
    
    22
    %Veterinary Market
    
    
    21,684
    
    
    
    100
    %
    
    
    19,945
    
    
    
    100
    %
    
    
    1,739
    
    
    
    9
    %Percentage of total revenues
    
    
    72
    %
    
    
    
    
    
    
    72
    %Other(2)
    
    
    2,233
    
    
    
    
    
    
    
    1,728
    
    
    
    
    
    
    
    505
    
    
    
    29
    %Percentage of total revenues
    
    
    7
    %
    
    
    
    
    
    
    6
    %Total revenues
    
    
    30,262
    
    
    
    
    
    
    
    27,688
    
    
    
    
    
    
    
    2,574
    
    
    
    9
    %Cost of revenues:Medical Market
    
    
    2,723
    
    
    
    43
    %
    
    
    2,998
    
    
    
    50
    %
    
    
    (275
    )
    
    
    (9
    %)Veterinary Market
    
    
    8,321
    
    
    
    38
    %
    
    
    8,240
    
    
    
    41
    %
    
    
    81
    
    
    
    1
    %Other(2)
    
    
    1,367
    
    
    
    
    
    
    
    1,108
    
    
    
    
    
    
    
    259
    
    
    
    23
    %Total cost of revenues
    
    
    12,411
    
    
    
    
    
    
    
    12,346
    
    
    
    
    
    
    
    65
    
    
    
    1
    %Gross profit:Medical Market
    
    
    3,622
    
    
    
    57
    %
    
    
    3,017
    
    
    
    50
    %
    
    
    605
    
    
    
    20
    %Veterinary Market
    
    
    13,363
    
    
    
    62
    %
    
    
    11,705
    
    
    
    59
    %
    
    
    1,658
    
    
    
    14
    %Other(2)
    
    
    866
    
    
    
    
    
    
    
    620
    
    
    
    
    
    
    
    246
    
    
    
    40
    %Gross profit
    
    $
    17,851
    
    
    
    
    
    
    $
    15,342
    
    
    
    
    
    
    $
    2,509
    
    
    
    16
    %
 
 (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.
 23




---



##### Table of Contents



Consumables.
 Gross Profit for Medical Market Segment
  Veterinary Market
 Revenues for Veterinary Market Segment
  
    
    Sales of our VetScan chemistry analyzers decreased 6%, or $170,000, during the three months
ended September 30, 2009, as compared to the three months ended September 30, 2008. The
decrease in revenues was primarily attributed to a decrease in revenues in North America of
19%, or $427,000, primarily due to unfavorable economic conditions and the resulting impact of
reduced capital spending at the veterinary clinic level as a result of the reduced
availability of credit to customers, and partially offset by an increase in revenues in Europe
of 58%, or $297,000, primarily due to the timing of inventory purchases by a distributor
during the three months ended September 30, 2009.
 
    
    Total revenues from veterinary reagent discs increased 1%, or $116,000, during the three
months ended September 30, 2009, as compared to the three months ended September 30, 2008.
The increase in revenues was primarily attributed to an increase in revenues in North America
of 9%, or $884,000, primarily due to higher average selling prices, and partially offset by a
decrease in revenues in Europe of 27%, or $835,000, primarily due to the timing of inventory
purchases by a distributor during the three months ended September 30, 2008.
 
    
    Total sales from our OEM supplied products, which include our (a) VetScan VSprocoagulation
analyzers and related consumables, which we launched in our fourth quarter of fiscal 2009, (b)
i-STAT analyzers and related consumables, which we launched in our fiscal 2010, and (c) canine
heartworm rapid tests, which we launched in our fourth quarter of fiscal 2009, were $1.6
million during the three months ended September 30, 2009, primarily in North America.
 Gross Profit for Veterinary Market Segment
  24




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##### Table of Contents



Six Months Ended September 30, 2009 Compared to Six Months Ended September 30, 2008
  Six Months EndedSeptember 30,
    
    
    ChangePercent of
    
    
    
    
    
    
    Percent of
    
    
    Increase/
    
    
    Percent2009
    
    
    Revenues(1)
    
    
    2008
    
    
    Revenues(1)
    
    
    (Decrease)
    
    
    ChangeRevenues:Medical Market
    
    $
    12,108
    
    
    
    100
    %
    
    $
    12,544
    
    
    
    100
    %
    
    $
    (436
    )
    
    
    (3
    %)Percentage of total revenues
    
    
    20
    %
    
    
    
    
    
    
    24
    %Veterinary Market
    
    
    43,507
    
    
    
    100
    %
    
    
    36,558
    
    
    
    100
    %
    
    
    6,949
    
    
    
    19
    %Percentage of total revenues
    
    
    73
    %
    
    
    
    
    
    
    70
    %Other(2)
    
    
    4,272
    
    
    
    
    
    
    
    3,158
    
    
    
    
    
    
    
    1,114
    
    
    
    35
    %Percentage of total revenues
    
    
    7
    %
    
    
    
    
    
    
    6
    %Total revenues
    
    
    59,887
    
    
    
    
    
    
    
    52,260
    
    
    
    
    
    
    
    7,627
    
    
    
    15
    %Cost of revenues:Medical Market
    
    
    5,354
    
    
    
    44
    %
    
    
    6,224
    
    
    
    50
    %
    
    
    (870
    )
    
    
    (14
    %)Veterinary Market
    
    
    17,038
    
    
    
    39
    %
    
    
    15,283
    
    
    
    42
    %
    
    
    1,755
    
    
    
    11
    %Other(2)
    
    
    2,489
    
    
    
    
    
    
    
    1,908
    
    
    
    
    
    
    
    581
    
    
    
    30
    %Total cost of revenues
    
    
    24,881
    
    
    
    
    
    
    
    23,415
    
    
    
    
    
    
    
    1,466
    
    
    
    6
    %Gross profit:Medical Market
    
    
    6,754
    
    
    
    56
    %
    
    
    6,320
    
    
    
    50
    %
    
    
    434
    
    
    
    7
    %Veterinary Market
    
    
    26,469
    
    
    
    61
    %
    
    
    21,275
    
    
    
    58
    %
    
    
    5,194
    
    
    
    24
    %Other(2)
    
    
    1,783
    
    
    
    
    
    
    
    1,250
    
    
    
    
    
    
    
    533
    
    
    
    43
    %Gross profit
    
    $
    35,006
    
    
    
    
    
    
    $
    28,845
    
    
    
    
    
    
    $
    6,161
    
    
    
    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.
 Gross Profit for Medical Market Segment
  25




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##### Table of Contents



Veterinary Market
 Revenues for Veterinary Market Segment
  
    
    Sales of our VetScan chemistry analyzers decreased 14%, or $851,000, during the six months
ended September 30, 2009, as compared to the six months ended September 30, 2008. The
decrease in revenues was primarily attributed to a decrease in revenues in North America of
27%, or $1.3 million, primarily due to unfavorable economic conditions and the resulting
impact of reduced capital spending at the veterinary clinic level as a result of the reduced
availability of credit to customers, and partially offset by an increase in revenues in Europe
of 29%, or $375,000, primarily due to the timing of inventory purchases by a distributor
during the six months ended September 30, 2009.
 
    
    Total revenues from veterinary reagent discs increased 18%, or $4.2 million, during the six
months ended September 30, 2009, as compared to the six months ended September 30, 2008. The
increase in revenues was primarily attributed to an increase in revenues in North America of
23%, or $4.3 million, primarily due to an increase in units sold resulting from an expanded
installed base of our VetScan chemistry analyzers, and partially offset by a decrease in
revenues in Europe of 3%, or $147,000, primarily due to the timing of inventory purchases by a
distributor during the six months ended September 30, 2008.
 
    
    Total sales from our OEM supplied products, which include our (a) VetScan VSprocoagulation
analyzers and related consumables, which we launched in our fourth quarter of fiscal 2009, (b)
i-STAT analyzers and related consumables, which we launched in our fiscal 2010, and (c) canine
heartworm rapid tests, which we launched in our fourth quarter of fiscal 2009, were $3.1
million during the six months ended September 30, 2009, primarily in North America.
 Gross Profit for Veterinary Market Segment
  Cost of Revenues
  Three Months Ended
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    Change
    
    September 30,
    
    ChangeIncrease/
    
    Percent
    
    
    
    
    
    
    
    
    
    Increase/
    
    Percent2009
    
    2008
    
    (Decrease)
    
    Change
    
    2009
    
    2008
    
    (Decrease)
    
    ChangeCost of revenues
    
    $
    12,411
    
    
    $
    12,346
    
    
    $
    65
    
    
    
    1
    %
    
    $
    24,881
    
    
    $
    23,415
    
    
    $
    1,466
    
    
    
    6
    %Percentage of total revenues
    
    
    41
    %
    
    
    45
    %
    
    
    
    
    
    
    
    
    
    
    42
    %
    
    
    45
    %
  Three and Six Months Ended September 30, 2009 Compared to Three and Six Months Ended September 30,
2008
 pro
 26




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##### Table of Contents



pro
 Gross Profit
  Three Months Ended
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    Change
    
    September 30,
    
    ChangeIncrease/
    
    Percent
    
    
    
    
    
    
    
    
    
    Increase/
    
    Percent2009
    
    2008
    
    (Decrease)
    
    Change
    
    2009
    
    2008
    
    (Decrease)
    
    ChangeTotal gross profit
    
    $
    17,851
    
    
    $
    15,342
    
    
    $
    2,509
    
    
    
    16
    %
    
    $
    35,006
    
    
    $
    28,845
    
    
    $
    6,161
    
    
    
    21
    %Total gross margin
    
    
    59
    %
    
    
    55
    %
    
    
    
    
    
    
    
    
    
    
    58
    %
    
    
    55
    %
 Three and Six Months Ended September 30, 2009 Compared to Three and Six Months Ended September 30,
2008
   Operating Expenses
 Research and Development
  Three Months Ended
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    Change
    
    September 30,
    
    ChangeIncrease/
    
    Percent
    
    
    
    
    
    
    
    
    
    Increase/
    
    Percent2009
    
    2008
    
    (Decrease)
    
    Change
    
    2009
    
    2008
    
    (Decrease)
    
    ChangeResearch and development
expenses
    
    $
    2,594
    
    
    $
    2,082
    
    
    $
    512
    
    
    
    25
    %
    
    $
    5,167
    
    
    $
    4,079
    
    
    $
    1,088
    
    
    
    27
    %Percentage of total revenues
    
    
    9
    %
    
    
    8
    %
    
    
    
    
    
    
    
    
    
    
    9
    %
    
    
    8
    %
  27




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##### Table of Contents



Three and Six Months Ended September 30, 2009 Compared to Three and Six Months Ended September 30,
2008
   Sales and Marketing
  Three Months Ended
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    Change
    
    September 30,
    
    ChangeIncrease/
    
    Percent
    
    
    
    
    
    
    
    
    
    Increase/
    
    Percent2009
    
    2008
    
    (Decrease)
    
    Change
    
    2009
    
    2008
    
    (Decrease)
    
    ChangeSales and marketing expenses
    
    $
    7,582
    
    
    $
    6,494
    
    
    $
    1,088
    
    
    
    17
    %
    
    $
    13,942
    
    
    $
    12,321
    
    
    $
    1,621
    
    
    
    13
    %Percentage of total revenues
    
    
    25
    %
    
    
    23
    %
    
    
    
    
    
    
    
    
    
    
    23
    %
    
    
    24
    %
  Three and Six Months Ended September 30, 2009 Compared to Three and Six Months Ended September 30,
2008
  General and Administrative
  Three Months Ended
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    Change
    
    September 30,
    
    ChangeIncrease/
    
    Percent
    
    
    
    
    
    
    
    
    
    Increase/
    
    Percent2009
    
    2008
    
    (Decrease)
    
    Change
    
    2009
    
    2008
    
    (Decrease)
    
    ChangeGeneral and administrative
expenses
    
    $
    2,689
    
    
    $
    1,952
    
    
    $
    737
    
    
    
    38
    %
    
    $
    5,187
    
    
    $
    3,614
    
    
    $
    1,573
    
    
    
    44
    %Percentage of total revenues
    
    
    9
    %
    
    
    7
    %
    
    
    
    
    
    
    
    
    
    
    9
    %
    
    
    7
    %
  Three and Six Months Ended September 30, 2009 Compared to Three and Six Months Ended September 30,
2008
  28




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##### Table of Contents



Interest and Other Income (Expense), Net
  Three Months Ended
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    Change
    
    September 30,
    
    ChangeIncrease/
    
    Percent
    
    
    
    
    
    
    
    
    
    Increase/
    
    Percent2009
    
    2008
    
    (Decrease)
    
    Change
    
    2009
    
    2008
    
    (Decrease)
    
    ChangeInterest and other
income (expense),
net
    
    $
    292
    
    
    $
    326
    
    
    $
    (34
    )
    
    
    (10
    )%
    
    $
    806
    
    
    $
    788
    
    
    $
    18
    
    
    
    2
    %
  Three and Six Months Ended September 30, 2009 Compared to Three and Six Months Ended September 30,
2008
   Income Tax Provision
  Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Income tax provision
    
    $
    2,081
    
    
    $
    1,843
    
    
    $
    4,563
    
    
    $
    3,546Effective tax rate
    
    
    39
    %
    
    
    36
    %
    
    
    40
    %
    
    
    37
    %
 Three and Six Months Ended September 30, 2009 Compared to Three and Six Months Ended September 30,
2008
    LIQUIDITY AND CAPITAL RESOURCES
  September 30,
    
    March 31,2009
    
    2009Cash and cash equivalents
    
    $
    51,579
    
    
    $
    49,237Short-term investments
    
    
    17,068
    
    
    
    20,776Long-term investments
    
    
    18,926
    
    
    
    4,886Total cash, cash equivalents and investments
    
    $
    87,573
    
    
    $
    74,899Percentage of total assets
    
    
    57
    %
    
    
    53
    %
 29




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##### Table of Contents



Cash Flow Changes
  Six Months EndedSeptember 30,2009
    
    2008Net cash provided by operating activities
    
    $
    13,236
    
    
    $
    6,731Net cash (used in) provided by investing activities
    
    
    (11,127
    )
    
    
    7,496Net cash provided by financing activities
    
    
    134
    
    
    
    3,151Effect of exchange rate changes on cash and cash equivalents
    
    
    99
    
    
    
    (25
    )Net increase in cash and cash equivalents
    
    $
    2,342
    
    
    $
    17,353
  Operating Activities
          Investing Activities
  Investments.
 30




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##### Table of Contents



Property and Equipment.
 Financing Activities
  Contractual Obligations
 Purchase Commitments.
 Patent License Agreement.
  Line of Credit.
 Contingencies
  Off-Balance Sheet Arrangements
  Financial Condition
  RECENT ACCOUNTING PRONOUNCEMENTS
  31




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
       Foreign Currency Rate Fluctuations
     32




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##### 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.
  33




---



##### 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.
  34




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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.
  35




---



##### 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.
    36




---



##### 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., 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.
   37




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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.
  We are subject to numerous governmental regulations and regulatory changes are difficult to predict
and may be damaging to our business.
 Need for FDA Certification for Our Medical Device Products
  38




---



##### 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 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.
   39




---



##### 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 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.
  40




---



##### Table of Contents



We are subject to increasingly complex requirements from recent legislation requiring companies to
evaluate internal control over financial reporting.
   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.
  41




---



##### Table of Contents



Our facilities and manufacturing operations are vulnerable to natural disasters and other
unexpected losses; system failures or delays may harm our business.
   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.
 42




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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
  
 Item 5. Other Information
  
 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. 43




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##### Table of Contents



SIGNATURES
  ABAXIS, INC.(Registrant)Date: November 9, 2009
    BY:
    /s/ Clinton H. SeversonClinton H. SeversonPresident, Chief Executive Officer and Director

(Principal Executive Officer)Date: November 9, 2009
    BY:
    /s/ Alberto R. Santa InesAlberto R. Santa InesChief Financial Officer and Vice President of Finance
(Principal Financial and Accounting Officer) 44