| ABAXIS INC Item 1A Risk Factors Our future performance is subject to a number of risks |
| If any of the following risks actually occur, our business could be harmed and the trading price of our common stock could decline |
| When used in these risk factors, the words “anticipates,” “believes,” “expects,” “intends,” “plans,” “future,” and similar expressions identify forward-looking statements |
| Our actual results could differ materially from those that we project in the forward-looking statements as a result of factors that we have set forth throughout this document as well as factors of which we are currently not aware |
| We Have Only Recently Become Consistently Profitable; We Must Increase Sales Of Our Piccolo And VetScan DXS Products To Maintain Profitability We have not recognized a net loss attributable to common shareholders in the last twelve fiscal quarters ended March 31, 2006 |
| However, as of March 31, 2006, we have cumulative net losses of dlra25dtta5 million |
| Our ability to be consistently profitable will depend, in part, on our ability to increase our sales volumes of our Piccolo and VetScan DXS products |
| Increasing the sales volume of our products will depend upon our ability to: 13 ______________________________________________________________________ • continue to develop our products; • increase our sales and marketing activities; • effectively manage our manufacturing activities; and • effectively compete against current and future competitors |
| We cannot assure you that we will be able to successfully increase our sales volumes of our products to achieve sustained profitability |
| We Are Not Able To Predict Sales In Future Quarters And A Number Of Factors Affect Our Periodic Results We are not able to accurately predict our sales in future quarters |
| Our revenue in the veterinary market are derived primarily by selling to distributors who resell our products to the ultimate user |
| While we are better able to predict sales of our reagent discs, as we sell these discs primarily for use with blood chemistry analyzers that we sold in prior periods, we generally are unable to predict with much certainty sales of our blood chemistry analyzers, as we typically sell our blood chemistry analyzers to new users |
| Accordingly, our sales in any one quarter are not indicative of our sales in any future period |
| We generally operate with limited order backlog, because we ship our products shortly after we receive the orders from our customers |
| As a result, our product sales in any quarter are generally dependent on orders that we receive and ship in that quarter |
| We base our expense levels, which are to a large extent fixed, in part on our expectations as to future revenues |
| We may be unable to reduce our spending in a timely manner to compensate for any unexpected revenue shortfall |
| As a result, any such shortfall would immediately materially and adversely impact our operating results and financial condition |
| Historically, we have experienced a decrease in our sales, especially in Europe, in our second and third quarters ending in September and December of each year, which we believe is due to seasonal patterns in the decision making processes to acquire our products |
| Accordingly, we believe that period to period comparisons of our results of operations are not necessarily meaningful |
| In the future, we anticipate our periodic operating results to vary significantly depending on, but not limited to, a number of factors, including, in addition to those factors discussed elsewhere in this section: • 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 analyzer and our reagent disc products; • the amount we spend on research and development; and • changes in our strategy |
| We Could Fail to Achieve Anticipated Revenue If The Market Does Not Accept Our Products Our core compact blood chemistry analyzer product differs substantially from current blood chemistry analyzers on the market |
| Our primary competition is from centralized laboratories that offer a greater number of tests than our products, but do so at a greater cost and requiring more time |
| We also compete with other point-of-care analyzers that cost more, require more maintenance and offer a narrower range of tests |
| However, these point-of-care analyzers are generally marketed by larger companies which have greater resources for sales and marketing, in addition to a recognized brand name and established distribution relationships |
| Historically we have marketed our VetScan DXS system through both direct sales and distribution channels to veterinarians |
| Although we believe that in our targeted markets, our reagent disc products provide a sufficient breadth of test menus, we continue to develop new animal blood tests and we cannot be assured that the tests will be accepted by the veterinary market |
| 14 ______________________________________________________________________ In the human medical market, we have relatively limited experience in large scale sales of our Piccolo analyzer |
| Although we believe that our blood analyzers offer consumers many advantages, including according to our analyses substantial cost savings, in terms of the actual product and implementation of it procedurally, these advantages involve changes to current standard practices, such as using large clinical laboratories, that will require changes in both the procedures and mindset of care providers |
| The human medical market in particular is highly regulated, structured, difficult to penetrate and often slow to adopt new product offerings |
| If we are unable to convince large numbers of medical clinics, hospitals and other point-of-care environments of the benefits of our products, we will suffer lost sales and could fail to achieve anticipated revenue |
| We Are Dependent Upon Our Profitability, And If We Cannot Remain Profitable We May Need Additional Funding In The Future And These Funds May Not Be Available To Us We believe that our existing capital resources, available line of credit and anticipated revenue from the sales of our products will be adequate to satisfy our currently planned operating and financial requirements through March 31, 2007, although no assurances can be given |
| The terms of our line of credit contain a number of covenants concerning financial tests that we must meet, and these tests are more fully explained herein under the subheading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| ” Further, we expect to incur incremental additional costs to support our future operations, including: • 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 |
| To the extent that our existing resources and anticipated revenue from the sale of our products are insufficient to fund our activities or if we are unable to meet the financial covenants of our line of credit, we may have to raise additional funds from the issuance of public or private securities |
| We may not be able to raise additional funding, or if we are able to, we may not be able to raise funding on acceptable terms |
| We may also dilute then-existing shareholders if we raise additional funds by issuing new equity securities |
| Alternately, we may have to relinquish rights to certain of our technologies, products and/or sales territories if we are required to obtain funds through arrangements with collaborative partners |
| If we are unable to raise needed funds, we may be required to curtail our operations significantly |
| This would materially adversely affect our operating results and financial condition |
| We Rely On Patents And Other Proprietary Information, The Loss Of Any Would Negatively Affect Our Business As of March 31, 2006, 35 patent applications have been filed on behalf of Abaxis with the United States Patent and Trademark Office, of which 29 have been issued |
| Additionally, we have filed several international patent applications covering the same subject matter as our domestic applications |
| The patent position of any medical device manufacturer, including Abaxis, is uncertain and may involve complex legal and factual issues |
| Consequently, we may not be issued any additional patents, either domestically or internationally |
| Furthermore, our patents may not provide significant proprietary protection because there is a chance that they will be circumvented or invalidated |
| We cannot be certain that we were the first creator of the inventions covered by our issued patents or pending patent applications, or that we were the first to file patent applications for these inventions, because (1) the United States Patent and Trademark Office maintains all patent applications that are not filed in any foreign jurisdictions in secrecy until it issues the patents (unless a patent application owner files a request for publication) and (2) publications of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months |
| We may have to participate in interference proceedings, which are proceedings in front of the United States Patent and Trademark Office, to determine who will be issued a patent |
| These proceedings could be costly and could be decided against us |
| 15 ______________________________________________________________________ We also rely upon copyrights, trademarks and unpatented trade secrets |
| Others may independently develop substantially equivalent proprietary information and techniques that would undermine our proprietary technologies |
| Further, others may gain access to our trade secrets or disclose such technology |
| Although we require our employees, consultants and advisors to execute agreements that require that our corporate information be kept confidential and that any inventions by these individuals are property of Abaxis, there can be no assurance that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information |
| The unauthorized dissemination of our confidential information would negatively impact our business |
| We Continue to Develop Our Marketing And Distribution Experience In the Human Diagnostic Market Although we have gained experience marketing our VetScan DXS system products in the veterinary diagnostic market, we have limited sales, marketing and distribution experience with our Piccolo systems in the human diagnostic market |
| Accordingly, we cannot assure you that: • 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 marketing and distributing our products will not be excessive |
| Should we fail to effectively develop our marketing and distribution efforts, our growth will be limited and our results of operations will be adversely affected |
| 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 Our business exposes us to potential warranty and product liability risks which are inherent in the testing, manufacturing and marketing of human and veterinary medical products |
| We strive to apply sophisticated methods to raw materials and produce defect-free medical test equipment |
| Although we have established procedures for quality control on both the raw materials that we receive from suppliers and our manufactured final products, these procedures may prove inadequate to detect a defect that either occurs in limited quantities or that we have not anticipated |
| We believe that our Piccolo and VetScan systems detect the vast majority of errors that occur on our reagent discs and automatically reject such tests, prompting the medical provider to retest the patient |
| However, our Piccolo and VetScan systems may be unable to detect errors which could result in the misdiagnosis of human or veterinary patients |
| Should we inadvertently ship defective products, we may be subject to substantial claims under our warranty policy or product liability law |
| In addition, our policy is to credit medical providers for any defective product that we produce, including those reagent discs that are rejected by our Piccolo and VetScan systems |
| Therefore, even if a mass defect within a lot or lots of reagent discs were detected by our Piccolo and VetScan systems, our need to replace such reagent discs free of charge would materially harm our financial condition |
| Further, in the event that a product defect is not detected by our Piccolo system, our relatively recent expansion into the human medical market greatly increases the risk that the amount of damages involved with just one product defect would be material to our operations |
| We currently maintain limited product liability insurance that we believe is adequate for our needs, taking into account the risks involved and cost of coverage |
| However, our product liability insurance and cash may be insufficient to cover potential liabilities |
| In addition, in the future the coverage that we require may be unavailable on commercially reasonable terms, if at all |
| Even with our current insurance coverage, a mass product defect, product liability claim or recall would materially adversely affect our business or our financial condition |
| Many of Our Sales Force Have Been Employed By Us For Less Than One Year And We Must Effectively Train And Integrate Our Sales Team In Order To Achieve Our Anticipated Revenue At March 31, 2006, we had fifty-two full-time sales personnel involved in our sales and marketing activities, many of whom have been employed by us for a limited period of time |
| While these individuals work with our distribution partners both domestically and internationally to extend our market reach, the primary selling activities are often done by these individuals |
| If we are to increase our sales, we will need to train new salespeople and supervise them closely |
| We also will continue hiring additional sales personnel |
| If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to our lack of resources to market our products |
| 16 ______________________________________________________________________ We Need to Successfully Manufacture And Market Additional Reagent Discs For The Human Diagnostic Market If We Are To Compete In That Market We have developed a blood analysis system that consists of a portable blood analyzer and single-use reagent discs |
| Each reagent disc performs a series of standard blood tests |
| We believe that it is necessary to develop additional series of reagent discs with various tests for use with the Piccolo and VetScan systems |
| Historically, we primarily developed reagent discs suitable for the veterinary diagnostic market |
| These tests are included in standard tests for which the medical community receives reimbursements from third party payors such as HMOs and Medicare |
| We may not be able to successfully manufacture or market these reagent discs |
| Our failure to meet these challenges will materially adversely affect our operating results and financial condition |
| We Rely On Distributors To Sell Our Products; We Rely On Sole Distributor Arrangements In A Number Of Countries We sell our products primarily through distributors |
| As a result, we are dependent upon these distributors to sell our products and to assist us in promoting and creating a demand for our products |
| We operate on a purchase order basis with the distributors and the distributors are under no contractual obligation to continue carrying our products |
| Further, many of our distributors may carry our competitors’ products, and may promote our competitors’ products over our own products |
| Two distributors, Henry Schein and DVM Resources accounted for 17prca and 13prca, respectively, of total revenues for fiscal 2006 |
| Two distributors, DVM Resources and Vedco, Inc, accounted for 17prca and 14prca of total revenues for fiscal 2005 |
| We have a number of distributors in the United States who distribute our VetScan products |
| While we continue to enter into arrangements with veterinary distributors, we have also terminated our distribution relationships with the veterinary division of Henry Schein in May 2006 and Vedco, Inc |
| in December 2004 |
| While we have in the past, and expect to in the future, support those customers who were previously supplied products by Henry Schein and Vedco, Inc |
| through our current distributor base and direct service, the loss of these or other distributors may negatively affect our future revenues |
| Accordingly, if one or more of our distributors were to stop selling our products in the future, we may not be able to replace such lost revenue or experience a delay in our sales revenue |
| In the United States medical market, we entered into a formal distribution agreement with PSS World Medical, Inc |
| in the third quarter of fiscal 2006, to sell and market Piccolo systems and the medical reagent discs |
| Internationally, we have a few distributors for our products in both the human and veterinary diagnostic markets, which includes one distributor in Japan who received clearance in September 2005 from the Japanese regulatory agency to import and market our complete line of medical reagent discs, the Piccolo system, as well as all veterinary reagent discs and the Vetscan DXS system, with the exception of those products containing the Bile Acid assay in the respective country |
| We currently have distributors for our products in the following countries: Australia, Austria, Bahrain, Belgium, Canada, Denmark, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Korea, Kuwait, Macao, Mexico, the Netherlands, New Zealand, Norway, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Arab Emirates, the United Kingdom and the United States |
| Our distributor in each of these countries is responsible for obtaining the necessary approvals to sell our products |
| These distributors may not be successful in obtaining proper approvals for our products in their respective countries, and they may not be successful in marketing our products |
| We plan to continue to enter into additional distributor relationships to expand our international distribution base and solidify our international presence |
| However, we may not be successful in entering into additional distributor relationships |
| Our distributors may terminate their relationship with us at any time |
| Historically, we have experienced a turnover among our international distributors |
| This high degree of turnover makes it difficult for us to establish a steady distribution network overseas |
| Consequently, we may not be successful in marketing our Piccolo and VetScan DXS products internationally |
| We Depend On Sole Suppliers For Several Key Components In Our Products, Many of Whom We Have Not Entered Into Contractual Relationships With We use several key components that are currently available from limited or sole sources as discussed below: • Reagent Discs: Two injection molding manufacturers, C Brewer & Co |
| and Nypro Oregon, 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, with Nypro Oregon, Inc |
| being qualified at two separate facilities, to manufacture the molded plastic discs |
| 17 ______________________________________________________________________ • 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 a stand-alone product: 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, Shinko American Inc |
| and Sigma Aldrich Inc |
| • Blood Analyzer Components: Our analyzer products use several technologically advanced components that we currently purchase from the following single source vendors, Electro Alliance, Inc, PerkinElmer, Inc, and UDT Sensors |
| Our analyzers use a printer that is only made by Seiko North America Corporation |
| The loss of the supply of any of these components could force us to redesign our analyzers |
| • Hematology Instruments and Reagents: The VetScan HMII is manufactured by Diatron in Hungary and is purchased by us as a completed instrument |
| To date, we have qualified two suppliers to produce the reagents for the hematology instruments: Clinical Diagnostic Solutions, Inc |
| and Mallinckrodt Baker BV For our hematology instruments purchased from Diatron, we are subject to minimum purchase requirements through fiscal 2009 |
| We operate on a purchase order basis with all of the suppliers of our molded plastic reagent discs, reagent chemicals and blood analyzer components and thus these suppliers are under no contractual obligation to supply us with their products or to do so at specified prices |
| Although we believe that there are potential alternate suppliers available for these critical components, to date we have not qualified additional vendors beyond those referenced above |
| Because we are dependent on a limited number of suppliers and manufacturers for critical components to our products, we are particularly susceptible to any interruption in the supply of these products or the viability of our assembly arrangements |
| The loss of any one of these suppliers or a disruption in our manufacturing arrangements could materially adversely affect our business and financial condition |
| We Compete With Larger, Better Established Entities Such As Hospitals And Commercial Laboratories Blood analysis is a well established field in which there are a number of competitors that have substantially greater financial resources and larger, more established marketing, sales and service organizations than we do |
| We compete with the following organizations: • 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 |
| ” We May Not Be Able To Compete With Larger, Better Established Entities Or Their Products Or With Future Organizations Or Future Products Historically, hospitals and commercial laboratories performed most human diagnostic testing, and commercial laboratories performed the most veterinary medical testing |
| We have identified five principal factors that customers typically use to evaluate our products and those of our competitors |
| These factors are: • range of tests offered; • the immediacy of results; • cost effectiveness; • ease of use; and • reliability of results |
| 18 ______________________________________________________________________ We believe that we compete effectively on each of these factors except for the range of tests offered |
| Clinical laboratories are effective at processing large panels of tests using skilled technicians and complex equipment |
| While our current offering of reagent discs cannot provide the same broad range of tests, we believe that in certain markets our products provide a sufficient breadth of test menus to compete successfully with clinical laboratories given the advantages of our products with respect to the other four factors |
| However, we cannot assure you that we will continue to be able to compete effectively on cost effectiveness, ease of use, immediacy of results or reliability of results |
| We also cannot assure you that we will ever be able to compete effectively on the basis of range of tests offered |
| Competition in the human and veterinary diagnostic markets is intense |
| Our principal competitors in the human diagnostic market are Alfa Wassermann SPA, i-STAT Corporation (which was purchased by Abbott Laboratories), Johnson & Johnson (including its subsidiary, Ortho-Clinical Diagnostics, Inc |
| Our principal competitors in the veterinary diagnostic market are Idexx Laboratories, Inc |
| Most of our competitors have significantly greater financial and other resources than we do |
| In particular, many of our competitors have large sales forces and well-established distribution channels |
| Consequently, we must develop our distribution channels and improve our direct sales force in order to compete in these markets |
| Changes In Third Party Payor Reimbursement Regulations Can Negatively Affect Our Business By regulating the maximum amount of reimbursement they will provide for blood testing services, third party payors, such as HMOs, pay-per-service insurance plans, Medicare and Medicaid, can indirectly affect the pricing or the relative attractiveness of our human testing products |
| For example, the Centers for Medicare and Medicaid Services (CMS) sets the level of reimbursement of fees for blood testing services for Medicare beneficiaries |
| If third party payors decrease the reimbursement amounts for blood testing services, it may decrease the amount that physicians and hospitals are able to charge patients for such services |
| Consequently, we will need to charge less for our products |
| If the government and third party payors do not provide for adequate coverage and reimbursement levels to allow health care providers to use our products, the demand for our products will decrease |
| We Are Subject To Numerous Governmental Regulations • Need for FDA Certification for Our Medical Device Products Our Piccolo products are regulated under the 1976 Medical Device Amendments to the Food, Drug and Cosmetic Act, which is administered by the Food and Drug Administration (FDA) |
| The FDA has classified our Piccolo products as “Class I” and “Class II” devices |
| These classifications require us to submit to the FDA a pre-market notification form or 510(k) |
| The FDA uses the 510(k) to substantiate product claims that are made by medical device manufacturers prior to marketing |
| In our 510(k) notification, we must, among other things, establish that the product we plan to market is “substantially equivalent” to (1) a product that was on the market prior to the adoption of the 1976 Medical Device Amendment or (2) to a product that the FDA has previously cleared under the 510(k) process |
| The FDA review process of a 510(k) notification can last anywhere from three to six months, and the FDA must issue a written order finding “substantial equivalence” before a company can market a medical device |
| As of March 31, 2006, we have received market clearance from the FDA for our Piccolo system and 25 reagent tests that we have on 12 reagent discs |
| We are currently developing additional tests that the FDA will have to clear through the 510(k) notification procedures |
| These new test products are crucial for our success in the human medical market |
| If we do not receive 510(k) clearance for a particular product, we will not be able to sell that product in the United States |
| • Need to Comply with Manufacturing Regulations The 1976 Medical Device Amendment also requires us to manufacture our Piccolo products in accordance with Good Manufacturing Practices guidelines |
| Current Good Manufacturing Practice requirements are set forth in the 21 CFR 820 Quality System Regulation |
| These requirements regulate the methods used in, and the facilities and controls used for the design, manufacture, packaging, storage, installation and servicing of our medical devices intended for human use |
| Our manufacturing facility is subject to periodic inspections |
| Although we have obtained a license from the State of California to manufacture our products, various state regulatory agencies may regulate the manufacture of our products |
| To date, we have complied with the following: • 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 |
| 19 ______________________________________________________________________ • 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 September 2005 and March 2003, the US FDA conducted a facility inspection and verified our compliance with the 21 CFR 820 Regulation |
| We cannot assure you that we will successfully pass a re-inspection by the US FDA or the State of California |
| In addition, we cannot assure you that we can comply with all current or future government manufacturing requirements and regulations |
| If we are unable to comply with the regulations, or if we do not pass routine inspections, our business and results of operations will be materially adversely affected |
| • Effects of the Clinical Laboratory Improvement Amendments on Our Products Our Piccolo products are affected by the Clinical Laboratory Improvement Amendments (CLIA) of 1988 |
| The Clinical Laboratory Improvement Amendments (CLIA) are intended to insure the quality and reliability of all medical testing in the United States regardless of where tests are performed |
| The current Clinical Laboratory Improvement Amendments (CLIA) divide laboratory tests into three categories: “simple,” “moderately complex” and “highly complex |
| ” Tests performed using the Piccolo system are in the “moderately complex” category |
| This category requires that any location in which testing is performed be certified as a laboratory |
| Hence, we can only sell our Piccolo products to customers who meet the standards of a laboratory |
| To receive “laboratory” certification, a testing facility must be certified by the Centers for Medicare and Medicaid Services (CMS) |
| After the testing facility receives a “laboratory” certification, it must then meet the Clinical Laboratory Improvement Amendments (CLIA) regulations |
| Because we can only sell our Piccolo products to testing facilities that are certified “laboratories,” the market for our products is correspondingly constrained |
| The tests included on our Lipid Panel and Lipid Panel Plus reagent discs have been granted waived status under CLIA regulations for our total cholesterol, HDL, triglycerides, glucose, ALT and AST tests when used in conjunction with our Piccolo system |
| Waived status permits untrained personnel to run the Piccolo system using the Lipid Panel and Lipid Panel Plus; thus, extending the sites (doctors’ offices and other point-of-care environments) that can use the Piccolo system |
| We cannot assure you that we will successfully receive the waived status from the FDA for other products |
| Consequently, for the reagent discs that have not received CLIA waived status, the market for our Piccolo products may be confined to those testing facilities that are certified as “laboratories” and our growth can be limited accordingly |
| However, we are engaged in an active program to test and apply for CLIA waiver for additional analytes |
| • We Are Subject to Various Federal, State, Local, and International Regulations Federal, state, local and international regulations regarding the manufacture and sale of health care products and diagnostic devices may change |
| In addition, as we continue to sell in foreign markets, we may have to obtain additional governmental clearances in those markets |
| We have received the following certifications: • 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 (CMDCAS) 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 |
| We cannot predict what impact, if any, such current or future regulatory changes would have on our business |
| We may not be able to obtain regulatory clearances for our products in the United States or in foreign markets, and the failure to obtain these regulatory clearances will materially adversely affect our business and results of operations |
| Although we believe that we will be able to comply with all applicable regulations of the Food and Drug Administration and of the State of California, including the Quality System Regulation, current regulations depend on administrative interpretations |
| Future interpretations made by the Food and Drug Administration, the Centers for Medicare and Medicaid Services (CMS) or other regulatory bodies may adversely affect our business |
| 20 ______________________________________________________________________ We Depend On Key Members Of Our Management And Scientific Staff, And We Must Retain And Recruit Qualified Individuals If We Are To Be Competitive We are highly dependent on the principal members of our management and scientific staff |
| The loss of any of these key personnel, including in particular Clinton H Severson, our President, Chief Executive Officer and Chairman of our Board of Directors, might impede the achievement of our business objectives |
| Severson’s amended and restated employment agreement with us has been filed with the Securities and Exchange Commission as an exhibit |
| We currently do not maintain key man life insurance on any of our employees |
| Although historically we have been relatively successful both in retaining our current management and scientific staff, as well as attracting and retaining skilled and experienced marketing, sales and manufacturing personnel, we may not be able to employ such personnel on acceptable terms in the future because numerous medical products and other high technology companies compete for the services of these qualified individuals |
| Standards For Compliance With Section 404 Of the Sarbanes-Oxley Act Of 2002 Are Complex, And If We Are Unable To Maintain Effective Internal Control Over Our Financial Reporting, Our Business Could Be Harmed And Our Stock Price Could Decline Rules adopted by the Securities and Exchange Commission pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal control over financial reporting by Abaxis’ management and an attestation of its assessment by independent registered public accountants |
| The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, require significant documentation, testing and possible remediation to meet the detailed standards |
| Abaxis’ management assessed the effectiveness of its internal control over financial reporting as of March 31, 2006 and March 31, 2005 |
| The assessment for fiscal 2005 identified a material weakness in its internal control over financial reporting related to ineffective controls over the determination and reporting of the provision for income taxes |
| The control deficiency identified in fiscal 2005 could have resulted in a future material misstatement of the Company’s income tax provision (and related balance sheet accounts) that would not have been prevented or detected by management |
| Although Abaxis received an unqualified opinion on its financial statements for the fiscal year ended March 31, 2006, and on the effectiveness of its internal control over financial reporting, the steps Abaxis has taken to date and the steps Abaxis is still in the process of taking to improve the reliability of its financial statements in the future are subject to continued management review, as well as oversight by the audit committee of its board of directors |
| Any failure to implement required new or improved controls, or difficulties encountered in implementation could harm operating results or prevent the Company from accurately reporting financial results or cause a failure by Abaxis to meet its reporting obligations in the future |
| If our management cannot assess Abaxis’ internal control over financial reporting as effective, or our independent registered public accounting firm is unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted |
| As a Result of New Requirements Relating to Accounting Treatment For Employee Stock Options, We May Be Forced to Change Our Business Practices We currently account for the issuance of stock options under APB Opinion Nodtta 25, “Accounting for Stock Issued to Employees |
| ” On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nodtta 123 (revised 2004), Share-Based Payment (“SFAS 123R”) |
| The new standard requires us to treat the value of the stock options granted to employees as a compensation expense |
| In April 2005, the Securities and Exchange Commission amended the compliance dates and, accordingly, we will be required to record an expense for our stock-based compensation plans using the fair value method beginning on April 1, 2006 |
| As a result, we may decide to reduce the number of stock options granted to employees or to grant options to fewer employees |
| This could affect our ability to retain existing employees and attract qualified candidates and increase the cash compensation we would have to pay to them |
| The adoption of SFAS 123R in the first quarter of fiscal 2007 will have a negative effect on our earnings |
| To minimize future compensation expense that we would recognize in our financial statements, on December 5, 2005, the Board of Directors of Abaxis approved full acceleration of unvested stock options with an exercise price of dlra19dtta12 or greater previously granted under the Abaxis, Inc |
| 1998 Stock Option Plan held by Company officers and employees |
| The pro forma effects on net income and earnings per share if we had applied the fair value recognition provisions of the original SFAS 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of Opinion 25) are disclosed in Note 1 to the enclosed financial statements |
| 21 ______________________________________________________________________ In October 2005, our 1998 Stock Option Plan was amended and restated as the Abaxis, Inc |
| 2005 Equity Incentive Plan, which allows the Company to provide as incentives, stock options, stock appreciation rights, stock awards (stock purchase rights and stock bonuses), restricted stock units, performance shares, performance units, other stock-based awards and cash-based awards |
| The impact of this new plan on our future earnings depends on the type of equity based incentives the Company grants, the vesting conditions and the number of awards granted |
| We Must Comply With Strict And Potentially Costly Environmental Regulations We are subject to stringent federal, state and local laws, rules, regulations and policies that govern the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes |
| In particular, we are subject to laws, rules and regulations governing the handling and disposal of biohazardous materials used in the development and testing of our products |
| We handle and dispose of human and veterinary blood samples for testing (whole blood, plasma, serum) and we paid approximately dlra54cmam000 in fiscal 2006 to comply with applicable environmental regulations |
| Although we believe that we have complied with applicable laws and regulations in all material respects and have not been required to take any action to correct any noncompliance, we may have to incur significant costs to comply with environmental regulations if our manufacturing to commercial levels continues to increase |
| In addition, if a government agency determines that we have not complied with these laws, rules and regulations, we may have to pay significant fines and/or take remedial action that would be expensive and we do not carry environmental-related insurance coverage |
| Our Facilities And Manufacturing Operations Are Vulnerable To Natural Disasters And Other Unexpected Losses; System Failures Or Delays May Harm Our Business Our success depends on the efficient and uninterrupted operation of our manufacturing operations, which are co-located with our corporate headquarters in Union City, California |
| A failure of manufacturing operations, be it in the development and manufacturing of our Piccolo or VetScan analyzers or the reagent discs used in the analyzers, could result in our inability to supply customer demand |
| We do not have a backup facility to provide redundant manufacturing capacity in the event of a system failure |
| Accordingly, if our Union City location experienced a system failure, or regulatory problem that temporarily shut-down our manufacturing facility, our manufacturing ability would become unavailable until we were able to bring an alternative facility online, a process which could take several weeks or even months |
| These manufacturing operations are also vulnerable to damage from earthquakes, fire, floods, power loss, telecommunications failures, break-ins and similar events |
| Although we carry property and business interruption insurance, our coverage may not be adequate to compensate us for all losses that may occur |
| Additionally, our computer servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions |
| Fluctuations In Foreign Exchange Rates And The Possible Lack Of Financial Stability In Foreign Countries Could Prevent Overseas Sales Growth Our international sales are overwhelmingly currently US dollar-denominated |
| As a result, an increase in the value of the US dollar relative to foreign currencies could make our products less competitive in international markets |
| For the limited amount of our sales denominated in local currencies, we are subject to fluctuations in exchange rates between the US dollar and the particular local currency |
| Our operating results could also be adversely affected by the seasonality of international sales and the economic conditions of our overseas markets |
| Our Stock Price Is Highly Volatile And Investing In Our Stock Involves A High Degree Of Risk The market price of our common stock, like the securities of many other medical products companies, fluctuates over a wide range, and will continue to be highly volatile in the future |
| The following factors may affect the market price of our common stock: • fluctuation in our operating results; • announcements of technological innovations or new commercial products by us or our competitors; 22 ______________________________________________________________________ • changes in governmental regulation; • 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 patent or our other proprietary rights; • public concern as to the safety of our devices or similar devices developed by our competitors; and • general market conditions |
| Because our stock price is so volatile, investing in our common stock is highly risky |
| A potential investor must be able to withstand the loss of his entire investment in our common stock |
| Our Shareholders Rights Plan And Our Ability To Issue Preferred Stock May Delay Or Prevent A Change Of Control Of Abaxis Our Shareholder Rights Plan, adopted by our Board of Directors on April 22, 2003, may make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire control of Abaxis |
| The Shareholder Rights Plan could limit the price that investors might be willing to pay in the future for shares of our common stock |
| In addition, our Board of Directors has the authority to issue up to 5cmam000cmam000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders, except to the extent required by NASDAQ rules |
| The issuance of preferred stock, while providing flexibility in connection with possible financings or acquisitions or other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock |