Edgar Filing: ABAXIS INC

form10q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2011

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-19720

ABAXIS, INC.

(Exact name of registrant as specified in its charter)

California		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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of February 6, 2012, there were 21,690,000 shares of the registrant’s common stock outstanding.

ABAXIS, INC.

Form 10-Q

For the Quarter Ended December 31, 2011

TABLE OF CONTENTS

			Page

PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited):

	Condensed Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2011 and 2010		3

	Condensed Consolidated Balance Sheets as of December 31, 2011 and March 31, 2011		4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2011 and 2010		5

	Notes to Condensed Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		34

Item 4.	Controls and Procedures		35

Item 4T.	Controls and Procedures		35

PART II. OTHER INFORMATION

Item 1.		Legal Proceedings	36

Item 1A.		Risk Factors	36

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.		Defaults Upon Senior Securities	46

Item 4.		Removed and Reserved	46

Item 5.		Other Information	46

Item 6.		Exhibits	47

SIGNATURES			48

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PART I. FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

ABAXIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended					Nine Months Ended
	December 31,					December 31,
	2011			2010		2011		2010
Revenues	$	37,850		$	35,906	$	113,878	$	106,136
Cost of revenues		17,372			16,097		52,156		46,793
Gross profit		20,478			19,809		61,722		59,343
Operating expenses:
Research and development		2,634			2,947		9,096		9,321
Sales and marketing		9,927			8,208		28,414		25,249
General and administrative		3,280			2,820		11,194		7,596
Total operating expenses		15,841			13,975		48,704		42,166
Income from operations		4,637			5,834		13,018		17,177
Interest and other income (expense), net		(91	)		46		259		698
Income before income tax provision		4,546			5,880		13,277		17,875
Income tax provision		1,696			2,045		4,892		6,711
Net income	$	2,850		$	3,835	$	8,385	$	11,164
Net income per share:
Basic net income per share	$	0.13		$	0.17	$	0.38	$	0.50
Diluted net income per share	$	0.13		$	0.17	$	0.37	$	0.49
Shares used in the calculation of net income per share:
Weighted average common shares outstanding - basic		21,672,000			22,398,000		22,213,000		22,309,000
Weighted average common shares outstanding - diluted		21,990,000			22,872,000		22,579,000		22,795,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ABAXIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

	December 31,			March 31,
	2011			2011
ASSETS
Current assets:
Cash and cash equivalents	$	35,368		$	43,471
Short-term investments		22,366			25,981
Receivables (net of allowances of $254 at December 31, 2011 and $320 at March 31, 2011)		26,041			27,880
Inventories		19,852			19,814
Prepaid expenses and other current assets		5,600			3,496
Net deferred tax assets, current		3,166			3,422
Total current assets		112,393			124,064
Long-term investments		30,189			36,237
Investment in unconsolidated affiliate		2,668			2,769
Property and equipment, net		23,448			19,637
Intangible assets, net		4,148			4,216
Net deferred tax assets, non-current		1,080			1,203
Other assets		106			134
Total assets	$	174,032		$	188,260

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,245		$	6,173
Accrued payroll and related expenses		5,747			6,129
Accrued taxes		-			559
Other accrued liabilities		2,072			1,677
Deferred revenue		1,138			953
Warranty reserve		1,123			1,031
Total current liabilities		16,325			16,522
Non-current liabilities:
Deferred rent		597			416
Deferred revenue		2,285			1,737
Warranty reserve		482			191
Notes payable, less current portion		808			746
Total non-current liabilities		4,172			3,090
Total liabilities		20,497			19,612
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred stock, no par value: 5,000,000 shares authorized; no shares issued and outstanding		-			-
Common stock, no par value: 35,000,000 shares authorized; 21,688,000 and 22,587,000 shares issued and outstanding at December 31, 2011 and at March 31, 2011, respectively		108,558			132,042
Retained earnings		44,991			36,606
Accumulated other comprehensive loss		(14	)		-
Total shareholders' equity		153,535			168,648
Total liabilities and shareholders' equity	$	174,032		$	188,260

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ABAXIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended
	December 31,
	2011			2010
Cash flows from operating activities:
Net income	$	8,385		$	11,164
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,725			3,326
Investment premium amortization, net		754			343
Net loss on disposals of property and equipment		10			5
Net loss (gain) on foreign exchange translation		402			(59	)
Share-based compensation expense		4,194			3,547
Excess tax benefits from share-based awards		(717	)		(1,908	)
Provision for deferred income taxes		157			980
Equity in net loss of unconsolidated affiliate		101			-
Changes in assets and liabilities:
Receivables, net		1,703			(1,576	)
Inventories		(1,100	)		(1,250	)
Prepaid expenses and other current assets		(1,142	)		(1,983	)
Other assets		21			(36	)
Accounts payable		108			(1,804	)
Accrued payroll and related expenses		(380	)		(452	)
Accrued taxes		(559	)		294
Other accrued liabilities		380			152
Deferred rent		181			212
Deferred revenue		733			205
Warranty reserve		383			(476	)
Net cash provided by operating activities		17,339			10,684
Cash flows from investing activities:
Purchases of available-for-sale investments		(8,268	)		-
Purchases of held-to-maturity investments		(18,174	)		(49,547	)
Proceeds from maturities and redemptions of held-to-maturity investments		35,337			56,861
Purchases of property and equipment		(5,960	)		(3,559	)
Net cash provided by investing activities		2,935			3,755
Cash flows from financing activities:
Proceeds from notes payable from municipal agency		147			-
Proceeds from the exercise of stock options		576			1,288
Tax withholdings related to net share settlements of restricted stock units		(2,172	)		(2,004	)
Repurchases of common stock		(27,328	)		-
Excess tax benefits from share-based awards		717			1,908
Net cash (used in) provided by financing activities		(28,060	)		1,192
Effect of exchange rate changes on cash and cash equivalents		(317	)		68
Net (decrease) increase in cash and cash equivalents		(8,103	)		15,699
Cash and cash equivalents at beginning of period		43,471			27,857
Cash and cash equivalents at end of period	$	35,368		$	43,556
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds	$	4,809		$	5,849
Supplemental disclosure of non-cash flow information:
Change in unrealized loss on investments, net of tax	$	(14	)	$	-
Transfers of equipment between inventory and property and equipment, net	$	1,130		$	746
Net change in capitalized share-based compensation	$	68		$	17
Common stock withheld for employee taxes in connection with share-based compensation	$	2,172		$	2,004
Repayment of notes payable by credits from municipal agency	$	70		$	-
Warrants issued for intangible assets	$	388		$	-

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ABAXIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.

DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business. Abaxis, Inc. (“Abaxis,” the “Company” or “we”), incorporated in California in 1989, develops, manufactures, markets and sells portable blood analysis systems for use in the human or veterinary patient-care setting to provide clinicians with rapid blood constituent measurements. In October 2011, Abaxis began providing veterinary reference laboratory diagnostic and consulting services for veterinarians.

Abaxis Europe GmbH, our wholly-owned subsidiary in Darmstadt, Germany, markets, promotes and distributes diagnostic systems for medical and veterinary uses in the European market.

Principles of Consolidation. The accompanying unaudited condensed consolidated financial statements as of and for the three and nine month periods ended December 31, 2011 include the accounts of Abaxis and our wholly-owned subsidiary, Abaxis Europe GmbH. Intercompany transactions and balances have been eliminated in consolidation.

Basis of Presentation. We have prepared the unaudited condensed consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim periods. The unaudited condensed consolidated financial statements included herein reflect all normal recurring adjustments, which are, in the opinion of our management, necessary to state fairly the results of operations and financial position for the periods presented. The results for the three and nine month periods ended December 31, 2011 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2012 or for any interim or future period.

These unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

Reclassifications. Certain reclassifications have been made to prior periods’ financial statements to conform to the current period presentation. These reclassifications did not result in any change in previously reported net income, total assets or shareholders’ equity.

Use of Estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such management estimates include allowance for doubtful accounts, sales and other allowances, estimated selling price of our products, fair value of investments, valuation of inventory, fair value of intangible assets, useful lives of intangible assets, income taxes, valuation allowance for deferred tax assets, share-based compensation and warranty reserves. Our management bases their estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Our actual results may differ materially from these estimates.

Significant Accounting Policies. The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in our Annual Report on Form 10-K for the year ended March 31, 2011 filed with the SEC on June 13, 2011, and have not changed significantly since such filing, except for the accounting standard on revenue recognition explained below.

Revenue Recognition: In October 2009, the Financial Accounting Standards Board (the “FASB”) amended the accounting standards for certain multiple deliverable revenue arrangements to:

provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;

require an entity to allocate revenue in an arrangement using estimated selling price (“ESP”) of deliverables if a vendor does not first have vendor-specific objective evidence (“VSOE”) of selling price or secondly does not have third-party evidence (“TPE”) of selling price; and

eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

Our multiple-element arrangement includes the sale of one or more tangible product offerings with one or more associated services offerings, each of which are individually considered separate units of accounting. The determination of our units of accounting did not change with the adoption of the new revenue recognition guidance and as such we allocate revenue to each element in a multiple-element arrangement based upon the relative selling price of each deliverable. When applying the relative selling price method, we determine the selling price for each deliverable using VSOE of selling price, if it exists, or TPE of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use our best estimate of selling price for that deliverable. Revenue allocated to each element is then recognized when all revenue recognition criteria are met for each element.

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These amendments became effective for the Company beginning on April 1, 2011 and we elected to apply the amendment prospectively to new or materially modified revenue arrangements after its effective date. The adoption of this amendment did not have a material impact on our consolidated financial position, results of operations and cash flows for the three and nine months ended December 31, 2011.

NOTE 2.

RECENT ACCOUNTING PRONOUNCEMENTS

Disclosure of Supplementary Pro Forma Information for Business Combinations: In December 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations,” (Topic 805) - Business Combinations (ASU 2010-29), to improve consistency in how the pro forma disclosures are calculated. The amendment enhances the disclosure requirements and requires description of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable to a business combination. The amendment became effective for the Company beginning on April 1, 2011 and is applied prospectively to business combinations for which the acquisition date is after the effective date. The Company will assess the impact of the amendment if and when future business combinations occur.

Presentation of Comprehensive Income: In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income,” (Topic 220) - Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the currently available option to present the components of other comprehensive income as part of the statement of shareholders’ equity. The amendment does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendment will be effective for the Company beginning on April 1, 2012. As this guidance relates to presentation only, the adoption of this guidance will not have any other effect on the Company’s financial statements.

Testing Goodwill for Impairment: In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment,” (Topic 350) - Intangibles - Goodwill and Other (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The amendment will be effective for the Company beginning on April 1, 2012 and earlier adoption is permitted. We are currently evaluating the impact of adopting the amendment on our consolidated financial position, results of operations or cash flows.

NOTE 3.

INVESTMENTS

Our investments are classified as either available-for-sale or held-to-maturity. The following table summarizes available-for-sale and held-to-maturity investments as of December 31, 2011 and March 31, 2011 (in thousands):

	Available-for-Sale Investments
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2011	Cost		Gain		(Loss)			Value
Certificates of deposits	$	1,245	$	-	$	(2	)	$	1,243
Corporate bonds		6,052		5		(15	)		6,042
Municipal bonds		971		-		(5	)		966
Total available-for-sale investments	$	8,268	$	5	$	(22	)	$	8,251

	Held-to-Maturity Investments
			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
December 31, 2011	Cost		Gain		(Loss)			Value
Certificates of deposits	$	2,591	$	-	$	-		$	2,591
Corporate bonds		25,231		113		(356	)		24,988
Municipal bonds		13,482		77		(1	)		13,558
U.S. agency securities		3,000		1		-			3,001
Total held-to-maturity investments	$	44,304	$	191	$	(357	)	$	44,138

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	Held-to-Maturity Investments
			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
March 31, 2011	Cost		Gain		(Loss)			Value
Certificates of deposits	$	12,084	$	2	$	-		$	12,086
Commercial paper		1,997		-		-			1,997
Corporate bonds		23,534		74		(110	)		23,498
Municipal bonds		11,603		31		(5	)		11,629
U.S. agency securities		13,000		7		(73	)		12,934
Total held-to-maturity investments	$	62,218	$	114	$	(188	)	$	62,144

The amortized cost of our held-to-maturity investments approximates their fair value. As of December 31, 2011 and March 31, 2011, we did not have other-than-temporary impairment in the fair value of any individual security classified as held-to-maturity or available-for-sale. As of December 31, 2011 and March 31, 2011, we had unrealized loss on available-for-sale investments, net of related income taxes of $14,000 and $0, respectively. Redemptions of investments in accordance with the callable provisions during the three months ended December 31, 2011 and 2010, were $250,000 and $5.5 million, respectively, and during the nine months ended December 31, 2011 and 2010, were $13.3 million and $36.1 million, respectively.

The following table summarizes the amortized cost and fair value of our investments, classified by stated maturity as of December 31, 2011 and March 31, 2011 (in thousands):

	December 31, 2011				December 31, 2011
	Available-for-Sale Investments				Held-to-Maturity Investments
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in less than one year	$	675	$	674	$	21,692	$	21,648
Due in 1 to 4 years		7,593		7,577		22,612		22,490
Total investments	$	8,268	$	8,251	$	44,304	$	44,138

	March 31, 2011
	Held-to-Maturity Investments
	Amortized Cost		Fair Value
Due in less than one year	$	25,981	$	25,988
Due in 1 to 4 years		36,237		36,156
Total investments	$	62,218	$	62,144

NOTE 4.

FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (“exit price”) in an orderly transaction between market participants at the measurement date. FASB Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

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The following table summarizes financial assets, measured at fair value on a recurring basis, by level within the fair value hierarchy as of December 31, 2011 and March 31, 2011 (in thousands):

	As of December 31, 2011
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	1,202	$	-	$	-	$	1,202
Available-for-sale investments:
Certificates of deposits		-		1,243		-		1,243
Corporate bonds		-		6,042		-		6,042
Municipal bonds		-		966		-		966
Total assets at fair value	$	1,202	$	8,251	$	-	$	9,453

	As of March 31, 2011
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	2,415	$	-	$	-	$	2,415
Total assets at fair value	$	2,415	$	-	$	-	$	2,415

As of December 31, 2011 and March 31, 2011, our Level 1 financial assets are comprised of money market mutual funds. Our cash equivalents are highly liquid instruments with original or remaining maturities of three months or less at the time of purchase that are readily convertible into cash. The fair value of our Level 1 financial assets is based on quoted market prices of the underlying security.

As of December 31, 2011, our Level 2 financial assets are comprised of certificates of deposits, corporate bonds and municipals bonds. We review trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from third party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy.

As of December 31, 2011 and March 31, 2011, we did not have any Level 3 financial assets or liabilities measured at fair value on a recurring basis. During the three and nine months ended December 31, 2011 and 2010, we did not have any Level 3 financial assets or liabilities on a recurring basis.

NOTE 5.

INVENTORIES

Inventories include material, labor and overhead, and are stated at the lower of cost (first-in, first-out method) or market. Components of inventories were as follows (in thousands):

	December 31,		March 31,
	2011		2011
Raw materials	$	9,081	$	9,950
Work-in-process		2,626		2,323
Finished goods		8,145		7,541
Inventories	$	19,852	$	19,814

NOTE 6.

INVESTMENT IN UNCONSOLIDATED AFFILIATE

Our investment in an unconsolidated affiliate consists of an investment in equity securities of Scandinavian Micro Biodevices APS (“SMB”). In February 2011, we purchased a 15% equity ownership interest in SMB, for $2.8 million in cash. SMB is a privately-held developer and manufacturer of point-of-care diagnostic products for veterinary use. SMB, based in Farum, Denmark, has been the original equipment manufacturer of the Abaxis VetScan VSpro point-of-care coagulation and specialty analyzer since 2008. Abaxis has had exclusive distribution rights for the analyzer and associated cartridges in North America since 2008. Starting January 2011, Abaxis has non-exclusive rights in other areas of the world. We accounted for our investment in SMB using the equity method due to our significant influence over SMB’s operations. During the three and nine months ended December 31, 2011, we recorded our allocated portion of SMB’s net loss of $29,000 and $101,000, respectively.

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NOTE 7.

WARRANTY RESERVES

We provide for the estimated future costs to be incurred under our standard warranty obligation on our instruments and reagent discs.

Instruments. Our standard warranty obligation on instruments ranges from one to three years. The estimated contractual warranty obligation is recorded when the related revenue is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. Cost of revenues reflects estimated warranty expense for instruments sold in the current period and any adjustments in estimated warranty expense for the installed base under our standard warranty obligation based on our quarterly evaluation of service experience. The estimated accrual for warranty exposure is based on historical experience as to product failures, estimated product failure rates, estimated repair costs, material usage and freight incurred in repairing the instrument after failure and known design changes under the warranty plan.

During the nine months ended December 31, 2011, we recorded an additional accrual to pre-existing warranties of $257,000, which increased our warranty reserves and our cost of revenues, based on both historical and projected product performance rates. Management continually evaluates the sufficiency of the warranty provisions and makes adjustments when necessary. If an unusual performance rate related to warranty claims is noted, an additional warranty accrual may be assessed and recorded when a failure event is probable and the cost can be reasonably estimated.

Reagent Discs. We record a provision for defective reagent discs when the related sale is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. The warranty cost includes the replacement costs and freight of a defective reagent disc. During the three and nine months ended December 31, 2011, the provision for warranty expense related to replacement of defective reagent discs was $105,000 and $299,000, respectively. The balance of accrued warranty reserve related to replacement of defective reagent discs at December 31, 2011 and 2010 was $460,000 and $401,000, respectively, which was classified as a current liability on the condensed consolidated balance sheets.

We evaluate our estimates for warranty reserves on an ongoing basis and believe we have the ability to reasonably estimate warranty costs. However, unforeseeable changes in factors may impact the estimate for warranty and such changes could cause a material change in our warranty reserve accrual in the period in which the change was identified.

The change in our accrued warranty reserve during the three and nine months ended December 31, 2011 and 2010 is summarized as follows (in thousands):

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2011			2010			2011			2010
Balance at beginning of period	$	1,436		$	851		$	1,222		$	1,343
Provision for warranty expense		500			319			1,113			729
Warranty costs incurred		(331	)		(153	)		(987	)		(491	)
Adjustment to pre-existing warranties		-			(150	)		257			(714	)
Balance at end of period		1,605			867			1,605			867
Non-current portion of warranty reserve		482			95			482			95
Current portion of warranty reserve	$	1,123		$	772		$	1,123		$	772

NOTE 8.

BORROWINGS

Notes Payable. Effective January 2011, we have a ten year loan agreement with the Community Redevelopment Agency of the City of Union City (“the Agency”) whereby the Agency provides us with an unsecured loan of up to $1.0 million, primarily to purchase capital equipment. The loan bears interest at 5.0% and is payable quarterly. As of December 31, 2011, our short-term and long-term notes payable balances were $100,000 and $808,000, respectively, and we recorded the short-term balance in other accrued liabilities on the condensed consolidated balance sheets. The entire outstanding balance of the note shall be payable in full on the earlier of: (i) December 2020, or (ii) the date Abaxis ceases operations in Union City, California. The Agency also has the right to accelerate the maturity date and declare all balances immediately due and payable upon the event of default as defined in the loan agreement. We evaluate covenants in our loan agreement on a quarterly basis, and we were in compliance with such covenants as of December 31, 2011.

In accordance with the terms of the loan agreement, the Agency will provide Abaxis with an annual credit that can be applied against the accrued interest and outstanding principal balance on a quarterly basis. The Agency determines the annual credit based on certain taxes paid by Abaxis to the City of Union City, California for a specified period, as defined in the loan agreement. We anticipate that our annual credits from the Agency will be used to fully repay our notes payable due to the Agency. We may carry forward unused quarterly credits to apply against our outstanding balance in a future period. Credits applied to repay our notes payable and accrued interest are recorded in “Interest and other income (expense), net” on the condensed consolidated statements of income.

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NOTE 9.

COMMITMENTS AND CONTINGENCIES

Purchase Commitments. In October 2008, we entered into an original equipment manufacturing (“OEM”) agreement with SMB of Denmark to purchase coagulation and specialty analyzers and related cartridges. Effective January 2011, we amended and restated our OEM agreement, including the terms of our minimum purchase commitments. Under the amended agreement, we committed to purchase a minimum number of coagulation and specialty analyzers and related cartridges on an annual basis during each calendar year 2011 through 2015. Our purchase obligations in the future may be adjusted if our minimum purchase commitments are not met during a calendar year period. At December 31, 2011, our total remaining outstanding commitment due is approximately $11.5 million.

In December 2011, we executed a term sheet to enter into a development and supply equipment agreement with Diatron MI PLC (“Diatron”) of Hungary to purchase Diatron hematology instruments. Under the terms of this agreement, we committed to purchase a minimum number of hematology instruments on an annual basis during each calendar year 2012 through 2014, which can be amended upon agreement by both parties. At December 31, 2011, our outstanding commitment due is approximately $12.6 million. The commitment amount is based on the minimum number of hematology instruments that we are required to purchase, the cost of the instruments and the Euro exchange rate at period-end. Since the exchange rate can fluctuate in the future, the commitment in absolute dollars will change accordingly.

Patent Licensing Agreement. Effective January 2009, we entered into a license agreement with Inverness Medical Switzerland GmbH, now known as Alere Switzerland GmbH (“Alere”). Under our license agreement, we licensed co-exclusively certain worldwide patent rights related to lateral flow immunoassay technology in the field of animal health diagnostics in the professional marketplace. The license agreement provides that Alere shall not grant any future rights to any third parties under its current lateral flow patent rights in the animal health diagnostics field in the professional marketplace. The license agreement enables us to develop and market products under rights from Alere to address animal health and laboratory animal research markets.

In exchange for the license rights, we (i) paid an up-front license fee of $5.0 million to Alere in January 2009, (ii) agreed to pay royalties during the term of the agreement, based solely on sales of products in a jurisdiction country covered by valid and unexpired claims in that jurisdiction under the licensed Alere patent rights, and (iii) agreed to pay a yearly minimum license fee of between $500,000 to $1.0 million per year, which fee will be creditable against any royalties due during such calendar year. The royalties, if any, are payable through the date of the expiration of the last valid patent licensed under the agreement that includes at least one claim in a jurisdiction covering products we sell in that jurisdiction. The yearly minimum fees became payable starting in fiscal 2011 for so long as we desire to maintain exclusivity under the agreement.

Litigation. On June 28, 2010, we filed a patent infringement lawsuit against Cepheid with respect to Cepheid’s Methicillin-resistant Staphylococcus aureus (MRSA) product, on which Cepheid has ceased paying license royalties. On December 17, 2010, Cepheid filed its amended answer and certain counterclaims seeking findings of no breach of contract, non-infringement, unenforceability and invalidity of the asserted patents, and a declaration regarding the patent term of one of the patents. We believe the counterclaims raised by Cepheid are without merit and intend to contest them vigorously. Because of the cost involved in pursuing patent infringement cases, we believe the cost of this litigation could have a material adverse effect on Abaxis, our consolidated financial position and results of operations. As of December 31, 2011, we had not recorded future litigation and related expenses to pursuing the patent infringement case and an estimate of such costs cannot be made at this time. A claims construction hearing was held in June 2011 and the court has issued its claims construction order. The case is ongoing. A trial date has been set for September 24, 2012.

We are involved from time to time in various litigation matters in the normal course of business. Other than as described above, we believe that the ultimate resolution of these matters will not have a material effect on our consolidated financial position or results of operations. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.

NOTE 10.

SHARE REPURCHASES

Share repurchase activity is as follows (in thousands, except share and average per share cost data):

	Three Months Ended		Nine Months Ended
	December 31, 2011		December 31, 2011
Number of shares repurchased		-		1,168,000
Total cost	$	-	$	27,328
Average per share cost including commissions	$	-	$	23.41

In August 2011, the Board of Directors authorized the repurchase of up to an aggregate of $40.0 million of our common stock. As of December 31, 2011, $12.7 million of share repurchases may yet be purchased under such authorization. In January 2012, the Board of Directors approved a $15.0 million increase to its existing share repurchase program, to a total of $55.0 million. The repurchases are made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. Repurchased shares are retired.

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NOTE 11.

SHARE-BASED COMPENSATION

In accordance with ASC 718, “Compensation-Stock Compensation,” we recognize share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award to employees and directors. The following table summarizes total share-based compensation expense, net of tax, related to restricted stock units during the three and nine months ended December 31, 2011 and 2010, which is included in our condensed consolidated statements of income (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2011			2010			2011			2010
Cost of revenues	$	187		$	168		$	698		$	475
Research and development		226			195			641			684
Sales and marketing		475			365			1,402			1,139
General and administrative		624			570			1,453			1,249
Share-based compensation expense before income taxes		1,512			1,298			4,194			3,547
Income tax benefit		(526	)		(476	)		(1,459	)		(1,327	)
Total share-based compensation expense after income taxes	$	986		$	822		$	2,735		$	2,220
Net impact of share-based compensation on:
Basic net income per share	$	0.05		$	0.04		$	0.12		$	0.10
Diluted net income per share	$	0.04		$	0.04		$	0.12		$	0.10

Share-based compensation has been classified in the condensed consolidated statements of income or capitalized on the condensed consolidated balance sheets in the same manner as cash compensation paid to employees. Capitalized share-based compensation costs at December 31, 2011 and March 31, 2011 were $175,000 and $107,000, respectively, which were included in inventories on our condensed consolidated balance sheets.

Cash Flow Impact

The accounting standard with respect to share-based payment requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised stock options and vested restricted stock units in excess of the deferred tax asset attributable to share-based compensation expense for such share-based awards. Excess tax benefits are considered realized when the tax deductions reduce taxes that otherwise would be payable. Excess tax benefits classified as a financing cash inflow for the three months ended December 31, 2011 and 2010 were $231,000 and $1.4 million, respectively, and for the nine months ended December 31, 2011 and 2010 were $717,000 and $1.9 million, respectively.

Equity Compensation Plans

Our share-based compensation plans are described below.

2005 Equity Incentive Plan. Our 2005 Equity Incentive Plan (the “Equity Incentive Plan”) restated and amended our 1998 Stock Option Plan. The Equity Incentive Plan allows for the awards of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance cash awards, performance shares, performance units, deferred compensation awards or other share-based awards to employees, directors and consultants. On October 27, 2010, our shareholders approved an amendment to the Equity Incentive Plan to (i) increase the aggregate number of shares of common stock reserved for issuance under the Equity Incentive Plan by 500,000 shares, (ii) clarify that we may continue to grant performance cash awards under the Equity Incentive Plan and (iii) reapprove the Internal Revenue Code Section 162(m) performance criteria and award limits of the Equity Incentive Plan to permit us to continue to grant awards to key officers that qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. As of December 31, 2011, the Equity Incentive Plan provides for the issuance of a maximum of 5,886,000 shares, of which 296,000 shares of common stock were then available for future issuance. Shares that are canceled or forfeited from an award and shares withheld in satisfaction of tax withholding obligations are again available for issue under the Equity Incentive Plan.

Options granted to employees and directors generally expire ten years from the grant date. Options granted to employees generally become exercisable over a period of four years based on cliff-vesting terms and continuous employment. Options granted to non-employee directors generally become exercisable over a period of one year based on monthly vesting terms and continuous service. See the “Stock Options” section in this Note for additional information.

Restricted stock units awarded to employees generally vest over a period of four years and the awards may also be subject to accelerated vesting upon achieving certain performance-based milestones and continuous employment during the vesting period. Restricted stock units awarded to non-employee directors generally vest in full one year after the grant date based on continuous service. See the “Restricted Stock Units” section in this Note for additional information.

1992 Outside Directors’ Stock Option Plan. Under our 1992 Outside Directors’ Stock Option Plan (the “Directors Plan”), options to purchase shares of common stock were automatically granted, annually, to non-employee directors. Options under the Directors Plan were nonqualified stock options and were granted at the fair market value on the date of grant and expired ten years from the date of grant. Options granted to non-employee directors generally become exercisable over a period of one year based on monthly vesting terms and continuous service. The Directors Plan provided for the issuance of a maximum of 250,000 shares. As of December 31, 2011, there were no stock options outstanding under the Directors Plan. Additionally, no shares of common stock were available for future issuance because the time period for granting options expired in June 2002 in accordance with the terms of the Directors Plan.

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Our current practice is to issue new shares of common stock from our authorized shares for share-based awards upon the exercise of stock options or vesting of restricted stock units.

Stock Options

Prior to April 1, 2006, we granted stock options to employees, with an exercise price equal to the closing market price of our common stock on the date of grant and with cliff-vesting terms over four years, conditional on continuous employment with the Company. In addition, prior to April 1, 2006, we granted stock options to non-employee directors with an exercise price equal to the closing market price of our common stock on the date of grant and became exercisable over a period of one year based on monthly vesting terms, conditional on continuous service to the Company. There were no stock options granted since the beginning of fiscal 2007 and we did not grant stock options during the nine months ended December 31, 2011. We have recognized compensation expense during the requisite service period of the stock option. As of December 31, 2011, we had no unrecognized compensation expense related to stock options granted.

Stock Option Activity

The following table summarizes information regarding options outstanding and options exercisable at December 31, 2011 and the changes during the nine-month period then ended:

				Average		Average		Aggregate
				Exercise		Remaining		Intrinsic
	Number of			Price		Contractual		Value
	Shares			Per Share		Life (Years)		(In thousands)
Outstanding at March 31, 2011		406,000		$	12.10
Granted		-			-
Exercised		(113,000	)		5.12
Canceled or forfeited		(2,000	)		5.31
Outstanding at December 31, 2011		291,000		$	14.84		2.00	$	3,738
Vested and expected to vest at December 31, 2011		291,000		$	14.84		2.00	$	3,738
Exercisable at December 31, 2011		291,000		$	14.84		2.00	$	3,738

The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on our closing stock price as of December 30, 2011, (the last trading day for the quarterly period ended December 31, 2011), that would have been received by the option holders had all option holders exercised their stock options as of that date. Total intrinsic value of stock options exercised during the three months ended December 31, 2011 and 2010 was $370,000 and $3.9 million, respectively, and during the nine months ended December 31, 2011 and 2010 was $2.3 million and $5.0 million, respectively. Cash proceeds from stock options exercised during the three months ended December 31, 2011 and 2010 were $146,000 and $839,000, respectively, and during the nine months ended December 31, 2011 and 2010 were $576,000 and $1.3 million, respectively.

Restricted Stock Units

We grant restricted stock unit awards to employees and directors as part of our share-based compensation program which began in fiscal 2007. The restricted stock unit awards entitle holders to receive shares of common stock at the end of a specified period of time. Vesting for restricted stock unit awards is based on continuous employment or service of the holder. Upon vesting, the equivalent number of common shares are typically issued net of tax withholdings. If the vesting conditions are not met, unvested restricted stock unit awards will be forfeited. Generally, the restricted stock unit awards vest according to one of the following time-based vesting schedules:

Restricted stock unit awards to employees: Four-year time-based vesting as follows: five percent vesting after the first year; additional ten percent after the second year; additional 15 percent after the third year; and the remaining 70 percent after the fourth year of continuous employment with the Company.

·	Restricted stock unit awards to non-employee directors: 100 percent vesting after one year of continuous service to the Company.

From time to time, restricted stock unit awards granted to employees may be subject to accelerated vesting upon achieving certain performance-based milestones. Additionally, the Compensation Committee of our Board of Directors (the “Compensation Committee”), in its discretion, may provide in the event of a change in control for the acceleration of vesting and/or settlement of the restricted stock unit held by a participant upon such conditions and to such extent as determined by the Compensation Committee. Our Board of Directors has adopted an executive change in control severance plan, which it may terminate or amend at any time, that provides that awards granted to executive officers will accelerate fully on a change of control. The vesting of non-employee director awards granted under the Equity Incentive Plan automatically will also accelerate in full upon a change in control.

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The fair value of restricted stock unit awards used in our expense recognition method is measured based on the number of shares granted and the closing market price of our common stock on the date of grant. Such value is recognized as an expense over the corresponding requisite service period. The share-based compensation expense is reduced for an estimate of the restricted stock unit awards that are expected to be forfeited. The forfeiture estimate is based on historical data and other factors, and compensation expense is adjusted for actual results. As of December 31, 2011, the total unrecognized compensation expense related to restricted stock unit awards granted amounted to $20.8 million, which is expected to be recognized over a weighted average service period of 2.29 years.

Restricted Stock Unit Activity

The following table summarizes restricted stock unit activity for the nine months ended December 31, 2011:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value(1)
Unvested at March 31, 2011		940,000		$	22.09
Granted		436,000			27.25
Vested(2)		(234,000	)		22.04
Canceled or forfeited		(16,000	)		23.32
Unvested at December 31, 2011		1,126,000		$	24.08

____________________________________________________________________

(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.

Total intrinsic value of restricted stock units vested during the three months ended December 31, 2011 and 2010 was $608,000 and $118,000, respectively, and during the nine months ended December 31, 2011 and 2010 was $6.5 million and $5.9 million, respectively. The total grant date fair value of restricted stock units vested during the three months ended December 31, 2011 and 2010 was $598,000 and $129,000, respectively, and during the nine months ended December 31, 2011 and 2010 was $5.1 million and $5.7 million, respectively.

NOTE 12.

COMMON STOCK WARRANTS

At December 31, 2011, there were 30,000 warrants outstanding, of which 6,000 shares vested, to purchase common stock at a weighted average exercise price of $3.00 per share, expiring in fiscal years 2016 through 2017. At March 31, 2011, there were 10,000 warrants outstanding, of which 2,000 shares vested, to purchase common stock at a weighted average exercise price of $3.00 per share, expiring in January 2016. The fair value of the warrants issued were determined using the Black-Scholes option-pricing model and are amortized over their estimated useful life, of approximately ten years, as an intangible asset.

In January 2011, we issued warrants to purchase 10,000 shares of Abaxis common stock to National Institute for Strategic Technology Acquisition and Commercialization (“NISTAC”) in connection with our Master Agreement with two entities affiliated with Kansas State University, NISTAC, and the Kansas State University Research Foundation (“KSURF”). The exercise price of the warrants issued were $3.00 per share and vests at a rate of 20% annually from its issuance date and has a term of five years. In October 2011, we issued additional warrants to NISTAC to purchase 20,000 shares of our common stock, pursuant to the Master Agreement. These warrants were issued based on the date that Abaxis first receives samples from a paying customer, as described in our Master Technical Testing Services Agreement with the Kansas State University and K-State Diagnostic and Analytical Services Inc. The exercise price of these warrants issued were $3.00 per share and vests at a rate of 20% annually from its issuance date and has a term of five years.

NOTE 13.

NET INCOME PER SHARE

Basic net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding using the treasury stock method. Dilutive potential common shares outstanding include outstanding stock options, restricted stock units and warrants.

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The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net income per share (in thousands, except share and per share data):

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2011		2010		2011		2010
Numerator:
Net income	$	2,850	$	3,835	$	8,385	$	11,164
Denominator:
Weighted average common shares outstanding - basic		21,672,000		22,398,000		22,213,000		22,309,000
Weighted average effect of dilutive securities:
Stock options		107,000		297,000		139,000		312,000
Restricted stock units		185,000		177,000		212,000		174,000
Warrants		26,000		-		15,000		-
Weighted average common shares outstanding - diluted		21,990,000		22,872,000		22,579,000		22,795,000
Net income per share:
Basic net income per share	$	0.13	$	0.17	$	0.38	$	0.50
Diluted net income per share	$	0.13	$	0.17	$	0.37	$	0.49

Stock options are excluded from the computation of diluted weighted average shares outstanding if the exercise price of the stock options is greater than the average market price of our common stock during the period because the inclusion of these stock options would be antidilutive to net income per share. During the three and nine months ended December 31, 2011 and 2010, there were no stock options excluded from the computation of diluted weighted average shares outstanding.

We excluded the following restricted stock units from the computation of diluted weighted average shares outstanding because the inclusion of these awards would be antidilutive to net income per share:

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2011		2010		2011		2010
Weighted average number of shares underlying antidilutive restricted stock units		307,000		58,000		249,000		269,000

NOTE 14.

INCOME TAXES

During the three months ended December 31, 2011 and 2010, our income tax provision was $1.7 million, based on an effective tax rate of 37%, and $2.0 million, based on an effective tax rate of 35%, respectively. The increase in the effective tax rate during the three months ended December 31, 2011, as compared to the three months ended December 31, 2010, was primarily due to tax benefits resulting from the retroactive extension of the federal research and development tax credit during the three months ended December 31, 2010, partially offset by an expense recognized during the three months ended December 31, 2010 as a result of a decrease in California deferred tax assets due to a change in tax law impacting California apportionment.

During the nine months ended December 31, 2011 and 2010, our income tax provision was $4.9 million, based on an effective tax rate of 37%, and $6.7 million, based on an effective tax rate of 38%, respectively. The decrease in the effective tax rate during the nine months ended December 31, 2011, as compared to the nine months ended December 31, 2010, was primarily due to lower state tax expenses resulting from the change in California to a single factor apportionment.

We did not have any unrecognized tax benefits as of December 31, 2011 or December 31, 2010. During the three and nine months ended December 31, 2011 and 2010, we did not recognize any interest or penalties related to unrecognized tax benefits.

NOTE 15.

COMPREHENSIVE INCOME

The following is a summary of comprehensive income for the three and nine months ended December 31, 2011 and 2010 (in thousands):

	Three Months Ended					Nine Months Ended
	December 31,					December 31,
	2011			2010		2011			2010
Net income	$	2,850		$	3,835	$	8,385		$	11,164
Other comprehensive loss:
Net change in unrealized loss on investments, net of tax		(14	)		-		(14	)		-
Comprehensive income	$	2,836		$	3,835	$	8,371		$	11,164

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NOTE 16.

SEGMENT REPORTING INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by our chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

Abaxis develops, manufactures, markets and sells portable blood analysis systems for use in the human or veterinary patient-care setting to provide clinicians with rapid blood constituent measurements. We identify our reportable segments as those customer groups that represent more than 10% of our combined revenue or gross profit or loss of all reported operating segments. We manage our business on the basis of the following two reportable segments: (i) the medical market and (ii) the veterinary market, which are based on the products sold and services performed by market and customer group. For the products that we manufacture and sell, each reportable segment has similar manufacturing processes, technology and shared infrastructures. The accounting policies for segment reporting are the same as for the Company as a whole. We do not segregate assets by segments since our chief operating decision maker, or decision making group, does not use assets as a basis to evaluate a segment’s performance.

Medical Market

In the medical market reportable segment, we serve a worldwide customer group consisting of military installations (ships, field hospitals and mobile care units), physicians’ office practices across all specialties, urgent care, outpatient and walk-in clinics (free-standing or hospital-connected), health screening operations, home care providers (national, regional or local), nursing homes, ambulance companies, oncology treatment clinics, dialysis centers, pharmacies and hospital labs. The products manufactured and sold in this segment primarily consist of Piccolo chemistry analyzers and medical reagent discs.

Veterinary Market

In the veterinary market reportable segment, we serve a worldwide customer group consisting of companion animal hospitals, animal clinics with mixed practices of small animals, birds and reptiles, equine and bovine practitioners, veterinary emergency clinics, veterinary referral hospitals, universities, government, pharmaceutical companies, biotechnology companies and private research laboratories. The products manufactured and sold in this segment primarily consist of VetScan chemistry analyzers and veterinary reagent discs. We also sell OEM supplied products in this segment consisting of VetScan hematology instruments and related reagent kits, VetScan VSpro coagulation and specialty analyzers and related consumables, VetScan i-STAT analyzers and related VetScan i-STAT consumables and rapid tests. During fiscal 2011, we began developing Abaxis Veterinary Reference Laboratories (“AVRL”), a full-service laboratory testing facility, based in Olathe, Kansas. In October 2011, we began operating and providing veterinary reference laboratory diagnostic and consulting services for veterinarians in the United States through AVRL.

The table below summarizes revenues, cost of revenues and gross profit from our two operating segments and from certain unallocated items for the three and nine months ended December 31, 2011 and 2010 (in thousands):

	Three Months Ended					Nine Months Ended
	December 31,					December 31,
	2011			2010		2011			2010
Revenues:
Medical Market	$	8,147		$	8,126	$	22,636		$	21,421
Veterinary Market		28,467			26,283		87,684			79,750
Other(1)		1,236			1,497		3,558			4,965
Total revenues		37,850			35,906		113,878			106,136
Cost of revenues:
Medical Market		3,514			3,721		10,180			9,927
Veterinary Market		12,472			11,153		37,893			33,209
Other(1)		1,386			1,223		4,083			3,657
Total cost of revenues		17,372			16,097		52,156			46,793
Gross profit:
Medical Market		4,633			4,405		12,456			11,494
Veterinary Market		15,995			15,130		49,791			46,541
Other(1)		(150	)		274		(525	)		1,308
Gross profit	$	20,478		$	19,809	$	61,722		$	59,343

____________________________________________________________________

(1)	Represents unallocated items, not specifically identified to any particular business segment.

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NOTE 17.

REVENUES BY PRODUCT AND SERVICE CATEGORY AND GEOGRAPHIC REGION AND SIGNIFICANT CONCENTRATIONS

Revenue Information

The following is a summary of our revenues by product and service category (in thousands):

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
Revenues by Product and Service Category	2011		2010		2011		2010
Instruments(1)	$	9,079	$	9,289	$	25,364	$	24,256
Consumables(2)		26,808		24,509		83,019		75,136
Other products and services(3)		1,925		1,753		5,372		5,558
Product and service revenues, net		37,812		35,551		113,755		104,950
Development and licensing revenue		38		355		123		1,186
Total revenues	$	37,850	$	35,906	$	113,878	$	106,136

____________________________________________________________________

(1)	Instruments include chemistry analyzers, hematology instruments, VSpro coagulation and specialty analyzers and i-STAT analyzers.

(2)	Consumables include reagent discs, hematology reagent kits, VSpro coagulation and specialty cartridges, i-STAT cartridges and rapid tests.

(3)	Other products and services include veterinary reference laboratory diagnostic and consulting services.

The following is a summary of revenues by geographic region based on customer location (in thousands):

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
Revenues by Geographic Region	2011		2010		2011		2010
North America	$	31,847	$	30,068	$	93,540	$	87,385
Europe		4,516		4,508		16,326		14,838
Asia Pacific and rest of the world		1,487		1,330		4,012		3,913
Total revenues	$	37,850	$	35,906	$	113,878	$	106,136

Significant Concentrations

During the three months ended December 31, 2011, one distributor in the United States, Animal Health International, accounted for 15% of our total worldwide revenues. During the nine months ended December 31, 2011, one distributor in the United States, Animal Health International, accounted for 12% of our total worldwide revenues. Animal Health International was formed in 2011 from two animal health companies, which included Walco International, Inc., d/b/a DVM Resources. During the three and nine months ended December 31, 2010, there were no distributors or direct customers that accounted for 10% or more of our total worldwide revenues.

At December 31, 2011, one distributor in the United States accounted for 19% of our total receivables balance. At December 31, 2010, one distributor in the United States accounted for 14% of our total receivables balance.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements, which reflect our current views with respect to future events and financial performance. In this report, the words “will,” “anticipates,” “believes,” “expects,” “intends,” “plans,” “future,” “projects,” “estimates,” “would,” “may,” “could,” “should,” “might,” and similar expressions identify forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties, including but not limited to those discussed below, in Part II, Item 1A of this report and in Part I, Item 1A of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”), that could cause actual results to differ materially from historical results or those anticipated. Such risks and uncertainties include, but are not limited to, the vulnerability of our manufacturing operations to potential interruptions and delays, fluctuations in our quarterly results of operations and difficulty in predicting future results, our dependence on certain sole or limited source suppliers, market acceptance of our products and services, the continuing development of our products, protection of Abaxis’ intellectual property or claims of infringement of intellectual property asserted by third parties, risks involved in carrying of inventory, development of our sales, marketing and distribution experience, our ability to attract, train and retain competent sales personnel, general market conditions, competition and other risks detailed under “Risk Factors” in this Quarterly Report on Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We assume no obligation to update any forward-looking statements as circumstances change.

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BUSINESS OVERVIEW

Company Description

Abaxis, Inc. develops, manufactures, markets and sells portable blood analysis systems for use in the human or veterinary patient-care setting to provide clinicians with rapid blood constituent measurements. In October 2011, Abaxis also began providing veterinary reference laboratory diagnostic and consulting services for veterinarians.

Abaxis, Inc. (“Abaxis,” “the Company,” “us” or “we”) was incorporated in California in 1989. Our principal offices are located at 3240 Whipple Road, Union City, California 94587. Our telephone number is (510) 675-6500 and our Internet address is www.abaxis.com. We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our common stock trades on the NASDAQ Global Market under the symbol “ABAX.”

Our corporate headquarters are located in Union City, California, from which we conduct our manufacturing, warehousing, research and development, regulatory, sales and marketing and administrative activities. We market and sell our products worldwide by maintaining direct sales forces and through independent distributors. Our sales force is primarily located in the United States. Abaxis Europe GmbH, our wholly-owned subsidiary in Germany since July 2008, markets and distributes diagnostic systems for medical and veterinary uses in the European market.

Products and Services. We manage our business in two operating segments, based on the products sold and services provided by market and customer group in the medical market and veterinary market.

Point-of-Care Blood Chemistry Analyzers. Our primary product is a blood analysis system, consisting of a compact portable analyzer and a series of single-use plastic discs, called reagent discs, containing all the chemicals required to perform a panel of up to 14 tests on human patients and 13 tests on veterinary patients. We market our blood chemistry analyzers in both the medical market and the veterinary market, as described below.

Medical Market: We currently market the blood analysis system in the medical market under the name Piccolo® Xpress. Through October 2006, we marketed the blood analysis system in the medical market as the Piccolo, now referred to as the Piccolo Classic. We continue to support and service our current population of Piccolo Xpress and Piccolo Classic chemistry analyzers.

Veterinary Market: We currently market the blood analysis system in the veterinary market under the name VetScan VS2. Through March 2006, we marketed the blood analysis system in the veterinary market as the VetScan, now referred to as the VetScan Classic. We continue to support and service our current population of VetScan VS2 and VetScan Classic chemistry analyzers.

In the veterinary market, we also offer the following products and services:

Hematology. We have marketed a veterinary hematology instrument under the name VetScan HM5 since September 2007. The VetScan HM5 offers a 22-parameter complete blood count (“CBC”) analysis, including a five-part differential cell counter specifically designed for veterinary applications. We also market the VetScan HM2, a veterinary hematology instrument that offers an 18-parameter CBC analysis, including a three-part white blood cell differential, marketed originally as the VetScan HMII. We currently purchase these hematology instruments from Diatron MI PLC (“Diatron”) of Budapest, Hungary. Through April 2004, we marketed a veterinary hematology instrument under the name VetScan HMT. We continue to support and service our current population of VetScan HM5, VetScan HM2, VetScan HMII and VetScan HMT hematology instruments. We also market reagent kits to be used with our hematology instruments which we currently purchase from two suppliers: Clinical Diagnostic Solutions, Inc. and Diatron.

Coagulation and Specialty. We have marketed a veterinary coagulation and specialty analyzer under the name VetScan VSpro since January 2009. The VetScan VSpro assists in the diagnosis and evaluation of suspected bleeding disorders, toxicity/poisoning, evaluation of disseminated intravascular coagulation, hepatic disease and in monitoring therapy and the progression of disease states. The point-of-care coagulation and specialty analyzer is offered with a combination assay (PT/aPTT test cartridge) for canine and feline testing. In December 2010, we introduced the VetScan VSpro Fibrinogen Test, to provide quantitative in-vitro determination of fibrinogen levels in equine platelet poor plasma from a citrated stabilized whole blood sample. The VetScan VSpro Fibrinogen Test is designed for use with the VSpro coagulation and specialty analyzer. We currently purchase the coagulation and specialty analyzers and related cartridges from Scandinavian Micro Biodevices APS of Farum, Denmark (“SMB”). Additionally, in February 2011, we purchased a 15% equity ownership interest in SMB. See the “Investment in Unconsolidated Affiliate” section in Critical Accounting Policies, Estimates and Judgments for additional information.

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i-STAT. We have marketed i-STAT instruments and related cartridges in the veterinary market since fiscal 2010. The VetScan i-STAT 1 delivers blood gas, electrolyte, basic blood chemistry and hematology results in minutes from two drops of whole blood. In May 2009, we entered into an exclusive agreement with Abbott Point of Care Inc. (“Abbott”), granting us the right to sell and distribute Abbott’s i-STAT® 1 handheld instrument and associated consumables for blood gas, electrolyte, basic blood chemistry and immunoassay testing in the animal health care market worldwide. Our right to sell and distribute these products was initially non-exclusive, but became exclusive in all countries of the world, except for Japan, in November 2009. Our rights in Japan remain non-exclusive for the term of the agreement. The initial term of the agreement ends on December 31, 2014, and after this initial term, our agreement continues automatically for successive one-year periods unless terminated by either party.

Rapid Tests. In the veterinary market, we offer the following three VetScan Rapid Tests, which deliver easy to read results in approximately ten minutes, as described below.

Canine Heartworm Rapid Test: In January 2009, we introduced the VetScan Canine Heartworm Rapid Test, a highly sensitive and specific test for the detection of Dirofilaria immitis in canine whole blood, serum or plasma. The lateral flow immunoassay technology in the canine heartworm rapid tests provides immediate results.

Canine Parvovirus Rapid Test: In March 2011, we introduced the VetScan Canine Parvovirus Rapid Test Kit, a qualitative test for the detection of canine parvovirus antigen in feces. The VetScan Canine Parvovirus Rapid Test Kit uses a unique combination of monoclonal antibodies that provides the detection of parvovirus antigen, allowing the veterinarian to screen for and diagnose the infection.

·	Giardia Rapid Test: In May 2011, we introduced the VetScan Giardia Rapid Test, which detects giardiasis, a gastrointestinal infection caused by the protozoan parasite Giardia. Symptoms of Giardia infection include diarrhea and weight loss and infection is also more common in younger pets.

Abaxis Veterinary Reference Laboratories. We began developing Abaxis Veterinary Reference Laboratories (“AVRL”), a full-service laboratory testing facility, based in Olathe, Kansas during fiscal 2011. In January 2011, we formed a strategic alliance with Kansas State University, K-State Veterinary Diagnostic Lab and a commercial affiliate of Kansas State University, the National Institute for Strategic Technology Acquisition and Commercialization, to enable AVRL to provide a full service commercial laboratory for veterinarians. In October 2011, AVRL began providing veterinary reference laboratory diagnostic and consulting services for veterinarians in the United States. AVRL also focuses on providing specialty and esoteric testing and analysis. This service complements our full suite of on-site laboratory instrumentation and rapid diagnostics for in hospital routine, critical care and emergency medicine laboratory needs.

Factors that May Impact Future Performance

Our industry is impacted by numerous competitive, regulatory and other significant factors. Our sales for any future periods are not predictable with a significant degree of certainty, and may depend on a number of factors outside of our control, including but not limited to inventory or timing considerations by our distributors. We generally operate with a limited order backlog because our products are typically shipped shortly after orders are received. Product sales in any quarter are generally dependent on orders booked and shipped in that quarter. As a result, any such revenue shortfall would negatively affect our operating results and financial condition. In addition, our sales may be adversely impacted by pricing pressure from competitors. Our ability to be consistently profitable will depend, in part, on our ability to increase the sales volumes of our Piccolo and VetScan products and to successfully compete with other competitors. We believe that period to period comparisons of our results of operations are not necessarily meaningful indicators of future results.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the Securities and Exchange Commission. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and the sensitivity of these estimates to deviations in the assumptions used in making them. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. However, there can be no assurance that our actual results will not differ from these estimates.

We have identified the policies below as critical because they are not only important to understanding our financial condition and results of operations, but also because application and interpretation of these policies requires both judgment and estimates of matters that are inherently uncertain and unknown. Accordingly, actual results may differ materially from our estimates. The impact and any associated risks related to these policies on our business operations are discussed below. A more detailed discussion on the application of these and other accounting policies are included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

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Revenue Recognition and Deferred Revenue. Our primary customers are distributors and direct customers in both the medical and veterinary markets. Revenues from product sales and services, net of estimated sales allowances, and rebates, are recognized when (i) evidence of an arrangement exists, (ii) upon shipment of the products or rendering of services to the customer, (iii) the sales price is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured. Rights of return are not provided. Amounts collected in advance of revenue recognition are recorded as a current or non-current liability based on the time from the balance sheet date to the future date of revenue recognition. We recognize revenue associated with extended maintenance agreements ratably over the life of the contract.

We occasionally enter into multiple element revenue arrangements in which a customer may purchase a combination of instruments, consumables or extended maintenance agreements. Additionally, we provide incentives in the form of free goods or extended maintenance agreements to customers in connection with the sale of our instruments. Revenues from such sales are allocated separately to the instruments and incentives based on the relative selling price method. Revenue allocated to each element is then recognized when the basic revenue recognition criteria, as described above, is met for each element. Revenues allocated to incentives are deferred until the goods are shipped to the customer or are recognized ratably over the life of the maintenance contract.

We periodically offer trade-in programs to customers for trading in an existing instrument to purchase a new instrument and we will either provide incentives in the form of free goods or reduce the sales price of the instrument. These incentives in the form of free goods are recorded based on the relative selling price method according to the policies described above.

We periodically offer programs to customers whereby certain instruments are made available to customers for rent or on an evaluation basis. These programs typically require customers to purchase a minimum quantity of consumables during a specified period for which we recognize revenue on the related consumables according to the policies described above. Depending on the program offered, customers may purchase the instrument during the rental or evaluation period. Proceeds from such sale are recorded as revenue according to the policies described above. Rental income, if any, are also recorded as revenue according to the policies described above.

Royalties are typically based on licensees’ net sales of products that utilize our technology and are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured, such as upon the receipt of a royalty statement from the licensee. Our royalty revenue depends on the licensees’ use of our technology, and therefore, may vary from period to period and impact our revenues during a quarter. On June 28, 2010, we notified Cepheid that Cepheid breached its license agreement with us due to Cepheid’s discontinuation of license royalty payments. On October 1, 2010, we informed Cepheid that the breach had not been cured, and we terminated the entire license, as to all or any Cepheid products. As a result of the license termination, our development and licensing revenue was adversely and materially impacted in our consolidated financial statements during fiscal 2011. Also, we expect the license termination will adversely and materially impact development and licensing revenue in our consolidated financial statements in the foreseeable future.

Distributor and Customer Rebates. We offer distributor pricing rebates and customer incentives, such as cash rebates, from time to time. The distributor pricing rebates are offered to distributors upon meeting the sales volume requirements during a qualifying period and are recorded as a reduction to gross revenues during a qualifying period. Cash rebates are offered to distributors or customers who purchase certain products or instruments during a promotional period and are recorded as a reduction to gross revenues.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts based on our assessment of the collectibility of the amounts owed to us by our customers. In determining the amount of the allowance, we make judgments about the creditworthiness of customers which is mostly determined by the customer’s payment history and the outstanding period of accounts. We specifically identify amounts that we believe to be uncollectible and the allowance for doubtful accounts is adjusted accordingly. An additional allowance is recorded based on certain percentages of our aged receivables, using historical experience to estimate the potential uncollectible and our assessment of the general financial condition of our customer base. If our actual collections experience changes, revisions to our allowances may be required, which could adversely affect our operating income.

Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (“exit price”) in an orderly transaction between market participants at the measurement date. The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. As of December 31, 2011, our investments in cash equivalents, which we classified as available-for-sale, totaled $1.2 million, using Level 1 inputs since these investments are traded in an active market. The valuations are based on quoted prices of the underlying security that are readily and regularly available in an active market, and accordingly, a significant degree of judgment is not required.

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Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument. As of December 31, 2011, our available-for-sale investments in certificates of deposits, corporate bonds and municipal bonds, totaled $8.3 million, using Level 2 inputs, based on market pricing and other observable market inputs for similar securities obtained from various third party data providers.

Level 3: Unobservable inputs that are supported by little or no market data and require the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. As of December 31, 2011, we did not have any Level 3 financial assets or liabilities measured at fair value on a recurring basis.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are developed to reflect those that market participants would use in pricing the asset or liability at the measurement date. At December 31, 2011, we also had $44.3 million in investments classified as held-to-maturity and carried at amortized cost.

Investment in Unconsolidated Affiliate. In February 2011, we purchased a 15% equity ownership interest in Scandinavian Micro Biodevices APS (“SMB”), for $2.8 million in cash. We use the equity method to account for our investment in this entity that we do not control, but where we have the ability to exercise significant influence. Equity method investments are recorded at original cost and adjusted periodically to recognize (1) our proportionate share of the investees’ net income or losses after the date of investment, (2) additional contributions made and dividends or distributions received, and (3) impairment losses resulting from adjustments to net realizable value. We eliminate all intercompany transactions in accounting for our equity method investments. We record our proportionate share of the investees’ net income or losses in “Interest and other income (expense), net” on the consolidated statements of income.

We assess the potential impairment of our equity method investments when indicators such as a history of operating losses, a negative earnings and cash flow outlook, and the financial condition and prospects for the investee’s business segment might indicate a loss in value. We did not recognize any impairment loss on investment in unconsolidated affiliate during the three and nine months ended December 31, 2011.

Warranty Reserves. We provide for the estimated future costs to be incurred under our standard warranty obligation on our instruments. Our standard warranty obligation on instruments ranges from one to three years. The estimated contractual warranty obligation is recorded when the related revenue is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. Cost of revenues reflects estimated warranty expense for instruments sold in the current period and any adjustments in estimated warranty expense for the installed base under our standard warranty obligation based on our quarterly evaluation of service experience. While we engage in product quality programs and processes, including monitoring and evaluating the quality of our suppliers, our estimated accrual for warranty exposure is based on our historical experience as to product failures, estimated product failure rates, estimated repair costs, material usage and freight incurred in repairing the instrument after failure and known design changes under the warranty plan.

A provision for defective reagent discs is recorded when the related sale is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated, at which time they are included in cost of revenues. The warranty cost includes the replacement costs and freight of a defective reagent disc.

As of December 31, 2011, our current portion of warranty reserves for instruments and reagent discs totaled $1.1 million and our non-current portion of warranty reserves for instruments totaled $482,000, which reflects our estimate of warranty obligations based on the estimated product failure rates, the number of instruments in standard warranty, estimated repair and related costs of instruments, and an estimate of defective reagent discs and replacement and related costs of a defective reagent disc.

Each quarter, we reevaluate our estimate of warranty reserves, including our assumptions. During the nine months ended December 31, 2011, we recorded an additional accrual to pre-existing warranties of $257,000, which increased our warranty reserves and our cost of revenues, based on both historical and projected product performance rates.

Management continually evaluates the sufficiency of the warranty provisions and makes adjustments when necessary. If an unusual performance rate related to warranty claims is noted, an additional warranty accrual may be assessed and recorded when a failure event is probable and the cost can be reasonably estimated. We review the historical warranty cost trends and analyze the adequacy of the ending accrual balance of warranty reserves each quarter. The determination of warranty reserves requires us to make estimates of the estimated product failure rate, expected costs to repair or replace the instruments and to replace defective reagent discs under warranty. If actual repair or replacement costs of instruments or replacement costs of reagent discs differ significantly from our estimates, adjustments to cost of revenues may be required. Additionally, if factors change and we revise our assumptions on the product failure rate of instruments or reagent discs, then our warranty reserves and cost of revenues could be materially impacted in the quarter of revision, as well as in following quarters.

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Inventories. We state inventories at the lower of cost or market, cost being determined using standard costs which approximate actual costs using the first-in, first-out (FIFO) method. Inventories include material, labor and overhead. We establish provisions for excess, obsolete and unusable inventories after evaluation of future demand and market conditions. If future demand or actual market conditions are less favorable than those estimated by management or if a significant amount of the material were to become unusable, additional inventory write-downs may be required, which would have a negative effect on our operating income.

Valuation of Long-Lived Assets. We evaluate the carrying value of our long-lived assets, such as property and equipment and amortized intangible assets, whenever events or changes in business circumstances or our planned use of long-lived assets indicate that the carrying amount of an asset may not be fully recoverable or their useful lives are no longer appropriate. We look to current and future profitability, as well as current and future undiscounted cash flows, excluding financing costs, as primary indicators of recoverability. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposal is less than the carrying amount. If impairment is determined to exist, any related impairment loss is calculated based on fair value and long-lived assets are written down to their respective fair values. We did not recognize any impairment charges on long-lived assets during the three or nine months ended December 31, 2011.

Income Taxes. We account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be recovered.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50 percent likely to be realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. At December 31, 2011 and 2010, we had no uncertain tax positions. Our policy is to include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes. During the three and nine months ended December 31, 2011 and 2010, we did not recognize any interest or penalties related to uncertain tax positions in the condensed consolidated statements of income, and at December 31, 2011 and 2010, we had no accrued interest or penalties.

Share-Based Compensation Expense. We recognize share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award to employees and directors.

There were no stock options granted since the beginning of fiscal 2007 and we did not grant stock options during the nine months ended December 31, 2011. For restricted stock units, share-based compensation expense is based on the fair value of our stock at the grant date and recognized net of an estimated forfeiture rate, over the requisite service period of the award. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future.

As required by fair value provisions of share-based compensation, employee share-based compensation expense recognized is calculated over the requisite service period of the awards and reduced for estimated forfeitures. The forfeiture rate is estimated based on historical data of our share-based compensation awards that are granted and cancelled prior to vesting and upon historical experience of employee turnover. Changes in estimated forfeiture rates and differences between estimated forfeiture rates and actual experience may result in significant, unanticipated increases or decreases in share-based compensation expense from period to period. To the extent we revise our estimate of the forfeiture rate in the future, our share-based compensation expense could be materially impacted in the quarter of revision, as well as in following quarters.

Share-based compensation expense resulted in a material impact on our earnings per share and on our condensed consolidated financial statements for fiscal 2011 and during the three and nine months ended December 31, 2011. The impact of share-based compensation expense on our condensed consolidated financial results is disclosed in Note 11, “Share-Based Compensation” in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. We expect that share-based compensation will materially impact our consolidated financial statements in the foreseeable future.

RESULTS OF OPERATIONS

Abaxis develops, manufactures, markets and sells portable blood analysis systems for use in the human or veterinary patient-care setting to provide clinicians with rapid blood constituent measurements. In October 2011, Abaxis began providing veterinary reference laboratory diagnostic and consulting services for veterinarians. We operate in two segments: (i) the medical market and (ii) the veterinary market. See “Segment Results” in this section for a detailed discussion.

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Total Revenues

Revenues by Geographic Region and by Product and Service Category. Revenues by geographic region based on customer location and revenues by product and service category during the three and nine months ended December 31, 2011 and 2010 were as follows (in thousands, except percentages):

	Three Months Ended										Nine Months Ended
	December 31,						Change				December 31,						Change
Revenues by Geographic Region	2011			2010			Increase/ (Decrease)			Percent Change	2011			2010			Increase/ (Decrease)			Percent Change
North America	$	31,847		$	30,068		$	1,779		6%	$	93,540		$	87,385		$	6,155		7%
Percentage of total revenues		84	%		84	%						82	%		82	%
Europe		4,516			4,508			8		<1%		16,326			14,838			1,488		10%
Percentage of total revenues		12	%		13	%						14	%		14	%
Asia Pacific and rest of the world		1,487			1,330			157		12%		4,012			3,913			99		3%
Percentage of total revenues		4	%		3	%						4	%		4	%
Total revenues	$	37,850		$	35,906		$	1,944		5%	$	113,878		$	106,136		$	7,742		7%

	Three Months Ended										Nine Months Ended
	December 31,						Change				December 31,						Change
Revenues by Product and Service Category	2011			2010			Increase/ (Decrease)			Percent Change	2011			2010			Increase/ (Decrease)			Percent Change
Instruments(1)	$	9,079		$	9,289		$	(210	)	(2)%	$	25,364		$	24,256		$	1,108		5%
Percentage of total revenues		24	%		26	%						22	%		23	%
Consumables(2)		26,808			24,509			2,299		9%		83,019			75,136			7,883		10%
Percentage of total revenues		71	%		68	%						73	%		71	%
Other products and services(3)		1,925			1,753			172		10%		5,372			5,558			(186	)	(3)%
Percentage of total revenues		5	%		5	%						5	%		5	%
Product and service revenues, net		37,812			35,551			2,261		6%		113,755			104,950			8,805		8%
Percentage of total revenues		100	%		99	%						100	%		99	%
Development and licensing revenue		38			355			(317	)	(89)%		123			1,186			(1,063	)	(90)%
Percentage of total revenues	<1		%		1	%						<1	%		1	%
Total revenues	$	37,850		$	35,906		$	1,944		5%	$	113,878		$	106,136		$	7,742		7%

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(1)	Instruments include chemistry analyzers, hematology instruments, VSpro coagulation and specialty analyzers and i-STAT analyzers.

(2)	Consumables include reagent discs, hematology reagent kits, VSpro coagulation and specialty cartridges, i-STAT cartridges and rapid tests.

(3)	Other products and services include veterinary reference laboratory diagnostic and consulting services.

Three Months Ended December 31, 2011 Compared to Three Months Ended December 31, 2010

North America. During the three months ended December 31, 2011, total revenues in North America increased by 6%, or $1.8 million, as compared to the three months ended December 31, 2010. The change in total revenues in North America was primarily attributable to the following:

Total sales of our Piccolo chemistry analyzers and medical reagent discs in North America (excluding sales to the U.S. government) increased by 11%, or $556,000, primarily due to an increase in the sales volume of medical reagent discs to various distributors resulting from higher sales to end users.

·	Total sales of our Piccolo chemistry analyzers and medical reagent discs to the U.S. government decreased by 59%, or $957,000, primarily due to a decrease in the U.S. Military’s needs for our products as a result of U.S. troops leaving Iraq in 2011.

Total sales of our VetScan chemistry analyzers and veterinary reagent discs in North America increased by 9%, or $1.3 million, primarily attributable to an increase in the sales volume of veterinary reagent discs resulting from an expanded installed base of our VetScan chemistry analyzers, partially offset by a net decrease in the sales volume of VetScan chemistry analyzers due in part to lower sales to various distributors.

Total sales of our VetScan hematology instruments and hematology reagent kits in North America decreased by 2%, or $78,000, primarily attributable to a decrease in the sales volume of VetScan hematology instruments due in part to lower sales to various distributors, partially offset by an increase in units of hematology reagent kits sold resulting from an expanded installed base of our VetScan hematology instruments.

Total sales from our VSpro coagulation and specialty analyzers and related consumables, i-STAT analyzers and related consumables and rapid tests in North America increased by 29%, or $1.2 million, primarily due to an increase in the sales volume of rapid tests, which includes our Canine Heartworm Rapid Test, introduced in January 2009, our Canine Parvovirus Rapid Test, introduced in March 2011 and our Giardia Rapid Test, introduced in May 2011.

Total revenues from development and licensing in North America decreased by 89%, or $317,000, primarily based on a licensee’s discontinuation of license royalty payments. On June 28, 2010, we notified Cepheid that Cepheid breached its license agreement with us due to Cepheid’s discontinuation of license royalty payments. On October 1, 2010, we informed Cepheid that the breach had not been cured, and we terminated the entire license, as to all or any Cepheid products. For further information, see Note 9 of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

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Europe. During the three months ended December 31, 2011, total revenues in Europe were flat as compared to the three months ended December 31, 2010. Revenues from Piccolo chemistry analyzers and medical reagent discs increased by 43%, or $469,000, primarily due to an increase in the sales volume of medical reagent discs to various distributors. Revenues from veterinary instruments increased by 37%, or $332,000, primarily due to an increase in the sales volume of VetScan chemistry analyzers to various distributors. Net revenues in Europe were partially offset by a decrease in sales of veterinary reagent discs by 40%, or $899,000, primarily due to the timing of inventory purchases by a distributor.

Asia Pacific and rest of the world. During the three months ended December 31, 2011, total revenues in Asia Pacific and rest of the world increased by 12%, or $157,000, as compared to the three months ended December 31, 2010, primarily due to a net increase in revenues from veterinary instruments of 32%, or $103,000, primarily resulting from an increase in the sales volume of VetScan chemistry analyzers to various distributors.

Significant concentration. During the three months ended December 31, 2011, one distributor in the United States, Animal Health International, accounted for 15% of our total worldwide revenues. Animal Health International was formed in 2011 from two animal health companies, which included Walco International, Inc., d/b/a DVM Resources. There were no distributors or direct customers that accounted for 10% or more of our total worldwide revenues during the three months ended December 31, 2010.

Nine Months Ended December 31, 2011 Compared to Nine Months Ended December 31, 2010

North America. During the nine months ended December 31, 2011, total revenues in North America increased by 7%, or $6.2 million, as compared to the nine months ended December 31, 2010. The change in total revenues in North America was primarily attributable to the following:

Total sales of our Piccolo chemistry analyzers and medical reagent discs in North America (excluding sales to the U.S. government) increased by 11%, or $1.5 million, primarily due to an increase in the sales volume of medical reagent discs to various distributors resulting from higher sales to end users.

·	Total sales of our Piccolo chemistry analyzers and medical reagent discs to the U.S. government decreased by 14%, or $452,000, primarily due to a decrease in the U.S. Military’s needs for our products as a result of U.S. troops leaving Iraq in 2011.

Total sales of our VetScan chemistry analyzers and veterinary reagent discs in North America increased by 7%, or $3.1 million, primarily attributable to (a) an increase in the sales volume of VetScan chemistry analyzers due in part to additional sales personnel, (b) an increase in the sales volume of veterinary reagent discs resulting from an expanded installed base of our VetScan chemistry analyzers and (c) higher average selling prices of veterinary reagent discs.

·	Total sales of our VetScan hematology instruments and hematology reagent kits in North America increased by 9%, or $915,000, primarily due to an increase in units of hematology reagent kits sold resulting from an expanded installed base of our VetScan hematology instruments.

Total sales from our VSpro coagulation and specialty analyzers and related consumables, i-STAT analyzers and related consumables and rapid tests in North America increased by 19%, or $2.4 million, primarily attributable to (a) an increase in the sales volume of i-STAT analyzers due in part to additional sales personnel and (b) an increase in the sales volume of rapid tests, which includes our Canine Heartworm Rapid Test, introduced in January 2009, our Canine Parvovirus Rapid Test, introduced in March 2011 and our Giardia Rapid Test, introduced in May 2011.

Total revenues from development and licensing in North America decreased by 90%, or $1.1 million, primarily based on a licensee’s discontinuation of license royalty payments. On June 28, 2010, we notified Cepheid that Cepheid breached its license agreement with us due to Cepheid’s discontinuation of license royalty payments. On October 1, 2010, we informed Cepheid that the breach had not been cured, and we terminated the entire license, as to all or any Cepheid products. For further information, see Note 9 of the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

Table of Contents

Europe. During the nine months ended December 31, 2011, total revenues in Europe increased by 10%, or $1.5 million, as compared to the nine months ended December 31, 2010. Revenues from Piccolo chemistry analyzers and medical reagent discs increased by 6%, or $200,000, primarily due to an increase in the sales volume of medical reagent discs to various distributors. Revenues from veterinary instruments increased by 25%, or $710,000, primarily due to an increase in the sales volume of VetScan chemistry analyzers to various distributors. Revenues from veterinary reagent discs increased by 5%, or $410,000, primarily attributable to higher Euro exchange rates during the first quarter of fiscal 2012, partially offset by a decrease in the sales volume primarily due to the timing of inventory purchases by a distributor.

Asia Pacific and rest of the world. During the nine months ended December 31, 2011, total revenues in Asia Pacific and rest of the world increased by 3%, or $99,000, as compared to the nine months ended December 31, 2010, primarily due to an increase in total revenues from VetScan chemistry analyzers and veterinary reagent discs of 5%, or $104,000.

Significant concentration. During the nine months ended December 31, 2011, one distributor in the United States, Animal Health International, accounted for 12% of our total worldwide revenues. Animal Health International was formed in 2011 from two animal health companies, which included Walco International, Inc., d/b/a DVM Resources. There were no distributors or direct customers that accounted for 10% or more of our total worldwide revenues during the nine months ended December 31, 2010.

Segment Results

Three Months Ended December 31, 2011 Compared to Three Months Ended December 31, 2010

The following table presents revenues, cost of revenues, gross profit and percentage of revenues by operating segments and from certain unallocated items for the three months ended December 31, 2011 and 2010 (in thousands, except percentages):

	Three Months Ended
	December 31,								Change
				Percent of				Percent of	Increase/			Percent
	2011			Revenues(1)	2010			Revenues(1)	(Decrease)			Change
Revenues:
Medical Market	$	8,147		100%	$	8,126		100%	$	21		<1%
Percentage of total revenues		22	%			23	%
Veterinary Market		28,467		100%		26,283		100%		2,184		8%
Percentage of total revenues		75	%			73	%
Other(2)		1,236				1,497				(261	)	(17)%
Percentage of total revenues		3	%			4	%
Total revenues		37,850				35,906				1,944		5%
Cost of revenues:
Medical Market		3,514