The Company’s
condensed consolidated financial statements were prepared on a going concern basis, which assumes continuity of operations and
realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include
any adjustments to reflect possible future effects on the recoverability and classification of assets and liabilities that may
result in the event the Company’s plans, including plans to rectify our liquidity issues, are not successful. As noted
above, during fiscal 2016 and throughout the first six months of fiscal 2017, we have operated either in default of, or under forbearance
arrangements with respect to, our credit agreements with Huntington Bank. During fiscal 2015 and 2016, we experienced depressed
revenues as compared to historical levels. A significant portion of our costs are fixed. Thus, decreases in revenues led to decreased
margins, which in turn negatively impacted cash provided from operating activities. To supplement cash from operating activities
during that period, we relied, and may in the future rely, on our cash balance and supplemental funds from our credit arrangements.
The Company’s operating performance for the three and six months ended March 31, 2017 reflects a significant improvement
in our reported revenue and profitability versus recent trends. The potential inability to find replacement financing continues
to raise doubt about the Company’s ability to continue as a going concern, and management has and will continue to take measures
to mitigate that possibility.
We cannot provide assurance
that we will be able to satisfy our cash requirements from cash provided by operating activities on a go-forward basis. If our
working capital needs and capital expenditure requirements exceed cash provided by operating activities, then we may again look
to our cash balance and committed credit lines, if any, to satisfy those needs. The term of our Fifth Forbearance Agreement ends
on July 31, 2017, after which, or sooner should we default on the Fifth Forbearance Agreement, Huntington Bank may refrain from
making additional advances under our revolving loan. In addition, alternative financing sources may hesitate to enter into credit
arrangements with us due in part to historical losses.
The Company’s
Board of Directors has directed management to seek alternatives that will enable the Company to repay its indebtedness to Huntington
Bank in full upon the expiration of the forbearance period. The following alternatives, among others, are being evaluated: replacement
financing, the potential disposition of certain assets and the possible sale of the West Lafayette building. Management has been
reviewing details of all current account management and marketing programs as well as all invoicing and top-line growth initiatives.
We cannot provide assurance that we will be able to resolve our liquidity issues on satisfactory terms, or at all.
Although the
Company continues to face the near term challenge of replacing its Huntington Bank debt, the operating performance for the
three and six months ended March 31, 2017 is encouraging. The financial results for the three and six months ended March 31,
2017 reflect Management’s initiatives aimed at growing revenue, reducing costs and generating more cash flow. The additional
revenues for archive services and the recent reductions in inventory and accounts payable are examples of these initiatives.
For the remainder of fiscal 2017, the entire BASi team remains committed to the Company’s core priorities and is focused on
seeking additional opportunities to increase revenue and profits. For example, we are exploring the use of distributor and
reseller arrangements to boost sales in our products business. Additionally, we intend to increase our investment in
product research and development. We anticipate making investments to increase our discovery and preclinical services
revenues. We have recently welcomed the Company’s founder as a scientific advisor to the team; and we are also looking
to selectively add to our scientific and business development staff. Lastly, the Board of Directors continues to weigh
options and timing for hiring a new Chief Executive Officer, to fill the position vacated in November of 2016.
In fiscal 2017, after
a thorough review of its service contracts with customers, the Company instituted the practice of uniformly charging archive fees
to clients where contracts allow. Historically, the Company’s practice of charging such fees was inconsistent.
Archive revenues include
fees for: (1) the handling of records (pickup and delivery of records, addition of new records, and retrieval and refiling of records);
(2) secure destruction of records; (3) secure shredding of sensitive documents; (4) other services, including the scanning, imaging
and document conversion of active and inactive physical and digital records; and (5) the secure storage of records in a designated
environmentally monitored, limited-access location.
In the first quarter
of fiscal 2017, the Company began recognizing archive revenue when the following criteria are met: (1) persuasive evidence of a
contractual arrangement; (2) the invoice price is fixed or determinable; (3) services have been rendered; and (4) collectability
of the resulting receivable is reasonably assured. Amounts related to future archiving or prepaid archiving contracts for customers
where archiving fees are billed in advance are accounted for as deferred revenue and recognized ratably over the period the applicable
archive service is performed. Archiving revenues for services rendered prior to calendar year 2017 are currently recognized when
payments are received. Archive revenue recognized for the three and six months ended March 31, 2017 was $229 and $237, respectively.
No archive revenue was recognized for the three and six months ended March 31, 2016.
|
4.
|
STOCK-BASED COMPENSATION
|
The Company’s
2008 Stock Option Plan (“the Plan”) is used to promote our long-term interests by providing a means of attracting and
retaining officers, directors and key employees and aligning their interests with those of our shareholders. The Plan is described
more fully in Note 10 in the Notes to the Consolidated Financial Statements in our Form 10-K for the year ended September 30, 2016.
All options granted under the Plan had an exercise price equal to the market value of the underlying common shares on the date
of grant. We expense the estimated fair value of stock options over the vesting periods of the grants. We recognize expense for
awards subject to graded vesting using the straight-line attribution method, reduced for estimated forfeitures. Forfeitures are
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment is recognized
at that time. The Compensation Committee may also issue non-qualified stock option grants with vesting periods different from the
2008 Plan. As of March 31, 2017, there are 15 shares underlying options outstanding that were granted outside of the Plan. The
assumptions used are detailed in Note 10 to the Consolidated Financial Statements in our Form 10-K for the year ended September
30, 2016. Stock based compensation expense for the three and six months ended March 31, 2017 was $(3) and $7, respectively. Stock
based compensation expense for the three and six months ended March 31, 2016 was $14 and $29, respectively. The negative expense
in the three month period ending March 31, 2017 was due to the forfeiture of options related to the former Chief Executive Officer.
The 17 options exercised in the current fiscal year were exercised through a cashless transaction.
A summary of our stock
option activity for the six months ended March 31, 2017 is as follows (in thousands except for share prices):
|
|
Options
(shares)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - October 1, 2016
|
|
|
262
|
|
|
$
|
1.76
|
|
|
$
|
1.39
|
|
Exercised
|
|
|
(17
|
)
|
|
$
|
1.03
|
|
|
$
|
0.87
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Terminated
|
|
|
(50
|
)
|
|
$
|
2.11
|
|
|
$
|
1.75
|
|
Outstanding - March 31, 2017
|
|
|
195
|
|
|
$
|
1.74
|
|
|
$
|
1.34
|
|
|
5.
|
INCOME (LOSS) PER SHARE
|
We compute basic income
(loss) per share using the weighted average number of common shares outstanding. The Company has two categories of dilutive potential
common shares: the Series A preferred shares issued in May 2011 in connection with the registered direct offering and shares issuable
upon exercise of options. We compute diluted earnings per share using the if-converted method for preferred stock and the treasury
stock method for stock options, respectively.
Shares issuable upon
exercise of options, warrants for 799 common shares and 592 common shares issuable upon conversion of preferred shares were not
considered in computing diluted earnings per share for the three and six months ended March 31, 2016, respectively, because they
were anti-dilutive. During the three months ended March 31, 2017, 150 preferred shares were converted to common shares via cashless
conversion resulting in no effect on the diluted net income per share calculation.
The following table reconciles our computation
of basic income (loss) per share to diluted income (loss) per share:
|
|
Three Months Ended
March 31,
|
|
|
Six Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
417
|
|
|
$
|
(254
|
)
|
|
$
|
434
|
|
|
$
|
(760
|
)
|
Weighted average common shares outstanding
|
|
|
8,148
|
|
|
|
8,108
|
|
|
|
8,128
|
|
|
|
8,107
|
|
Basic net income (loss) per share
|
|
$
|
0.05
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) applicable to common shareholders
|
|
$
|
417
|
|
|
$
|
(254
|
)
|
|
$
|
434
|
|
|
$
|
(760
|
)
|
Weighted average common shares outstanding
|
|
|
8,148
|
|
|
|
8,108
|
|
|
|
8,128
|
|
|
|
8,107
|
|
Plus: Incremental shares from assumed conversions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred shares
|
|
|
554
|
|
|
|
—
|
|
|
|
573
|
|
|
|
—
|
|
Dilutive stock options/shares
|
|
|
8
|
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
|
|
8,710
|
|
|
|
8,108
|
|
|
|
8,707
|
|
|
|
8,107
|
|
Diluted net income (loss) per share
|
|
$
|
0.05
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.09
|
)
|
Inventories consisted of the following:
|
|
March 31,
2017
|
|
|
September 30,
2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
876
|
|
|
$
|
1,190
|
|
Work in progress
|
|
|
256
|
|
|
|
267
|
|
Finished goods
|
|
|
221
|
|
|
|
284
|
|
|
|
|
1,353
|
|
|
|
1,741
|
|
Obsolescence reserve
|
|
|
(234
|
)
|
|
|
(288
|
)
|
|
|
$
|
1,119
|
|
|
$
|
1,453
|
|
We operate in two
principal segments - research services and research products. Our Services segment provides research and development support on
a contract basis directly to pharmaceutical companies. Our Products segment provides liquid chromatography, electrochemical and
physiological monitoring products to pharmaceutical companies, universities, government research centers and medical research institutions.
Our accounting policies in these segments are the same as those described in the summary of significant accounting policies found
in Note 2 to Consolidated Financial Statements in our annual report on Form 10-K for the year ended September 30, 2016.
|
|
Three Months Ended
March 31,
|
|
|
Six Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
4,962
|
|
|
$
|
4,053
|
|
|
$
|
10,226
|
|
|
$
|
8,108
|
|
Product
|
|
|
1,397
|
|
|
|
1,286
|
|
|
|
2,307
|
|
|
|
2,126
|
|
|
|
$
|
6,359
|
|
|
$
|
5,339
|
|
|
$
|
12,533
|
|
|
$
|
10,234
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
445
|
|
|
$
|
(279
|
)
|
|
$
|
739
|
|
|
$
|
(598
|
)
|
Product
|
|
|
110
|
|
|
|
17
|
|
|
|
(90
|
)
|
|
|
(193
|
)
|
|
|
$
|
555
|
|
|
$
|
(262
|
)
|
|
$
|
649
|
|
|
$
|
(791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(134
|
)
|
|
|
(70
|
)
|
|
|
(210
|
)
|
|
|
(136
|
)
|
Decrease in fair value of warrant liability
|
|
|
—
|
|
|
|
79
|
|
|
|
—
|
|
|
|
168
|
|
Other income
|
|
|
1
|
|
|
|
—
|
|
|
|
2
|
|
|
|
1
|
|
Income (loss) before income taxes
|
|
$
|
422
|
|
|
$
|
(253
|
)
|
|
$
|
441
|
|
|
$
|
(758
|
)
|
We use the asset and
liability method of accounting for income taxes. We recognize deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities 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.
We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the
enactment date. We record valuation allowances based on a determination of the expected realization of tax assets.
We recognize the tax
benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical
merits of the position. We measure the amount of the accrual for which an exposure exists as the largest amount of benefit determined
on a cumulative probability basis that we believe is more likely than not to be realized upon ultimate settlement of the position.
At March 31, 2017 and
September 30, 2016, we had a $16 liability for uncertain income tax positions. The difference between the federal statutory rate
of 34% and our effective rate of 1.5% is due to changes in our valuation allowance on our net deferred tax assets.
We record
interest and penalties accrued in relation to uncertain income tax positions as a component of income tax expense.
Any
changes in the liability for uncertain tax positions would impact our effective tax rate. We do not expect the total amount of
unrecognized tax benefits to significantly change in the next twelve months.
We file income tax
returns in the U.S. and several U.S. States. We remain subject to examination by taxing authorities in the jurisdictions in which
we have filed returns for years after 2011.
Credit Facility
On May 14, 2014, we
entered into a Credit Agreement with Huntington Bank, which was subsequently amended on May 14, 2015 (“Agreement”).
The Agreement includes both a term loan and a revolving loan and is secured by mortgages on our facilities in West Lafayette and
Evansville, Indiana and liens on our personal property. As of December 31, 2015, we were not in compliance with certain financial
covenants of the Agreement, and during fiscal 2016 and the first six months of fiscal 2017 we operated either in default of, or
under forbearance arrangements with respect to, the Agreement.
On April 27, 2016,
the Company entered into a Forbearance Agreement and Second Amendment to Credit Agreement (“Forbearance Agreement”)
with Huntington Bank and on July 1, 2016, the Company entered into a Second Forbearance Agreement and Third Amendment to Credit
Agreement (“Second Forbearance Agreement”) with Huntington Bank. As of June 30, 2016, the Company was not in compliance
with an additional financial covenant under the Second Forbearance Agreement, resulting in termination of the forbearance period
thereunder. On September 30, 2016, the Company entered into a Third Forbearance Agreement and Fourth Amendment to Credit Agreement
with Huntington Bank (“Third Forbearance Agreement”), on October 31, 2016, the Company entered into a Fourth Forbearance
Agreement and Fifth Amendment to Credit Agreement (“Fourth Forbearance Agreement”) and on January 31, 2017 the Company
entered into a Fifth Forbearance Agreement and Sixth Amendment to Credit Agreement (“Fifth Forbearance Agreement”)
with Huntington Bank. Subject to the conditions set forth in the Fifth Forbearance Agreement, Huntington Bank has agreed to continue
to forbear from exercising its rights and remedies under the Agreement and from terminating the Company’s related swap agreement
with respect to the Company’s non-compliance with applicable financial covenants under the Agreement and any further non-compliance
with such covenants during a forbearance period ending July 31, 2017 and to continue to make advances under the Agreement.
In exchange for Huntington
Bank’s agreement to continue to forbear from exercising its rights and remedies under the Agreement, the Company has agreed
to, among other things: (i) amend the maturity dates for the term and revolving loans under the Agreement to July 31, 2017, (ii)
take commercially reasonable efforts to obtain funds sufficient to repay the indebtedness in full upon the expiration of the forbearance
period, (iii) provide to Huntington Bank certain cash flow forecasts and other financial information, (iv) comply with a minimum
cash flow covenant, (v) continue to engage the services of the Company’s financial consultant and cause the financial consultant
to provide Huntington Bank such information regarding its efforts as Huntington Bank reasonably requests, and (vi) pay to Huntington
Bank a forbearance fee in the amount of $227, $27 of which was paid at the execution of the Fifth Forbearance Agreement, with the
remainder payable upon the first to occur of payment in full of the indebtedness under the Credit Agreement or July 14, 2017. Should
the Company repay the indebtedness to Huntington Bank in full on or before July 14, 2017, the forbearance fee would be reduced
by $100. Because we believe that more likely than not that we will have to pay the full fee of $200, we have accrued for the fees
from the Fifth Forbearance net of accumulated amortization in Term loan, net of debt issuance costs on the condensed consolidated
balance sheets. We amortize the fees on a straight line basis to interest expense over the contractual term of the Fifth Forbearance.
We incurred $67 in interest expense in our second fiscal quarter of 2017 from the amortization of the fees.
The Fifth Forbearance
Agreement provides for immediate termination of the forbearance period upon the occurrence of, among other events, the failure
of the Company to perform, observe or comply with the terms of the Fifth Forbearance Agreement. The available remedies in the event
of a default by the Company include among others, the ability to accelerate and immediately demand payment of the outstanding debt
under our term loan and revolving loan, to exercise on the security interest, to take possession of or sell the underlying collateral,
to refrain from making additional advances under the revolving loan, to increase interest accruing on the debt by five percent
(5%) per annum over the otherwise applicable rate effective after receipt of written notice from Huntington Bank, and to terminate
our interest rate swap.
The term loan bears
interest at LIBOR plus 325 basis points with monthly principal payments of approximately $65 plus interest. We have made all required
principal payments on the term loan. The balance on the term loan at March 31, 2017 and September 30, 2016 was $3,339 and $3,666,
respectively. The revolving loan for $2,000 bears interest at LIBOR plus 300 basis points with interest paid monthly. The revolving
loan also carries a facility fee of .25%, paid quarterly, for the unused portion of the revolving loan. The revolving loan includes
an annual clean-up provision that requires the Company to maintain a balance of not more than 20% of the maximum loan of $2,000
for a period of 30 days in any 12 month period while the revolving loan is outstanding. We were not in compliance with this requirement
as of March 31, 2017. On February 13, 2017, Huntington Bank waived our noncompliance with the clean-up provision, together with
all other defaults or events of default directly resulting solely on account of the non-compliance with the clean-up provision,
the Company’s failure to timely report the non-compliance and the Company’s representation of compliance with the Agreement
notwithstanding the non-compliance. Huntington Bank also waived the Company’s further compliance with the clean-up provision
through the period ending July 31, 2017. The revolving loan balance was $1,419 and $1,358 at March 31, 2017 and September 30, 2016,
respectively.
Were Huntington Bank
to demand payment of the outstanding debt (whether at or, in the case of a default of the Fifth Forbearance Agreement, prior to
the scheduled maturity of the loans on July 31, 2017), we would currently have insufficient funds to satisfy that obligation, and
the bank’s exercise of alternative remedies could also have a material adverse effect on our operations and financial condition.
As an example, in recent periods we have drawn on our revolving facility to supplement cash from operations. Should cash from operating
activities remain insufficient to cover expenses and if Huntington Bank determines to refrain from making additional advances under
the revolving facility, we may not have the requisite funds to continue operations.
We
incurred $10 of costs on September 30, 2016 related to the Third Forbearance Agreement that was amortized in the first quarter
of fiscal 2017.
We incurred $17 of costs on November 1, 2016 related to the Fourth Forbearance
Agreement that was amortized in the first and second quarters of fiscal 2017. We incurred $29 of costs February 2017 related to
the Fifth Forbearance Agreement that was partially amortized in the second fiscal quarter of 2017 with the remainder to be amortized
on a straight-line basis through July 31, 2017.
For the three months
ended March 31, 2017 and 2016, we amortized $82 and $7, respectively, into interest expense on the condensed consolidated statements
of operations and comprehensive income (loss). For the six months ended March 31, 2017 and 2016, we amortized $103 and $14, respectively,
into interest expense on the condensed consolidated statements of operations and comprehensive income (loss). These noncash charges
are included in depreciation and amortization on the consolidated statements of cash flows. As of March 31, 2017 and September
30, 2016, the unamortized portion of debt issuance costs related to the credit facility was $152 and $10, respectively, and was
included in Term loan, net of debt issuance costs on the condensed consolidated balance sheets.
Interest Rate Swap
We entered into an
interest rate swap agreement with respect to the above loans to fix the interest rate with respect to 60% of the value of the term
loan at approximately 5.0%. We entered into this interest rate swap agreement to hedge interest rate risk of the related debt obligation
and not to speculate on interest rates. The changes in the fair value of the interest rate swap are recorded in Accumulated Other
Comprehensive Income to the extent effective. We assess on an ongoing basis whether the derivative that is used in the hedging
transaction is highly effective in offsetting changes in cash flows of the hedged debt. The Fourth and Fifth Forbearance Agreements
amended the terms of the interest rate swap to match the terms of the underlying debt resulting in no ineffectiveness.
In March 2012, we announced
a plan to restructure our bioanalytical laboratory operations. The restructuring plan included the closure of our facility and
bioanalytical laboratory in Warwickshire, United Kingdom.
As part of the restructuring,
we accrued for lease payments at the cease use date for our United Kingdom facility and have considered free rent, sublease rentals
and the number of days it would take to restore the space to its original condition prior to our improvements. Based on these matters,
we have a $1,000 reserve for lease related costs. Additionally, we accrued $117
for
legal and professional fees and other costs to remove improvements previously made to the facility.
At March 31, 2017 and
September 30, 2016, respectively, we have $1,117 reserved for the restructuring liability. The full restructuring reserve is classified
as a current liability on the Consolidated Balance Sheets.
|
11.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The provisions of the Fair Value Measurements and Disclosure
Topic defines fair value, establishes a consistent framework for measuring fair value and provides the disclosure requirements
about fair value measurements. This Topic also establishes a hierarchy for inputs used in measuring fair value that maximizes the
use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on
market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s judgment
about the assumptions market participants would use in pricing the asset or liability based on the best information available in
the circumstances. The hierarchy is broken down into three levels based on the inputs as follows:
|
•
|
Level 1 – Valuations
based on quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
|
|
•
|
Level 2 – Valuations
based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
|
|
•
|
Level 3 – Valuations
based on inputs that are unobservable and significant to the overall fair value measurement.
|
In May 2011, we issued
Class A and B Warrants that were measured at fair value on a recurring basis. We recorded these warrants as a liability determining
the fair value at inception on May 11, 2011. Subsequent quarterly fair value measurements, using the Black Scholes model which
is considered a level 2 measurement, were calculated with fair value changes charged to the statement of operations and comprehensive
income (loss). The Class B Warrants expired in May 2012 and the liability was reduced to zero and the Class A Warrants expired
in May 2016 and the liability was reduced to zero. In the first three and six months of fiscal 2016, the fair value of the Warrant
liability decreased $79 and $168, respectively.
The carrying amounts
for cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other assets, accounts payable and other
accruals approximate their fair values because of their nature and respective duration. The carrying value of the note payable
approximates fair value due to the variable nature of the interest rates.
We use an interest
rate swap, designated as a hedge, to fix 60% of the term loan debt from our credit facility with Huntington Bank. We did not enter
into this derivative transaction to speculate on interest rates, but to hedge interest rate risk. The swap is recognized as a liability
on the balance sheet at its fair value. The fair value is determined utilizing a cash flow model that takes into consideration
interest rates and other inputs observable in the market from similar types of instruments, and is therefore considered a level
2 measurement.
The
following table summarizes fair value measurements by level as of March 31, 2017, for the Company’s financial liabilities
measured at fair value on a recurring basis:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreement
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
-
|
|
The
following table summarizes fair value measurements by level as of September 30, 2016, for the Company’s financial liabilities
measured at fair value on a recurring basis:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreement
|
|
$
|
-
|
|
|
$
|
35
|
|
|
$
|
-
|
|
|
12.
|
NEW ACCOUNTING PRONOUNCEMENTS
|
Effective October 1,
2018, the Company will be required to adopt the new guidance of ASC Topic 606,
Revenue from Contracts with Customers
(Topic
606), which will supersede the revenue recognition requirements in ASC Topic 605,
Revenue Recognition
. Topic 606 requires
the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires the
Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the
contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract;
and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company will be required to adopt Topic
606 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the
cumulative effect of initially applying the new guidance recognized at the date of initial application. If the Company elects the
modified retrospective approach, it will be required to provide additional disclosures of the amount by which each financial statement
line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and an
explanation of the reasons for significant changes. The Company is still assessing the impact of the new guidance on its consolidated
financial statements.
In
August 2014, the FASB issued new guidance in
Accounting Standards Update
(ASU) No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40).” The update provides
guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability
to continue as a going concern and to provide related footnote disclosures. The Company adopted the guidance in the first quarter
of fiscal 2017
and added the required disclosures to the footnotes.
In
November 2014, the FASB issued new guidance in ASU No. 2014-16, “Derivatives and Hedging (Topic 815) – Determining
whether the host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or to equity.”
The guidance clarifies how current GAAP should be interpreted in subjectively evaluating the economic characteristics and risks
of a host contract in a hybrid financial instrument that is issued in the form of a share. The Company adopted this guidance in
the first quarter of fiscal 2017 with no material impact
on our condensed consolidated financial statements.
In
February 2015, the FASB amended guidance in ASU No. 2015-02, “Consolidation Topic 810.” The guidance made certain targeted
revisions to various area of the consolidation guidance, including the determination of the primary beneficiary of an entity, among
others. The Company adopted the guidance in the first quarter of fiscal 2017 with no material
impact on our condensed consolidated
financial statements.
In April 2015, the
FASB amended the existing accounting standards for imputation of interest. The amendments require that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by these amendments.
The Company adopted the guidance in the first quarter of fiscal 2017, presenting the remaining debt issuance costs at March 31,
2017 and September 30, 2016 of $152 and $10, respectively, as a reduction in the carrying amount of the long-term debt.
In July 2015, the FASB
issued an amendment to the accounting guidance related to the measurement of inventory. The amendment revises inventory to be measured
at lower of cost and net realizable value from lower of cost or market. Subsequent measurement is unchanged for inventory measured
using last-in, first-out (LIFO) or the retail inventory method. This guidance will be effective prospectively for the first quarter
of fiscal 2018, with early application permitted. We are currently evaluating the impact that this guidance will have on our consolidated
financial statements.
In February 2016, the
FASB issued updated guidance on leases which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease
liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee
to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line
basis. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years, with earlier application permitted. We are currently evaluating the effects of the adoption and have not yet determined
the impact the revised guidance will have on our consolidated financial statements and related disclosures.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains
statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Those statements appear in a number of places in this Report and may include, but are not limited to, statements regarding our
intent, belief or current expectations with respect to (i) our strategic plans; (ii) trends in the demand for our products and
services; (iii) trends in the industries that consume our products and services; (iv) our ability to develop new products and services;
(v) our ability to make capital expenditures and finance operations; (vi) global economic conditions, especially as they impact
our markets; (vii) our cash position; (viii) our ability to integrate a new sales and marketing team; (ix) our ability to service
our outstanding indebtedness and (x) our expectations regarding the volume of new bookings, pricing, gross profit margins and liquidity.
Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties.
Actual results may differ materially from those in the forward looking statements as a result of various factors, many of which
are beyond our control.
In addition, we have based these forward-looking
statements on our current expectations and projections about future events. Although we believe that the assumptions on which the
forward-looking statements contained herein are based are reasonable, actual events may differ from those assumptions, and as a
result, the forward-looking statements based upon those assumptions may not accurately project future events. The following discussion
and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included
or incorporated by reference elsewhere in this Report. In addition to the historical information contained herein, the discussions
in this Report may contain forward-looking statements that may be affected by risks and uncertainties, including those discussed
in Item 1A, Risk Factors contained in our annual report on Form 10-K for the fiscal year ended September 30, 2016. Our actual results
could differ materially from those discussed in the forward-looking statements.
The following amounts are in thousands,
unless otherwise indicated.
Recent Events
Credit Facility
During fiscal 2016
and throughout the first six months of fiscal 2017 we have operated either in default of, or under forbearance arrangements with
respect to, our credit agreements with Huntington National Bank (“Huntington Bank”), as more fully described under
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources
– Credit Facility.” Effective January 31, 2017, we entered into a Fifth Forbearance Agreement and Sixth Amendment to
Credit Agreement (the “Fifth Forbearance Agreement”) with Huntington Bank. Pursuant to the Fifth Forbearance Agreement,
Huntington Bank agreed to forbear from exercising its rights and remedies under the Company’s credit facility and from terminating
the Company’s related swap agreement with respect to the Company’s non-compliance with applicable financial covenants
under the credit agreement and any further non-compliance with such covenants until July 31, 2017. If we are unable to refinance
our indebtedness before the end of the forbearance period, and were Huntington Bank to demand payment on the outstanding debt under
our credit arrangements, we would have insufficient funds to satisfy that obligation. In such case, in addition to the ability
to immediately demand payment of the outstanding debt under our term loan and revolving loan, Huntington Bank would have the right
to exercise its security interest, to take possession of or sell the underlying collateral, to increase interest accruing on the
debt, to refrain from making additional advances under the revolving loan, and to terminate our interest rate swap.
The Company’s
Board of Directors has directed management to seek alternatives that will enable the Company to repay its indebtedness to Huntington
Bank in full upon the expiration of the forbearance period. The following alternatives, among others, are being evaluated: replacement
financing, the potential disposition of certain of its assets and the possible sale of its West Lafayette building. Management
has been reviewing details of all current account management and marketing programs as well as all invoicing and top-line growth
initiatives. We cannot provide assurance that we will be able to resolve our liquidity issues on satisfactory terms, or at all.
Business Overview
We are a contract research
organization providing drug discovery and development services. Our clients and partners include pharmaceutical, biotechnology,
academic and governmental organizations. We apply innovative technologies and products and a commitment to quality to help clients
and partners accelerate the development of safe and effective therapeutics and maximize the returns on their research and development
investments. We offer an efficient, variable-cost alternative to our clients’ internal product development programs. Outsourcing
development work to reduce overhead and speed drug approvals through the Food and Drug Administration (“FDA”) is an established
alternative to in-house development among pharmaceutical companies. We derive our revenues from sales of our research services
and drug development tools, both of which are focused on determining drug safety and efficacy. The Company has been involved in
the research of drugs to treat numerous therapeutic areas for over 40 years.
We support the preclinical
and clinical development needs of researchers and clinicians for small molecule and large biomolecule drug candidates. We believe
our scientists have the skills in analytical instrumentation development, chemistry, computer software development, physiology,
medicine, analytical chemistry and toxicology to make the services and products we provide increasingly valuable to our current
and potential clients. Our principal clients are scientists engaged in analytical chemistry, drug safety evaluation, clinical trials,
drug metabolism studies, pharmacokinetics and basic research at many of the small start-up biotechnology companies and the largest
global pharmaceutical companies.
Our business is largely
dependent on the level of pharmaceutical and biotechnology companies’ efforts in new drug discovery and approval. Our services
segment is a direct beneficiary of these efforts, through outsourcing by these companies of research work. Our products segment
is an indirect beneficiary of these efforts, as increased drug development leads to capital expansion, providing opportunities
to sell the equipment we produce and the consumable supplies we provide that support our products.
Developments within
the industries we serve have a direct, and sometimes material, impact on our operations. Currently, many large pharmaceutical companies
have major “block-buster” drugs that are nearing the end of their patent protections. This puts significant pressure
on these companies both to develop new drugs with large market appeal, and to re-evaluate their cost structures and the time-to-market
of their products. Contract research organizations (“CRO’s”) have benefited from these developments, as the pharmaceutical
industry has turned to out-sourcing to both reduce fixed costs and to increase the speed of research and data development necessary
for new drug applications. The number of significant drugs that have reached or are nearing the end of their patent protection
has also benefited the generic drug industry. Generic drug companies provide a significant source of new business for CROs as they
develop, test and manufacture their generic compounds.
We also believe that
the development of innovative new drugs is going through an evolution, evidenced by the significant reduction of expenditures on
research and development at several major international pharmaceutical companies, accompanied by increases in outsourcing and investments
in smaller start-up companies that are performing the early development work on new compounds. Many of these smaller companies
are funded by either venture capital or pharmaceutical investment, or both, and generally do not build internal staffs that possess
the extensive scientific and regulatory capabilities to perform the various activities necessary to progress a drug candidate to
the filing of an Investigative New Drug application with the FDA.
A significant portion
of innovation in the pharmaceutical industry is now being driven by biotech and small, venture capital funded, drug development
companies. Many of these companies are “single-molecule” entities, whose success depends on one innovative compound.
While several of the biotech companies have reached the status of major pharmaceuticals, the industry is still characterized by
smaller entities. These developmental companies generally do not have the resources to perform much of the research within their
organizations, and are therefore dependent on the CRO industry for both their research and for guidance in preparing their FDA
submissions. These companies have provided significant new opportunities for the CRO industry, including us. They do, however,
provide challenges in selling, as they frequently have only one product in development, which causes CROs to be unable to develop
a flow of projects from a single company. These companies may expend all their available funds and cease operations prior to fully
developing a product. Additionally, the funding of these companies is subject to investment market fluctuations, which changes
as the risk profiles and appetite of investors change.
While continuing to
maintain and develop our relationships with large pharmaceutical companies, we intend to aggressively promote our services to developing
businesses, which will require us to expand our existing capabilities to provide services early in the drug development process,
and to consult with customers on regulatory strategy and compliance leading to their FDA filings. Our Enhanced Drug Discovery services,
part of this strategy, utilizes our proprietary
Culex®
technology to provide early experiments in our laboratories that
previously would have been conducted in the sponsor’s facilities. As we move forward, we must balance the demands of the
large pharmaceutical companies with the personal touch needed by smaller biotechnology companies to develop a competitive advantage.
We intend to accomplish this through the use of and expanding upon our existing project management skills, strategic partnerships
and relationship management.
Research services are
capital intensive. The investment in equipment and facilities to serve our markets is substantial and continuing. While our physical
facilities are adequate to meet market needs for the near term, rapid changes in automation, precision, speed and technologies
necessitate a constant investment in equipment and software to meet market demands. We are also impacted by the heightened regulatory
environment and the need to improve our business infrastructure to support our increasingly diverse operations, which will necessitate
additional capital investment. Our ability to generate capital to reinvest in our capabilities, both through operations and financial
transactions, is critical to our success. While we are currently committed to fully utilizing our existing capacity, sustained
growth will require additional investment in future periods. Our financial position could limit our ability to make such investments.
Executive Summary
As noted above, during fiscal 2016 and
the first six months of fiscal 2017, we have operated either in default of, or under forbearance arrangements with respect to our
credit arrangements with Huntington Bank. Please see “Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Liquidity and Capital Resources – Credit Facility.”
Our revenues are dependent
on a relatively small number of industries and customers. As a result, we closely monitor the market for our services and products.
In the first six months of fiscal 2017, we experienced a 26.1% increase in revenues in our Services segment and an 8.5% increase
in revenues for our Products segment as compared to the first six months of fiscal 2016. Our Services revenue was positively impacted
by increased preclinical services studies in the first six months of fiscal 2017 versus the comparable period of fiscal 2016. The
higher revenue in our Products segment was mainly due to increased sales of instruments and related consumables in our
Culex
®
,
in vivo
sampling product line as compared to the prior year period.
We review various metrics
to evaluate our financial performance, including revenue, margins and earnings. Revenues increased approximately 22.5% and gross
margin increased 69.7% in the first six months of fiscal 2017 from the prior year period. Operating expenses increased 5.2% in
the first six months of fiscal 2017 from the first six months of fiscal 2016 due in large part to expenses associated with the
severance agreement with our former Chief Executive Officer as well as higher consulting costs. The increased revenues and margins
contributed to the reported operating income of $649 for the first six months of fiscal 2017 compared to an operating loss of $791
for the prior year period. For a detailed discussion of our revenue, margins, earnings and other financial results for the three
and six months ended March 31, 2017, see “Results of Operations” below.
As of March 31, 2017,
we had $419 of cash and cash equivalents as compared to $386 of cash and cash equivalents at the end of fiscal 2016. In the first
six months of fiscal 2017, we generated $561 in cash from operations as compared to cash generated of $126 in the first six months
of fiscal 2016. Total capital expenditures decreased from $632 in the first six months of fiscal 2016 to $158 in the first six
months of fiscal 2017. We had $60 of net borrowings on our line of credit in the first six months of fiscal 2017, as compared to
$1,042 of net borrowings on our line of credit in the same period of the prior year.
Although the
Company continues to face the near term challenge of replacing its Huntington Bank debt, the operating performance for the
three and six months ended March 31, 2017 is encouraging. The quarterly and year to date 2017 financial results reflect
Management’s initiatives aimed at growing revenue, reducing costs and generating more cash flow. For the remainder of fiscal
2017, the entire BASi team remains committed to the Company’s core priorities and is focused on seeking additional
opportunities to increase revenue and profits. For example, we are exploring the use of distributor and reseller arrangements
to boost sales in our products business. Additionally, we intend to increase our investment in product research and
development. We anticipate making investments to increase our discovery and preclinical services revenues. We have recently
welcomed the Company’s founder as a scientific advisor to the team; and we are also looking to selectively add to our
scientific and business development staff. Lastly, the Board of Directors continues to weigh options and timing for hiring a
new Chief Executive Officer, to fill the position vacated in November of 2016.
Our long-term strategic
objective is to maximize the Company’s intrinsic value per share. While we remain focused on productivity and
better processes and a continued emphasis on generating free cash flow, we are also dedicated to the strategies that drive our
top-line growth. We are intensifying our efforts to improve our processes, embrace change and solidify our liquidity position.
Refer to Note 2, Management’s Plan, for further information regarding the Company’s plan to address current operations.
Results of Operations
The following table
summarizes the condensed consolidated statement of operations as a percentage of total revenues:
|
|
Three Months Ended
March 31,
|
|
|
Six Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
|
78.0
|
%
|
|
|
75.9
|
%
|
|
|
81.6
|
%
|
|
|
79.2
|
%
|
Product revenue
|
|
|
22.0
|
|
|
|
24.1
|
|
|
|
18.4
|
|
|
|
20.8
|
|
Total revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Service revenue
(a)
|
|
|
71.5
|
%
|
|
|
81.8
|
|
|
|
71.3
|
|
|
|
82.1
|
|
Cost of Product revenue
(a)
|
|
|
55.1
|
%
|
|
|
54.9
|
|
|
|
57.9
|
|
|
|
60.2
|
|
Total cost of revenue
|
|
|
67.9
|
%
|
|
|
75.4
|
|
|
|
68.9
|
|
|
|
77.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
32.1
|
|
|
|
24.6
|
|
|
|
31.1
|
|
|
|
22.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
23.4
|
|
|
|
29.6
|
|
|
|
26.0
|
|
|
|
30.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
8.7
|
|
|
|
(5.0
|
)
|
|
|
5.1
|
|
|
|
(7.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(2.1
|
)
|
|
|
0.2
|
|
|
|
(1.7
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
6.6
|
|
|
|
(4.8
|
)
|
|
|
3.4
|
|
|
|
(7.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
6.5
|
%
|
|
|
(4.8
|
)%
|
|
|
3.3
|
%
|
|
|
(7.4
|
)%
|
|
(a)
|
Percentage of service and product revenues, respectively
|
Three Months Ended March 31, 2017
Compared to Three Months Ended March 31, 2016
Service and Product Revenues
Revenues for the fiscal quarter ended March
31, 2017 increased 19.1% to $6,359 compared to $5,339 for the same period last year.
Our Service revenue
increased 22.4% to $4,962 in the second quarter of fiscal 2017 compared to $4,053 for the prior year period. Preclinical services
revenues increased due to an overall increase in the number of studies from the prior year period. Other laboratory services revenues
were positively impacted by higher discovery and pharmaceutical analysis revenues in the second quarter of fiscal 2017 versus the
comparable period in fiscal 2016. Also, archive revenue added $229 to Other laboratory services revenue in the second fiscal quarter
of 2017. Bioanalytical analysis revenues declined due to fewer samples received and analyzed in the second quarter of fiscal 2017
and a mix favoring method development and validation projects during that time period, which generate lower revenue but involve
more dedicated resources.
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
Bioanalytical analysis
|
|
$
|
1,245
|
|
|
$
|
1,591
|
|
|
$
|
(346
|
)
|
|
|
(21.7
|
)%
|
Preclinical services
|
|
|
3,094
|
|
|
|
2,262
|
|
|
|
832
|
|
|
|
36.8
|
%
|
Other laboratory services
|
|
|
623
|
|
|
|
200
|
|
|
|
423
|
|
|
|
211.5
|
%
|
|
|
$
|
4,962
|
|
|
$
|
4,053
|
|
|
$
|
909
|
|
|
|
|
|
Sales in our Products segment increased
8.6% in the second quarter of fiscal 2017 from $1,286 to $1,397 when compared to the same period in the prior fiscal year. The
majority of the increase stems from higher sales of our Culex automated
in vivo
sampling systems and related consumables
over the same period in the prior fiscal year.
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
Culex, in-vivo sampling systems
|
|
$
|
883
|
|
|
$
|
630
|
|
|
$
|
253
|
|
|
|
40.2
|
%
|
Analytical instruments
|
|
|
323
|
|
|
|
407
|
|
|
|
(84
|
)
|
|
|
(20.6
|
)%
|
Other instruments
|
|
|
191
|
|
|
|
249
|
|
|
|
(58
|
)
|
|
|
(23.3
|
)%
|
|
|
$
|
1,397
|
|
|
$
|
1,286
|
|
|
$
|
111
|
|
|
|
|
|
Cost of Revenues
Cost of revenues for
the second quarter of fiscal 2017 was $4,316 or 67.9% of revenue, compared to $4,023, or 79.5% of revenue for the prior year period.
Cost of Service revenue
as a percentage of Service revenue decreased to 71.5% during the second quarter of fiscal 2017 from 81.8% in the comparable period
last year. The principal cause of this decrease was the increase in revenues, which led to higher absorption of the fixed costs
in our Service segment. A significant portion of our costs of productive capacity in the Service segment are fixed. Thus, increases
in revenues led to decreases in costs as a percentage of revenue.
Costs of Products revenue
as a percentage of Products revenue in the second quarter of fiscal 2017 increased slightly to 55.1% from 54.9% in the comparable
prior year period. This increase is mainly due to slightly higher material costs and efforts to reduce inventory in the current
quarter.
Operating Expenses
Selling expenses for
the three months ended March 31, 2017 decreased 32.8% to $242 from $360 for the comparable period last year. This decrease is mainly
due to lower salaries and benefits from the loss of sales employees plus lower consulting costs in the second fiscal quarter of
2017 compared to the same period in fiscal 2016, partially offset by higher commissions.
Research and development
expenses for the second quarter of fiscal 2017 decreased 16.7% over the comparable period last year to $110 from $132. The decrease
was primarily due to lower salaries and benefits from the loss of an employee in fiscal 2016 who was not immediately replaced.
General and administrative
expenses for the second quarter of fiscal 2017 increased 4.6% to $1,136 from $1,086 for the comparable prior year period. The principal
reasons for the increase were higher consulting services. These items were offset slightly by decreased spending for outside services
and employee search costs.
Other Income (Expense)
Other
income (expense), net, was expense of $133 for the second quarter of fiscal 2017 as compared to income of $9 for the same quarter
of the prior fiscal year.
The primary reason for the change in income (expense) was due to
the decrease in the fair value of the warrant liability in the second fiscal quarter of 2016. The Class A warrants expired in May
2016. Thus, no fair value changes were recorded in the second quarter of fiscal 2017. Also, interest expense increased $64 or in
the second fiscal quarter of 2017 compared to the same period of fiscal 2016 due to the amortization of fees associated with our
Fifth Forbearance arrangement.
Income Taxes
Our effective tax rate
for the quarters ended March 31, 2017 and 2016 was 1.2% and (0.4)%, respectively. The current year expense primarily relates to
alternative minimum taxes and state income taxes.
Six Months Ended March 31, 2017 Compared
to Six Months Ended March 31, 2016
Service and Product Revenues
Revenues for the six months ended March
31, 2017 increased 22.5% to $12,533 as compared to $10,234 for the same period last fiscal year.
Our Service revenue
increased 26.1% to $10,226 in the first six months of fiscal 2017 compared to $8,108 for the prior fiscal year period. Preclinical
services revenues increased due to an overall increase in the number of studies from the prior year period. Other laboratory services
revenues were positively impacted by higher discovery and pharmaceutical analysis revenues in fiscal 2017 versus the comparable
period in fiscal 2016. Also, archive revenue added $237 to Other laboratory services revenue in fiscal 2017. Bioanalytical analysis
revenues decreased due to fewer samples received and analyzed in fiscal 2017 in addition to a mix favoring method development and
validation projects during this time period, which generate lower revenue but involve more dedicated resources.
|
|
Six Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
Bioanalytical analysis
|
|
$
|
2,560
|
|
|
$
|
3,029
|
|
|
$
|
(469
|
)
|
|
|
(15.5
|
)%
|
Preclinical services
|
|
|
6,646
|
|
|
|
4,762
|
|
|
|
1,884
|
|
|
|
39.6
|
%
|
Other laboratory services
|
|
|
1,020
|
|
|
|
317
|
|
|
|
703
|
|
|
|
221.8
|
%
|
|
|
$
|
10,226
|
|
|
$
|
8,108
|
|
|
$
|
2,118
|
|
|
|
|
|
Sales in our Product
segment increased 8.5% in the first six months of fiscal 2017 from $2,126 to $2,307 when compared to the same period in the prior
fiscal year. The majority of the increase is derived from improvement in instrument sales from our Culex automated
in vivo
sampling line and related consumables in the first six months of fiscal 2017.
|
|
Six Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
Culex, in-vivo sampling systems
|
|
$
|
1,271
|
|
|
$
|
932
|
|
|
$
|
339
|
|
|
|
36.4
|
%
|
Analytical instruments
|
|
|
621
|
|
|
|
753
|
|
|
|
(132
|
)
|
|
|
(17.5
|
)%
|
Other instruments
|
|
|
415
|
|
|
|
441
|
|
|
|
(26
|
)
|
|
|
(5.9
|
)%
|
|
|
$
|
2,307
|
|
|
$
|
2,126
|
|
|
$
|
181
|
|
|
|
|
|
Cost of Revenues
Cost of revenues for
the first six months of fiscal 2017 was $8,631 or 68.9% of revenue, compared to $7,934, or 77.5% of revenue for the prior year
period.
Cost of Service revenue
as a percentage of Service revenue decreased to 71.3% during the first six months of fiscal 2017 from 82.1% in the comparable period
last year. The principal cause of this decrease was the increase in revenues, which led to higher absorption of the fixed costs
in our Service segment. A significant portion of our costs of productive capacity in the Service segment are fixed. Thus, increases
in revenues led to decreases in costs as a percentage of revenue.
Cost of Product revenue
as a percentage of Product revenue in the first six months of fiscal 2017 decreased to 57.9% from 60.2% in the comparable prior
year period. This decrease is mainly due to a change in the mix of products sold in the first six months of fiscal 2017 as well
as slightly higher material costs.
Operating Expenses
Selling expenses for
the six months ended March 31, 2017 decreased 13.3% to $578 from $667 for the comparable fiscal 2016 period. This decrease is mainly
due to lower salaries and benefits from the loss of sales employees plus lower consulting costs in fiscal 2017 compared to the
same period in fiscal 2016, partially offset by higher commissions.
Research and development expenses for the
first six months of fiscal 2017 decreased 25.9% over the comparable fiscal 2016 period to $214 from $289. The decrease was primarily
due to lower utilization of outsourced professional engineering services plus lower salaries and benefits from the loss of an employee
in fiscal 2016 who was not immediately replaced.
General and administrative
expenses for the first six months of fiscal 2017 increased 15.3% to $2,461 from $2,135 for the comparable fiscal 2016 period. The
principal reasons for the increase were the accrual for the severance for our former Chief Executive Officer in the first fiscal
quarter as well as higher consulting services. These items were offset slightly by decreased spending for outside services and
employee search costs.
Other Income (Expense)
Other expense for the
first six months of fiscal 2017 increased to $208 from other income of $33 for the same period of fiscal 2016. The primary reason
for the increase in expense is the change in the fair value of the warrant liability which expired in May 2016. Thus, no fair value
changes were recorded in fiscal 2017. Also, interest expense increased $74 in the first six months of fiscal 2017 compared to the
same period of fiscal 2016 due to the amortization of fees associated with our Fifth Forbearance arrangement.
Income Taxes
Our effective tax rate
for the six months ended March 31, 2017 and 2016 was 1.5% and (0.2)%, respectively. The current year expense primarily relates
to alternative minimum taxes and state taxes.
Restructuring Activities
In March 2012, we announced a
plan to restructure our bioanalytical laboratory operations. The restructuring plan included the closure of our facility and bioanalytical
laboratory in Warwickshire, United Kingdom.
As part of the restructuring,
we accrued for lease payments at the cease use date for our United Kingdom facility and have considered free rent, sublease rentals
and the number of days it would take to restore the space to its original condition prior to our improvements. Based on these matters,
we have a $1,000 reserve for lease related costs. Additionally, we accrued $117
for
legal and professional fees and other costs to remove improvements previously made to the facility.
At March 31, 2017 and
September 30, 2016, respectively, we have $1,117 reserved for the restructuring liability. The full restructuring reserve is classified
as a current liability on the Consolidated Balance Sheets.
Liquidity and Capital Resources
Recent Events
Please refer to the
discussion above under “Recent Events” – “Credit Facility” regarding non-compliance with certain
financial covenants of our credit facility. Please also refer to the disclosure under “ITEM 1A - RISK FACTORS” herein.
Comparative Cash Flow Analysis
At March 31, 2017,
we had cash and cash equivalents of $419, compared to $386 at September 30, 2016.
Net cash provided by
operating activities was $561 for the six months ended March 31, 2017 compared to cash used in operating activities of $126 for
the six months ended March 31, 2016. The increase in cash provided by operating activities in the first six months of fiscal 2017
partially resulted from operating income versus an operating loss in the prior year period. Other contributing factors to our cash
provided by operations in the first half of fiscal 2017 were noncash charges of $860 for depreciation and amortization, a net increase
in customer advances of $649 and in accrued expenses of $198 as well as a net decrease in inventory of $334. These were partially
offset by a net increase in accounts receivable of $997 and a net decrease in accounts payable of $962.
Days’ sales in
accounts receivable increased to 46 days at March 31, 2017 from 40 days at September 30, 2016 due to increased invoicing, few extended
collections from certain customers and a decrease in unbilled revenues
.
It is not unusual to see a fluctuation in the Company’s
pattern of days’ sales in accounts receivable. Customers may expedite or delay payments from period-to-period for a variety
of reasons including, but not limited to, the timing of capital raised to fund on-going research and development projects.
Included in operating
activities for the first six months of 2016 are non-cash charges of $688 for depreciation and a net decrease in accounts receivable
of $306 and in prepaid expenses of $388 as well as a net increase in accounts payable of $341. These items were partially offset
by a decrease in accrued expenses of $406 and a decrease in customer advances of $334.
Investing activities
used $152 in the first half of fiscal 2017 due to capital expenditures as compared to $632 in the first half months of fiscal 2016.
The investing activity in the first quarter fiscal 2017 consisted of investments in building improvements as well as laboratory
and IT equipment.
Financing activities
used $376 in the first six months of fiscal 2017 as compared to $521 provided during the first six months of fiscal 2016. The main
use of cash in the first half of fiscal 2017 was long-term debt and capital lease payments of $391 slightly offset by net borrowings
on our line of credit of $60. In the first half of fiscal 2016, we had long-term debt and capital lease payments of $524, as well
as net borrowings on our line of credit of $1,042.
Capital Resources
Credit Facility
On May 14, 2014, we
entered into a Credit Agreement with Huntington Bank, which was subsequently amended on May 14, 2015 (“Agreement”).
The Agreement includes both a term loan and a revolving loan and is secured by mortgages on our facilities in West Lafayette and
Evansville, Indiana and liens on our personal property. As of December 31, 2015, we were not in compliance with certain financial
covenants of the Agreement, and during fiscal 2016 and the first quarter of fiscal 2017 we operated either in default of, or under
forbearance arrangements with respect to, the Agreement.
On April 27, 2016,
the Company entered into a Forbearance Agreement and Second Amendment to Credit Agreement with Huntington Bank and on July 1, 2016,
the Company entered into a Second Forbearance Agreement and Third Amendment to Credit Agreement with Huntington Bank. As of June
30, 2016, the Company was not in compliance with an additional financial covenant under the Second Forbearance Agreement, resulting
in termination of the forbearance period thereunder. On September 30, 2016, the Company entered into a Third Forbearance Agreement
and Fourth Amendment to Credit Agreement with Huntington Bank, on October 31, 2016, the Company entered into a Fourth Forbearance
Agreement and Fifth Amendment to Credit Agreement and on January 31, 2017 the Company entered into a Fifth Forbearance Agreement
and Sixth Amendment to Credit Agreement (“Fifth Forbearance Agreement”) with Huntington Bank. Subject to the conditions
set forth in the Fifth Forbearance Agreement, Huntington Bank has agreed to continue to forbear from exercising its rights and
remedies under the Agreement and from terminating the Company’s related swap agreement with respect to the Company’s
non-compliance with applicable financial covenants under the Agreement and any further non-compliance with such covenants during
a forbearance period ending July 31, 2017 and to continue to make advances under the Agreement.
In exchange for Huntington
Bank’s agreement to continue to forbear from exercising its rights and remedies under the Agreement, the Company has agreed
to, among other things: (i) amend the maturity dates for the term and revolving loans under the Agreement to July 31, 2017, (ii)
take commercially reasonable efforts to obtain funds sufficient to repay the indebtedness in full upon the expiration of the forbearance
period, (iii) provide to Huntington Bank certain cash flow forecasts and other financial information, (iv) comply with a minimum
cash flow covenant, (v) continue to engage the services of the Company’s financial consultant and cause the financial consultant
to provide Huntington Bank such information regarding its efforts as Huntington Bank reasonably requests, and (vi) pay to Huntington
Bank a forbearance fee in the amount of $227,000, $27,000 of which was paid at the execution of the Fifth Forbearance Agreement,
with the remainder payable upon the first to occur of payment in full of the indebtedness under the Credit Agreement or July 14,
2017. Should the Company repay the indebtedness to Huntington Bank in full on or before July 14, 2017, the forbearance fee would
be reduced by $100,000.
The Fifth Forbearance
Agreement provides for immediate termination of the forbearance period upon the occurrence of, among other events, the failure
of the Company to perform, observe or comply with the terms of the Fifth Forbearance Agreement. The available remedies in the event
of a default by the Company include among others, the ability to accelerate and immediately demand payment of the outstanding debt
under our term loan and revolving loan, to exercise on the security interest, to take possession of or sell the underlying collateral,
to refrain from making additional advances under the revolving loan, to increase interest accruing on the debt by five percent
(5%) per annum over the otherwise applicable rate effective after receipt of written notice from Huntington Bank, and to terminate
our interest rate swap.
The term loan bears interest at LIBOR plus
325 basis points with monthly principal payments of approximately $65 plus interest. We have made all required principal payments
on the term loan. The balance on the term loan at March 31, 2017 and September 30, 2016 was $3,339 and $3,666, respectively. The
revolving loan for $2,000 bears interest at LIBOR plus 300 basis points with interest paid monthly. The revolving loan also carries
a facility fee of .25%, paid quarterly, for the unused portion of the revolving loan. The revolving loan includes an annual clean-up
provision that requires the Company to maintain a balance of not more than 20% of the maximum loan of $2,000 for a period of 30
days in any 12 month period while the revolving loan is outstanding. We were not in compliance with this requirement as of December
31, 2016. On February 13, 2017, Huntington Bank waived our noncompliance with the clean-up provision, together with all other defaults
or events of default directly resulting solely on account of the non-compliance with the clean-up provision, the Company’s
failure to timely report the non-compliance and the Company’s representation of compliance with the Agreement notwithstanding
the non-compliance. Huntington Bank also waived the Company’s further compliance with the clean-up provision through the
period ending July 31, 2017. The revolving loan balance was $1,419 and $1,358 at March 31, 2017 and September 30, 2016, respectively.
Were Huntington Bank
to demand payment of the outstanding debt (whether at or, in the case of a default of the Fifth Forbearance Agreement, prior to
the scheduled maturity of the loans on July 31, 2017), we would currently have insufficient funds to satisfy that obligation, and
the bank’s exercise of alternative remedies could also have a material adverse effect on our operations and financial condition.
As an example, in recent periods we have drawn on our revolving facility to supplement cash from operations. Should cash from operating
activities remain insufficient to cover expenses and if Huntington Bank determines to refrain from making additional advances under
the revolving facility, we may not have the requisite funds to continue operations.
We entered into an
interest rate swap agreement with respect to the above loans to fix the interest rate with respect to 60% of the value of the term
loan at approximately 5.0%. We entered into this derivative transaction to hedge interest rate risk of the related debt obligation
and not to speculate on interest rates. The changes in the fair value of the interest rate swap are recorded in AOCI to the extent
effective. We assess on an ongoing basis whether the derivative that is used in the hedging transaction is highly effective in
offsetting changes in cash flows of the hedged debt. The terms of the interest rate swaps match the terms of the underlying debt
resulting in no ineffectiveness.
We cannot provide assurance
that we will be able to complete initiatives to refinance our indebtedness or otherwise resolve our liquidity issues. If we are
unable to execute on our initiatives, we may have insufficient funds to both satisfy our debt obligations and operate our business.
Critical Accounting Policies
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources”
discuss the unaudited condensed consolidated financial statements of the Company, which have been prepared in accordance with accounting
principles generally accepted in the United States. Preparation of these financial statements requires management to make judgments
and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent
assets and liabilities. Certain significant accounting policies applied in the preparation of the financial statements require
management to make difficult, subjective or complex judgments, and are considered critical accounting policies. We have identified
the following areas as critical accounting policies.
Revenue Recognition
The majority of our Bioanalytical and analytical
research service contracts involve the development of analytical methods and the processing of bioanalytical samples for pharmaceutical
companies and generally provide for a fixed fee for each sample processed. Revenue is recognized under the specific performance
method of accounting and the related direct costs are recognized when services are performed. Our preclinical research service
contracts generally consist of preclinical studies, and revenue is recognized under the proportional performance method of accounting.
Revisions in profit estimates, if any, are reflected on a cumulative basis in the period in which such revisions become known.
The establishment of contract prices and total contract costs involves estimates we make at the inception of the contract. These
estimates could change during the term of the contract and impact the revenue and costs reported in the consolidated financial
statements. Revisions to estimates have generally not been material. Research service contract fees received upon acceptance are
deferred until earned, and classified within customer advances. Unbilled revenues represent revenues earned under contracts in
advance of billings. Our bioanalytical and preclinical research services contracts also contain charges for data storage (archive)
services. Archive revenues include charges for related service activities, which include: (1) the handling of records, including
the addition of new records, retrieval and temporary removal of records from storage, refiling of removed records and the secure
destruction of records; (2) courier operations, consisting primarily of the pickup and delivery of records upon customer request;
(3) secure shredding of sensitive documents; (4) other services, including the scanning, imaging and document conversion services
of active and inactive records, which relate to physical and digital records; (5) customer termination and permanent removal fees;
and (6) the secure storage of records in a designated limited-access location that is environmentally monitired.
Beginning in calendar
year 2017, we began to recognize archive revenue when the following criteria are met: (1) persuasive evidence of an arrangement
exists; (2) services have been rendered; (3) the invoice price is fixed or determinable; and (4) collectability of the resulting
receivable is reasonably assured. Archiving revenues are recognized in the month the service is provided, and customers are generally
billed on a monthly basis on contractually agreed-upon terms. Amounts related to future archiving or prepaid archiving contracts
for customers where archiving fees are billed in advance are accounted for as deferred revenue and recognized ratably over the
period the applicable archive service is performed. For archiving revenues that were billed for services rendered prior to 2017,
the revenue is recognized when the invoice is paid by the customer.
Product revenue from
sales of equipment not requiring installation, testing or training is recognized upon shipment to customers. One product includes
internally developed software and requires installation, testing and training, which occur concurrently. Revenue from these sales
is recognized upon completion of the installation, testing and training when the services are bundled with the equipment sale.
Long-Lived Assets, Including Goodwill
Long-lived assets,
such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
We carry goodwill at
cost. Other intangible assets with definite lives are stated at cost and are amortized on a straight-line basis over their estimated
useful lives. All intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately
sold, transferred, licensed, rented, or exchanged, are recognized as an asset apart from goodwill. Goodwill is not amortized.
Goodwill is tested
annually for impairment and more frequently if events and circumstances indicate that the asset might be impaired. First, we can
assess qualitative factors in determining whether it is more likely than not that the fair value of a reporting unit is less
than its carrying amount. Then, we follow a two-step quantitative process. In the first step, we compare the fair value of
each reporting unit, as computed primarily by present value cash flow calculations, to its book carrying value, including goodwill.
We do not believe that market value is indicative of the true fair value of the Company mainly due to average daily trading volumes
of less than 1%. If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized.
If the carrying value exceeds the fair value, the goodwill of the reporting unit is potentially impaired and we would then complete
step 2 in order to measure the impairment loss. In step 2, the implied fair value is compared to the carrying amount of the goodwill.
If the implied fair value of goodwill is less than the carrying value of goodwill, we would recognize an impairment loss equal
to the difference. The implied fair value is calculated by allocating the fair value of the reporting unit (as determined in step
1) to all of its assets and liabilities (including unrecognized intangible assets) and any excess in fair value that is not assigned
to the assets and liabilities is the implied fair value of goodwill.
The discount rate,
gross margin and sales growth rates are the two material assumptions utilized in our calculations of the present value cash flows
used to estimate the fair value of the reporting units when performing the annual goodwill impairment test. Our reporting unit
with goodwill at March 31, 2017 is preclinical services which is included in our Services segment, based on the discrete financial
information available which is reviewed by management. We utilize a cash flow approach in estimating the fair value of the reporting
units, where the discount rate reflects a weighted average cost of capital rate. The cash flow model used to derive fair value
is sensitive to the discount rate and sales growth assumptions used.
Considerable management
judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows. Assumptions
used in our impairment evaluations, such as forecasted sales growth rates and our cost of capital or discount rate, are based on
the best available market information. Changes in these estimates or a continued decline in general economic conditions could change
our conclusion regarding an impairment of goodwill and potentially result in a non-cash impairment loss in a future period. The
assumptions used in our impairment testing could be adversely affected by certain of the risks discussed in “Risk Factors”
in Item 1A contained herein and in our 10-K for the fiscal year ended September 30, 2016. There have been no significant events
since the timing of our impairment tests that have triggered additional impairment testing. At March 31, 2017, remaining recorded
goodwill was $38.
Stock-Based Compensation
We
recognize the cost resulting from all share-based payment transactions in our financial statements using a fair-value-based method.
We measure compensation cost for all share-based awards based on estimated fair values and recognize compensation over the vesting
period for awards. We recognized stock-based compensation related to stock options of $(3) and $14 during the three months ended
March 31, 2017 and 2016, respectively. Similarly, we recognized stock-based compensation expense related to stock options of $7
and $29 during the six months ended March 31, 2017 and 2016, respectively.
We use the binomial option valuation model
to determine the grant date fair value. The determination of fair value is affected by our stock price as well as assumptions regarding
subjective and complex variables such as expected employee exercise behavior and our expected stock price volatility over the term
of the award. Generally, our assumptions are based on historical information and judgment is required to determine if historical
trends may be indicators of future outcomes. We estimated the following key assumptions for the binomial valuation calculation:
|
•
|
Risk-free interest rate.
The risk-free interest
rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option.
|
|
•
|
Expected volatility.
We use our historical
stock price volatility on our common stock for our expected volatility assumption.
|
|
•
|
Expected term.
The expected term represents
the weighted-average period the stock options are expected to remain outstanding. The expected term is determined based on historical
exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.
|
|
•
|
Expected dividends.
We assumed that we will
pay no dividends.
|
Employee stock-based compensation expense
recognized in the first three and six months of fiscal 2017 and 2016 was calculated based on awards ultimately expected to vest
and has been reduced for estimated forfeitures. Forfeitures are revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates and an adjustment will be recognized at that time.
Income Taxes
As described in Note
8 to the condensed consolidated financial statements, we use the asset and liability method of accounting for income taxes.
We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. We measure deferred tax assets and liabilities 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. We recognize the effect on deferred tax assets
and liabilities of a change in tax rates in income in the period that includes the enactment date. We record valuation allowances
based on a determination of the expected realization of tax assets.
We recognize the tax
benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical
merits of the position. We measure the amount of the accrual for which an exposure exists as the largest amount of benefit determined
on a cumulative probability basis that we believe is more likely than not to be realized upon ultimate settlement of the position.
We
record interest and penalties accrued in relation to uncertain income tax positions as a component of income tax expense.
Any changes in the accrued liability for uncertain tax positions would impact our effective tax rate.
Over the next twelve months we do not anticipate changes to the carrying value of our reserve. Interest and penalties are
included in the reserve.
As of March 31, 2017
and September 30, 2016, we had a $16 liability for uncertain income tax positions.
We file income tax
returns in the U.S. and several U.S. states. We remain subject to examination by taxing authorities in the jurisdictions in which
we have filed returns for years after 2011.
We have an accumulated
net deficit in our UK subsidiary. With the closure of the UK facility, we no longer have any filing obligations in the UK. Consequently,
the related deferred tax asset on such losses and related valuation allowance on the UK subsidiary have been removed.
Inventories
Inventories are stated
at the lower of cost or market using the first-in, first-out (FIFO) cost method of accounting. We evaluate inventories on a regular
basis to identify inventory on hand that may be obsolete or in excess of current and future projected market demand. For inventory
deemed to be obsolete, we provide a reserve for this inventory. Inventory that is in excess of current and projected use is reduced
by an allowance to a level that approximates the estimate of future demand.
Fair Value of Warrant Liability
In May 2011, we issued
Class A and B Warrants that are measured at fair value on a recurring basis. We recorded these warrants as a liability determining
the fair value at inception on May 11, 2011. Subsequent quarterly fair value measurements, using the Black Scholes model which
is considered a level 2 fair value measurement, were calculated with fair value changes charged to the statement of operations
and comprehensive income (loss). Class B Warrants expired in May 2012 and the liability was reduced to zero. Class A Warrants expired
in May 2016 and the liability was reduced to zero.
The fair value of the warrants exercised was
$854. The following table sets forth the changes in the fair value of the warrant liability for the fiscal year ended September
30, 2016:
|
|
|
|
|
|
|
|
Change in
|
|
|
|
Fair Value per Share
|
|
|
Fair Value in $$
|
|
|
Fair Value
|
|
Evaluation Date
|
|
Warrant A
|
|
|
Warrant B
|
|
|
Warrant A
|
|
|
Warrant B
|
|
|
Total
|
|
|
(Income) Expense
|
|
9/30/2015
|
|
|
0.236
|
|
|
|
-
|
|
|
|
189
|
|
|
|
-
|
|
|
|
189
|
|
|
|
(134
|
)
|
12/31/2015
|
|
|
0.124
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
100
|
|
|
|
(89
|
)
|
03/31/2016
|
|
|
0.025
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
21
|
|
|
|
(79
|
)
|
06/30/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(21
|
)
|
Interest Rate Swap
The Company uses an
interest rate swap designated as a cash flow hedge to fix the interest rate on 60% of the Huntington debt due to changes in interest
rates. The changes in the fair value of the interest rate swap are recorded in Accumulated Other Comprehensive Income (“AOCI”)
to the extent effective. We assess on an ongoing basis whether the derivative that is used in the hedging transaction is highly
effective in offsetting changes in cash flows of the hedged debt. The terms of the interest rate swaps match the terms of the underlying
debt resulting in no ineffectiveness. When we determine that a derivative is not highly effective as a hedge, hedge accounting
is discontinued and we reclassify gains or losses that were accumulated in AOCI to other income (expense), net on the Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss).
Building Lease
The Lease Agreement
with Cook Biotech, Inc. for a portion of the Company’s headquarters facility is recorded as an operating lease with the escalating
rents being recognized on a straight-line basis once the Tenant took full possession of the space on May 1, 2015 through the end
of the lease on December 31, 2024. The straight line rents of $53 per month are recorded as a reduction to general and administrative
expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss) and other accounts receivable on the Consolidated
Balance Sheets. The cash rent received is recorded in other accounts receivable on the Consolidated Balance Sheets. The variance
between the straight line rents recognized and the actual cash rents received will net to zero by the end of the agreement on December
31, 2024.