ITEM 7–MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion
and analysis should be read in conjunction with the 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. Our actual results could differ materially from those discussed in the forward-looking statements. Please refer to page
1 of this Report for a cautionary statement regarding forward-looking information.
References to years
or portions of years in this Item refer to our fiscal year ended September 30, unless otherwise indicated. The following amounts
are in thousands unless otherwise indicated.
Recent Events
New Credit Facility
On June 23, 2017, we
entered into a new Credit Agreement (the “Credit Agreement”) with First Internet Bank of Indiana (“FIB”).
The Credit Agreement includes both a term loan and a revolving line of credit and is secured by mortgages on our facilities and
personal property in West Lafayette and Evansville, Indiana. We used the proceeds from the term loan to satisfy our indebtedness
with Huntington Bank and terminated the related interest rate swap. We had a zero balance on our new line of credit as of September
30, 2017. During fiscal 2016 and through the first nine months of fiscal 2017, we had operated either in default of, or under forbearance
arrangements with respect to, our credit agreements with Huntington Bank.
Business Overview
We are a contract research
organization providing drug discovery and development services. Our customers and partners include pharmaceutical, biotechnology,
academic and governmental organizations. We apply innovative technologies and products and a commitment to quality to help customers
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 customers’ 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. 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 customers.
Our principal customers 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 contract
research 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 (“CROs”) 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 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. Rapid changes
in automation, precision, speed and technologies necessitate a constant investment in equipment and software to meet market demands.
Market opportunities may also prompt investment in upkeep or expansion of our facilities. We are also impacted by the heightened
regulatory environment and the need to improve our business infrastructure to support our 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. Sustained growth will require additional investment in future periods. Continued positive cash flow
and access to capital will be important to our ability to make such investments.
Executive Summary
Our revenues are
dependent on a relatively small number of industries and customers. As a result, we closely monitor the market for our services.
For a discussion of the trends affecting the market for our services, see “Item 1. Business – Trends Affecting the
Drug Discovery and Development Industry.” In fiscal 2017, we experienced a 26.7% increase in revenues in our Services segment
and an 10.1% decrease in revenues for our Products segment as compared to fiscal 2016. Our Services revenue was positively impacted
by increased preclinical services and pharmaceutical analysis studies as well as our efforts to initiate archive revenues in fiscal
2017. The revenue decline in our Product segment was mainly due to lower sales of our analytical instruments as compared to the
prior fiscal year.
We review various metrics
to evaluate our financial performance, including revenue, margins and earnings. In fiscal 2017, total revenues increased 18.6%,
gross profit increased 73.9% and operating expenses were lower by 14.0% as compared to fiscal 2016
.
The
increased revenues and margins contributed to the reported operating income of $1,278 for fiscal 2017 compared to an operating
loss of $3,040 for the prior year period. For a detailed discussion of our revenue, margins, earnings and other financial results
for the fiscal year ended September 30, 2017, see “Results of Operations – 2017 Compared to 2016 below.
As of September 30,
2017, we had $434 of cash and cash equivalents as compared to $386 of cash and cash equivalents at the end of fiscal 2016. In fiscal
2017, we generated $1,236 in cash from operations as compared to $1,060 in fiscal 2016. Total capital expenditures decreased in
fiscal 2017 to $347, down from $1,256 in fiscal 2016. In addition, accounts payable and inventory decreased by $913 and $540, respectively,
compared to prior fiscal year. We had a zero balance on our line of credit as of September 30, 2017.
The fiscal 2017 financial
results reflect management’s initiatives aimed at growing revenue, reducing costs and generating additional cash flow. We believe
that our new Credit Agreement with FIB, as described in Recent Events, gives us the liquidity to continue to implement initiatives
begun in fiscal 2017. Also, in fiscal 2017, we welcomed the Company’s founder as a scientific advisor to management. We focused
on marketing efforts to improve our message to customers and increase our visibility in the marketplace. We significantly reduced
our employee turnover in fiscal 2017 and began investing in developing complementary services and evaluating expansion and growth
initiatives. We intend to keep these trends and initiatives moving forward into fiscal 2018 in order to grow our business and recruit
and retain talent.
During fiscal 2018
for the Products segment, we intend to increase our investment in Product research and development for upgrades to current products
and potential future new products. We intend to further develop and expand our relationships with distributors and resellers to
boost sales in our Product business. We anticipate adding additional partnerships with companies like Joanneum Research and PalmSens
to expand our Product offerings. Further, we have added key talent to help drive these initiatives and focus on rebuilding the
relationships with our customers.
For the Services segment
in fiscal 2018, we are investing in laboratory equipment to add efficiencies and capabilities. We are investing in talent and equipment
upgrades to revive our discovery services capabilities. We will continue the practice of charging for archive services as warranted.
Further, we are exploring a possible expansion for preclinical services to meet customer demand.
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 and initiatives mentioned above.
Results of Operations
The following table
summarizes the consolidated statement of operations as a percentage of total revenues:
|
|
Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Services revenue
|
|
|
83.3
|
%
|
|
|
77.9
|
%
|
Products revenue
|
|
|
16.7
|
|
|
|
22.1
|
|
Total revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Cost of services revenue
(a)
|
|
|
69.3
|
|
|
|
83.9
|
|
Cost of products revenue
(a)
|
|
|
62.9
|
|
|
|
58.9
|
|
Total cost of revenue
|
|
|
68.2
|
|
|
|
78.4
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
31.8
|
|
|
|
21.6
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
26.4
|
|
|
|
36.5
|
|
Operating income (loss)
|
|
|
5.4
|
|
|
|
(14.9
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
1.5
|
|
|
|
(1.0
|
)
|
Income (loss) before income taxes
|
|
|
3.9
|
|
|
|
(15.9
|
)
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
3.8
|
%
|
|
|
(15.8
|
%)
|
|
(a)
|
Percentage of service and product revenues, respectively.
|
2017 Compared to 2016
Services and Products Revenues
Revenues for the year
ended September 30, 2017 increased 18.6% to $24,242 compared to $20,441 for the year ended September 30, 2016.
Our Services revenue
increased 26.7% in fiscal 2017 to $20,182 compared to $15,924 for the prior fiscal year. Preclinical services revenues increased
due to an overall increase in the number of studies from the prior fiscal 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, in fiscal 2017 we instituted the practice of uniformly charging archive fees to clients where contracts allow. Archive
revenue added $572 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.
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
Bioanalytical analysis
|
|
$
|
4,823
|
|
|
$
|
5,273
|
|
|
$
|
(450
|
)
|
|
|
-8.5
|
%
|
Preclinical services
|
|
|
13,010
|
|
|
|
9,948
|
|
|
|
3,062
|
|
|
|
30.8
|
%
|
Other laboratory services
|
|
|
2,349
|
|
|
|
703
|
|
|
|
1,646
|
|
|
|
234.1
|
%
|
|
|
$
|
20,182
|
|
|
$
|
15,924
|
|
|
$
|
4,258
|
|
|
|
|
|
Sales in our Products
segment decreased 10.1% from $4,517 to $4,060 when compared to the prior fiscal year. The decline stems mainly from lower sales
of analytical instruments.
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
Culex, in-vivo sampling systems
|
|
$
|
1,977
|
|
|
$
|
2,001
|
|
|
$
|
(24
|
)
|
|
|
-1.2
|
%
|
Analytical instruments
|
|
|
1,354
|
|
|
|
1,698
|
|
|
|
(344
|
)
|
|
|
-20.3
|
%
|
Other instruments
|
|
|
729
|
|
|
|
818
|
|
|
|
(89
|
)
|
|
|
-10.9
|
%
|
|
|
$
|
4,060
|
|
|
$
|
4,517
|
|
|
$
|
(457
|
)
|
|
|
|
|
Cost of Revenue
Cost of revenue for
the year ended September 30, 2017 was $16,545 or 68.2% of revenue compared to $16,016 or 78.4% of revenue for the prior fiscal
year.
Cost of Services revenue
as a percentage of Services revenue decreased to 69.3% in the current fiscal year from 83.9% in the prior fiscal year. The principal
cause of this decrease was the increase in revenues, which led to higher absorption of the fixed costs in our Services segment.
A significant portion of our costs of productive capacity in the Services segment are fixed. Thus, increases in revenues led to
decreases in costs as a percentage of revenue.
Cost of Products revenue
as a percentage of Products revenue in fiscal 2017 increased to 62.9% from 58.9% in the prior fiscal year. This increase is mainly
due to the mix of sales favoring lower margin instruments and efforts to reduce inventory in fiscal 2017.
Operating Expenses
Selling expenses for
the year ended September 30, 2017 decreased by 25.7% to $1,053 from $1,417 for the year ended September 30, 2016. This decrease
is mainly due to lower salaries and benefits from the loss of sales employees and 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 year ended September 30, 2017 decreased 6.3% to $465 from $496 for the year ended September 30, 2016. The decrease
was primarily due to lower salaries and benefits from the loss of an employee in fiscal 2016 as well as lower outside services
expenses, partially offset by higher consulting expenses.
General and administrative
expenses for the current fiscal year increased 7.0% to $4,901 from $4,581 for the prior fiscal year. The principal reason for the
increase in fiscal 2017 was higher costs for consulting services. This increase was partially offset by decreased spending for
other outside services.
In fiscal 2016, we
incurred a non-recurring goodwill charge. In late fiscal 2015, we began to experience a declining revenue pattern resulting from
a smaller percentage of quotes accepted for our Bioanalytical analysis services due in part to staff turnover in our business development
group. Accordingly, step two of the goodwill impairment test was completed for the Bioanalytical Services reporting unit which
resulted in an impairment of all the goodwill associated with our Bioanalytical analysis services, totaling $971. There was no
indication of impairment for the Preclinical services reporting unit as of September 30, 2017 and 2016, respectively.
Other Income/Expense
Other income/expense,
net, was expense of $370 for the year ended September 30, 2017 as compared to expense of $204 for the year ended September 30,
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 decreased $24 or 6% in fiscal 2017 compared
to fiscal 2016.
Income Taxes
Our effective tax rate
for the year ended September 30, 2017 was 2.6% compared to 0.4% for the prior fiscal year. The current year expense primarily relates
to state income taxes and alternative minimum taxes. No net benefits have been provided on taxable losses in the current fiscal
year.
Accrued Expenses
As part of a fiscal
2012 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 September 30, 2017
and 2016, respectively, we had $1,117 reserved for the liability. The reserve is classified as a current liability on the Consolidated
Balance Sheets.
Liquidity and Capital Resources
Comparative Cash Flow Analysis
At September 30, 2017,
we had cash and cash equivalents of $434 compared to $386 at September 30, 2016, plus we had $2,000 available on our line of credit
as of September 30, 2017.
Net cash provided by
operating activities was $1,236 for the year ended September 30, 2017, compared to net cash provided by operating activities of
$1,060 for the year ended September 30, 2016. The increase in cash provided by operating activities in fiscal 2017 partially resulted
from operating income versus an operating loss in fiscal 2016. Other contributing factors to our cash from operations in fiscal
2017 were noncash charges of $1,680 for depreciation and amortization and $19 for stock option expense as well as a decrease in
inventory of $540. These factors were partially offset by, among other items, a decrease in accounts payable of $913 and an increase
in accounts receivable of $941.
Days’ sales in
accounts receivable increased to 48 days at September 30, 2017 from 40 days at September 30, 2016 due to extended customer payments
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 fiscal 2016 are non-cash charges of $1,556 for depreciation and amortization, $971 for goodwill impairment and $45
for stock option expense as well as a decrease in accounts receivable of $1,639 and an increase in accounts payable of $1,122.
These factors were partially offset by, among other items, a decrease in accrued expenses of $621 and a decrease in customer advances
of $300.
Investing activities
used $339 in fiscal 2017 due to capital expenditures of $347 as opposed to $1,256 in fiscal 2016. The investing activity in fiscal
2017 consisted of investments in computing infrastructure, building improvements and laboratory equipment. The investing activity
in fiscal 2016 consisted of investments in computing infrastructure, building improvements and equipment replacement.
Financing activities
used $849 in fiscal year 2017 as compared to $144 provided in fiscal 2016. The main use of cash in fiscal 2017 was the payoff of
the Huntington Bank long-term debt and line of credit. Total long-term debt and net line of credit payments were $5,079. Capital
lease payments of $127 and payment of debt issuance costs of $214 also used cash. These uses of cash were partially offset by $4,500
of new borrowings from our new Credit Agreement with FIB. The main uses of cash in fiscal 2016 were for net borrowings on our line
of credit of $1,272 offset by capital lease payments of $277, net payments on our long-term debt of $786 and payment of debt issuance
costs of $68.
Capital Resources
New Credit Facility
On June 23, 2017, we
entered into a new Credit Agreement (the “Credit Agreement”) with First Internet Bank of Indiana (“FIB”).
The Credit Agreement includes both a term loan and a revolving line of credit and is secured by mortgages on our facilities and
personal property in West Lafayette and Evansville, Indiana. We used the proceeds from the term loan to satisfy our indebtedness
with Huntington Bank and terminated the related interest rate swap. During fiscal 2016 and throughout most of the first nine months
of fiscal 2017, we had operated either in default of, or under forbearance arrangements with respect to, our credit agreements
with Huntington Bank.
The term loan for $4,500
bears interest at a fixed rate of 3.99%, with monthly principal and interest payments of approximately $33. The term loan matures
in June 2022. The balance on the term loan at September 30, 2017 was $4,446. The revolving line of credit for up to $2,000 matures
in June 2019 and bears interest at the Prime Rate (generally defined as the highest rate identified as the “Prime Rate”
in The Wall Street Journal “Money Rates” column on the date the interest rate is to be determined, or if that date
is not a publication date, on the publication date immediately preceding) less twenty-five (25) basis points (0.25%). There was
a zero balance on the revolving line of credit at September 30, 2017. We must pay accrued and unpaid interest on the outstanding
balance under the credit line on a monthly basis.
The Credit Agreement
contains various restrictive covenants, including restrictions on the Company’s ability to dispose of assets, make acquisitions
or investments, incur debt or liens, make distributions to shareholders or repurchase outstanding stock, enter into related party
transactions and make capital expenditures, other than upon satisfaction of the conditions set forth in the Credit Agreement. The
Credit Agreement also requires us to maintain (i) a minimum debt service coverage ratio of not less than 1.20 to 1.00 for the quarters
ending September 30, 2017 and December 31, 2017 and of not less than 1.25 to 1.0 for the quarters thereafter and (ii) beginning
with the quarter ending September 30, 2017, a debt to equity ratio of not greater than 2.50 to 1.00 until maturity. Upon an event
of default, which includes certain customary events such as, among other things, a failure to make required payments when due,
a failure to comply with covenants, certain bankruptcy and insolvency events, and defaults under other material indebtedness, FIB
may cease advancing funds, increase the interest rate on outstanding balances, accelerate amounts outstanding, terminate the agreement
and foreclose on all collateral. The Company was in compliance with these covenants as of September 30, 2017.
The Company’s sources of liquidity
for fiscal 2018 are expected to consist primarily of cash generated from operations, cash on-hand and, if needed, borrowings under
our revolving credit facility. Management believes that the resources described above will be sufficient to fund operations, planned
capital expenditures and working capital requirements over the next twelve months.
On January 28, 2015, the Company entered
into a lease agreement with Cook Biotech, Inc. The lease agreement has and will provide the Company with additional cash in the
range approximately $50 per month during the first year of the initial term to approximately $57 per month during the final year
of the initial term.
The following table
summarizes the cash payments under our contractual term debt and other obligations at September 30, 2017 and the effect such obligations
are expected to have on our liquidity and cash flows in future fiscal periods (amounts in thousands). The table does not include
our revolving line of credit. Additional information on the debt is described in Note 8, Debt Arrangements.
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
224
|
|
|
$
|
233
|
|
|
$
|
242
|
|
|
$
|
252
|
|
|
$
|
3,495
|
|
|
$
|
4,446
|
|
Capital lease obligations
|
|
|
136
|
|
|
|
69
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
205
|
|
Operating leases
|
|
|
24
|
|
|
|
24
|
|
|
|
19
|
|
|
|
7
|
|
|
|
-
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
384
|
|
|
$
|
326
|
|
|
$
|
261
|
|
|
$
|
259
|
|
|
$
|
3,495
|
|
|
$
|
4,725
|
|
Equity Offering (amounts in this section
not in thousands)
On May 11, 2011, we
completed a registered public offering of 5,506 units at a price of $1,000 per unit. Each unit consisted of one 6% Series A convertible
preferred share which is convertible into 500 common shares at a conversion price of $2.00 per share, one Class A Warrant to purchase
250 common shares at an exercise price of $2.00 per share, and one Class B Warrant to purchase 250 common shares at an exercise
price of $2.00 per share.
The designation, rights,
preferences and other terms and provisions of the Preferred Shares are set forth in the Certificate of Designation. The Series
A preferred shares participate in any dividends payable upon our common shares on an “as converted” basis. The Class
B Warrants expired in May 2012 and the Class A Warrants expired in May 2016. The Class A Warrants were accounted for as a liability
using the fair value for each on the issuance date and were marked to fair value at each reporting date. The net proceeds from
the sale of the units, after deducting the fees and expenses of the placement agent and other expenses were $4.6 million. We used
the proceeds for the purchase of laboratory equipment and for working capital and general corporate purposes. Because the preferred
dividend or make-whole payment is triggered at the option of the preferred shareholder, we recorded the dividend liability at the
time of the offering close.
As of September 30,
2017, 4,471 preferred shares had been converted into 2,639,108 common shares and 217,366 common shares have been issued for quarterly
preferred dividends for remaining outstanding, unconverted preferred shares. At September 30, 2017, 1,035 preferred shares remained
outstanding.
Inflation
We do not believe that
inflation has had a material adverse effect on our business, operations or financial condition.
Critical Accounting Policies
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources”
discusses the 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.
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 calendar
year 2017, 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 of 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 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 September 30, 2017 is Preclinical Services which is included in our contract research 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.
We performed our annual
goodwill impairment test for our Preclinical services reporting unit at September 30, 2017, and there was no indication of impairment.
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 of this report. There have been no significant events since the timing of our impairment tests that would have triggered
additional impairment testing.
At September 30, 2017
and 2016, respectively, the 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 $19 and $45 during the fiscal years ended September 30, 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 common share 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
share price volatility on our common shares 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 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 Tax Accounting
As described in Note
8 to the 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 carry-forwards.
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 resolution
to the carrying value of our reserve. Interest and penalties are included in the reserve.
As of September 30, 2017
and 2016, we had a $16 liability for uncertain income tax positions, respectively.
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 2012.
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.
Interest Rate Swap
The Company used an interest
rate swap designated as a cash flow hedge to fix the interest rate on 60% of its prior debt with Huntington Bank due to changes
in interest rates. The changes in the fair value of the interest rate swap were recorded in Accumulated Other Comprehensive Income
(“AOCI”) to the extent effective. We assessed on an ongoing basis whether the derivative that was used in the hedging
transaction was highly effective in offsetting changes in cash flows of the hedged debt. The terms of the interest rate swaps matched
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 would be discontinued and we would have reclassified gains or losses that were accumulated in AOCI to
other income (expense), net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The interest
rate swap was terminated as a result of the new credit facility described above and the balance was reduced to zero as of June
30, 2017.
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 lease rent 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.
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. With the help of external consultants, the Company is in the process of 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
with no material effect on the 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 this guidance in the first fiscal quarter of 2017 with no material effect on the 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 September 30, 2017 and 2016 of $64 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. 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.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which addresses eight specific cash flow
issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified
in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15,
2017, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated
financial statements.
In January 2017, the
FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairments
by eliminating Step 2 from the goodwill impairment test. Under the previous guidance an impairment of goodwill exists when the
carrying amount of goodwill exceeds its implied fair value, whereas under the new guidance a goodwill impairment loss would be
recognized if the carrying amount of the reporting unit exceeds its fair value, limited to the total amount of goodwill allocated
to that reporting unit. The ASU is effective for annual and any interim impairment tests for periods beginning after December
15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January
1, 2017. We are currently evaluating the impact this standard will have on our consolidated financial statements.
In January 2017, the FASB
issued ASU 2017-01,
Business Combinations – Clarifying the definition of a business
(Topic 805). This ASU
clarifies the definition of a business with the objective of providing a more robust framework to evaluate whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance will be effective for fiscal years
beginning after December 15, 2017, including interim periods within that fiscal year, with early adoption permitted. The amendments
are to be applied prospectively to business combinations that occur after the effective date.
ITEM 8–FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
BIOANALYTICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
434
|
|
|
$
|
386
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
Trade, net of allowance of $2,404 at September 30, 2017 and $565 at
September 30, 2016
|
|
|
2,530
|
|
|
|
1,649
|
|
Unbilled revenues and other
|
|
|
615
|
|
|
|
591
|
|
Inventories, net
|
|
|
913
|
|
|
|
1,453
|
|
Prepaid expenses
|
|
|
814
|
|
|
|
798
|
|
Total current assets
|
|
|
5,306
|
|
|
|
4,877
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
14,965
|
|
|
|
16,136
|
|
Lease rent receivable
|
|
|
87
|
|
|
|
51
|
|
Goodwill
|
|
|
38
|
|
|
|
38
|
|
Other assets
|
|
|
21
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,417
|
|
|
$
|
21,129
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,052
|
|
|
$
|
2,965
|
|
Restructuring liability
|
|
|
1,117
|
|
|
|
1,117
|
|
Accrued expenses
|
|
|
1,202
|
|
|
|
1,089
|
|
Customer advances
|
|
|
2,980
|
|
|
|
3,114
|
|
Income taxes payable
|
|
|
20
|
|
|
|
13
|
|
Revolving line of credit
|
|
|
—
|
|
|
|
1,358
|
|
Fair value of interest rate swap
|
|
|
—
|
|
|
|
35
|
|
Current portion of capital lease obligation
|
|
|
128
|
|
|
|
126
|
|
Current portion of long-term debt
|
|
|
224
|
|
|
|
3,656
|
|
Total current liabilities
|
|
|
7,723
|
|
|
|
13,473
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, less current portion
|
|
|
69
|
|
|
|
198
|
|
Long-term debt, less current portion, net of debt issuance costs
|
|
|
4,158
|
|
|
|
—
|
|
Total liabilities
|
|
|
11,950
|
|
|
|
13,671
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred shares, authorized 1,000,000 shares, no par value:
|
|
|
|
|
|
|
|
|
1,035 Series A shares at $1,000 stated value issued
and outstanding at September 30, 2017 and 1,185 at September 30, 2016
|
|
|
1,035
|
|
|
|
1,185
|
|
Common shares, no par value:
|
|
|
|
|
|
|
|
|
Authorized 19,000,000 shares; 8,243,896 issued and
outstanding at September 30, 2017 and 8,107,558 at September 30, 2016
|
|
|
2,023
|
|
|
|
1,989
|
|
Additional paid-in capital
|
|
|
21,446
|
|
|
|
21,240
|
|
Accumulated deficit
|
|
|
(16,037
|
)
|
|
|
(16,921
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
—
|
|
|
|
(35
|
)
|
Total shareholders’ equity
|
|
|
8,467
|
|
|
|
7,458
|
|
Total liabilities and shareholders’ equity
|
|
$
|
20,417
|
|
|
$
|
21,129
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
BIOANALYTICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
|
|
For the Years Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Services revenue
|
|
$
|
20,182
|
|
|
$
|
15,924
|
|
Products revenue
|
|
|
4,060
|
|
|
|
4,517
|
|
Total revenue
|
|
|
24,242
|
|
|
|
20,441
|
|
|
|
|
|
|
|
|
|
|
Cost of services revenue
|
|
|
13,990
|
|
|
|
13,355
|
|
Cost of products revenue
|
|
|
2,555
|
|
|
|
2,661
|
|
Total cost of revenue
|
|
|
16,545
|
|
|
|
16,016
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,697
|
|
|
|
4,425
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling
|
|
|
1,053
|
|
|
|
1,417
|
|
Research and development
|
|
|
465
|
|
|
|
496
|
|
General and administrative
|
|
|
4,901
|
|
|
|
4,581
|
|
Impairment of goodwill
|
|
|
—
|
|
|
|
971
|
|
Total operating expenses
|
|
|
6,419
|
|
|
|
7,465
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
1,278
|
|
|
|
(3,040
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(375
|
)
|
|
|
(399
|
)
|
Decrease in fair value of warrant liability
|
|
|
—
|
|
|
|
189
|
|
Other income
|
|
|
5
|
|
|
|
6
|
|
Income (loss) before income taxes
|
|
|
908
|
|
|
|
(3,244
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
24
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
884
|
|
|
$
|
(3,230
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) :
|
|
|
35
|
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
919
|
|
|
$
|
(3,318
|
)
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share:
|
|
$
|
0.11
|
|
|
$
|
(0.40
|
)
|
Diluted net income (loss) per share:
|
|
$
|
0.10
|
|
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
Weighted common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,178
|
|
|
|
8,107
|
|
Diluted
|
|
|
8,733
|
|
|
|
8,107
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
BIOANALYTICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
(In thousands, except number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
Total
|
|
|
|
Preferred Shares
|
|
|
Common Shares
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
shareholder’s
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
income (loss)
|
|
|
equity
|
|
Balance at October 1, 2015
|
|
|
1,185
|
|
|
$
|
1,185
|
|
|
|
8,105,007
|
|
|
$
|
1,988
|
|
|
$
|
21,193
|
|
|
$
|
(13,691
|
)
|
|
$
|
53
|
|
|
$
|
10,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,230
|
)
|
|
|
|
|
|
|
(3,230
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88
|
)
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercise
|
|
|
-
|
|
|
|
-
|
|
|
|
2,551
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
|
1,185
|
|
|
$
|
1,185
|
|
|
|
8,107,558
|
|
|
$
|
1,989
|
|
|
$
|
21,240
|
|
|
$
|
(16,921
|
)
|
|
$
|
(35
|
)
|
|
$
|
7,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
884
|
|
|
|
|
|
|
|
884
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercise
|
|
|
|
|
|
|
|
|
|
|
61,338
|
|
|
|
15
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred shares to common shares
|
|
|
(150
|
)
|
|
|
(150
|
)
|
|
|
75,000
|
|
|
|
19
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
|
1,035
|
|
|
$
|
1,035
|
|
|
|
8,243,896
|
|
|
$
|
2,023
|
|
|
$
|
21,446
|
|
|
$
|
(16,037
|
)
|
|
$
|
-
|
|
|
$
|
8,467
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
BIOANALYTICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Years Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
884
|
|
|
$
|
(3,230
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,680
|
|
|
|
1,556
|
|
Employee stock compensation expense
|
|
|
19
|
|
|
|
45
|
|
Decrease in fair value of warrant liability
|
|
|
—
|
|
|
|
(189
|
)
|
(Gain)/Loss on sale of property and equipment
|
|
|
(5
|
)
|
|
|
14
|
|
Provision for doubtful accounts
|
|
|
—
|
|
|
|
84
|
|
Impairment of goodwill
|
|
|
—
|
|
|
|
971
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(941
|
)
|
|
|
1,639
|
|
Inventories
|
|
|
540
|
|
|
|
13
|
|
Income taxes payable
|
|
|
7
|
|
|
|
(17
|
)
|
Prepaid expenses and other assets
|
|
|
(14
|
)
|
|
|
(27
|
)
|
Accounts payable
|
|
|
(913
|
)
|
|
|
1,122
|
|
Accrued expenses
|
|
|
113
|
|
|
|
(621
|
)
|
Customer advances
|
|
|
(134
|
)
|
|
|
(300
|
)
|
Net cash provided by operating activities
|
|
$
|
1,236
|
|
|
|
1,060
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(347
|
)
|
|
|
(1,256
|
)
|
Proceeds from sale of equipment
|
|
|
8
|
|
|
|
—
|
|
Net cash used by investing activities
|
|
|
(339
|
)
|
|
|
(1,256
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payments of long-term debt
|
|
|
(3,721
|
)
|
|
|
(786
|
)
|
New borrowings on long-term debt
|
|
|
4,500
|
|
|
|
—
|
|
Payments of debt issuance costs
|
|
|
(214
|
)
|
|
|
(68
|
)
|
Proceeds from exercise of stock options
|
|
|
71
|
|
|
|
3
|
|
Payments on revolving line of credit
|
|
|
(11,516
|
)
|
|
|
(11,304
|
)
|
Borrowings on revolving line of credit
|
|
|
10,158
|
|
|
|
12,576
|
|
Payments on capital lease obligations
|
|
|
(127
|
)
|
|
|
(277
|
)
|
Net cash (used) provided by financing activities
|
|
|
(849
|
)
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
48
|
|
|
|
(52
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
386
|
|
|
|
438
|
|
Cash and cash equivalents at end of year
|
|
$
|
434
|
|
|
$
|
386
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
230
|
|
|
$
|
312
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Equipment financed under capital leases
|
|
$
|
—
|
|
|
$
|
303
|
|
The accompanying notes
are an integral part of the consolidated financial statements.
BIOANALYTICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands unless otherwise indicated)
|
1.
|
DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
|
Bioanalytical Systems,
Inc. and its subsidiaries (“We,” “Our,” “Us,” the “Company” or “BASi”)
engage in contract laboratory research services and other services related to pharmaceutical development. We also manufacture scientific
instruments for life sciences research, which we sell with related software for use by pharmaceutical companies, universities,
government research centers and medical research institutions. Our customers are located throughout the world.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
(a)
|
Principles of Consolidation
|
The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions
have been eliminated.
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.
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 calendar year 2017, 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.
We consider all highly
liquid investments with an original maturity of three months or less when purchased to be cash equivalents. At September 30, 2017,
we did not have any cash accounts that exceeded federally insured limits.
We perform periodic credit
evaluations of our customers’ financial conditions and generally do not require collateral on trade accounts receivable.
We account for trade receivables based on the amounts billed to customers. Past due receivables are determined based on contractual
terms. We do not accrue interest on any of our trade receivables. The allowance for doubtful accounts is determined by management
based on our historical losses, specific customer circumstances, and general economic conditions. Periodically, management reviews
accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables when all
attempts to collect have failed. Our allowance for doubtful accounts was $2,404 and $565 at September 30, 2017 and 2016, respectively.
The increase in fiscal 2017 stemmed from the uncollected archive invoices from the first quarter of fiscal 2017. Until these are
collected, they are not recorded as earned revenue and will remain in the reserve. A summary of activity in our allowance for doubtful
accounts is as follows:
|
|
Fiscal year ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Opening balance
|
|
$
|
565
|
|
|
$
|
559
|
|
Charged to expense
|
|
|
—
|
|
|
|
84
|
|
Accounts recovered
|
|
|
—
|
|
|
|
(25
|
)
|
Accounts written off
|
|
|
—
|
|
|
|
(53
|
)
|
Uncollected archive invoices
|
|
|
1,839
|
|
|
|
—
|
|
Ending balance
|
|
$
|
2,404
|
|
|
$
|
565
|
|
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. 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. A summary of activity in our inventory obsolescence is as follows for
the years ended September 30, 2017 and 2016:
|
|
Fiscal year ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Opening balance
|
|
$
|
288
|
|
|
$
|
301
|
|
Provision for slow moving and obsolescence
|
|
|
92
|
|
|
|
21
|
|
Write-off of obsolete and slow moving inventory
|
|
|
(169
|
)
|
|
|
(34
|
)
|
Closing balance
|
|
$
|
211
|
|
|
$
|
288
|
|
|
(f)
|
Property and Equipment
|
We record property and
equipment at cost, including interest capitalized during the period of construction of major facilities. We compute depreciation,
including amortization on capital leases, using the straight-line method over the estimated useful lives of the assets, which we
estimate to be: buildings and improvements, 34 to 40 years; machinery and equipment, 5 to 10 years, and office furniture and fixtures,
10 years. Expenditures for maintenance and repairs are expensed as incurred unless the life of the asset is extended beyond one
year, which would qualify for asset treatment. Depreciation expense was $1,515 in fiscal 2017 and $1,398 in fiscal 2016. Property
and equipment, net, as of September 30, 2017 and 2016 consisted of the following:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
1,001
|
|
|
$
|
1,043
|
|
Buildings and improvements
|
|
|
22,090
|
|
|
|
21,943
|
|
Machinery and equipment
|
|
|
19,059
|
|
|
|
18,568
|
|
Office furniture and fixtures
|
|
|
638
|
|
|
|
645
|
|
Construction in progress
|
|
|
57
|
|
|
|
603
|
|
|
|
|
42,845
|
|
|
|
42,802
|
|
Less: accumulated depreciation
|
|
|
(27,880
|
)
|
|
|
(26,666
|
)
|
Net property and equipment
|
|
$
|
14,965
|
|
|
$
|
16,136
|
|
|
(g)
|
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
of 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. We elected to bypass the qualitative assessment aspect of this guidance. We proceeded directly to 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 material assumptions utilized in our calculations of the present value cash flows used to estimate
the fair value of the reporting unit when performing the annual goodwill impairment test. Our reporting unit with goodwill at September
30, 2017 was 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 unit, 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.
We performed our annual
goodwill impairment test for the Preclinical Services reporting unit at September 30, 2017 and there was no indication of impairment.
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 risks. There have been no significant events
since the timing of our impairment tests that would have triggered additional impairment testing.
At September 30, 2017 and
2016, respectively, the remaining recorded goodwill was $38. We amortize costs of patents and licenses, which are included in other
assets on the Consolidated Balance Sheets. For the fiscal years ended September 30, 2017 and 2016, the amortization expense
associated with these was $6 and $5, respectively.
|
(h)
|
Stock-Based Compensation
|
We have a stock-based employee
compensation plan and a stock-based employee and outside director compensation plan, which are described more fully in Note 9.
All options granted under these plans have 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. Our policy is to recognize
expense for awards subject to graded vesting using the straight-line attribution method, reduced for estimated forfeitures.
We use a binomial option-pricing
model as our method of valuation for share-based awards, requiring us to make certain assumptions about the future, which are more
fully described in Note 9.
Income taxes are accounted
for under the asset and liability method. Deferred tax assets and liabilities are recognized 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 carry-forwards. 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. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized 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 may 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. The amount of the accrual for which an exposure exists is measured as the largest amount of benefit determined
on a cumulative probability basis that we believe is more likely than not to be realized upon 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 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.
|
(j)
|
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.
|
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 credit facility entered
into in fiscal 2017 approximates fair value since it was signed within the most recent fiscal year.
We used an interest rate
swap, designated as a hedge, to fix 60% of the debt from our Huntington credit facility. We did not enter into this derivative
transaction to speculate on interest rates, but to hedge interest rate risk. The swap was recognized on the balance sheet at its
fair value. The fair value was 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 was therefore considered a level 2 measurement. The interest rate
swap was terminated as a result of the new credit facility described in Note 7 and the balance was reduced to zero.
As
of September 30, 2017, the Company did not have any financial assets or liabilities measured at fair value on a recurring basis.
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
|
|
|
$
|
-
|
|
Class A warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The preparation of financial
statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates as part of the issuance
of these consolidated financial statements include but are not limited to the determination of fair values, allowance for doubtful
accounts, inventory obsolescence, deferred tax valuations, depreciation, impairment charges and stock compensation. Our actual
results could differ from those estimates.
|
(l)
|
Research and Development
|
In fiscal 2017 and 2016,
we incurred $465 and $496, respectively, on research and development. Separate from our contract research services business, we
maintain applications research and development to enhance our products business. We expense research and development costs as incurred.
The Company used an interest
rate swap designated as a cash flow hedge to fix the interest rate on 60% of its prior debt with Huntington Bank due to changes
in interest rates. The changes in the fair value of the interest rate swap were recorded in Accumulated Other Comprehensive Income
(“AOCI”) to the extent effective. We assessed on an ongoing basis whether the derivative that was used in the hedging
transaction was highly effective in offsetting changes in cash flows of the hedged debt. The terms of the interest rate swaps matched
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 would be discontinued and we would have reclassified gains or losses that were accumulated in AOCI to
other income (expense), net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The interest
rate swap was terminated as a result of the new credit facility in Note 7 below and the balance was reduced to zero as of June
30, 2017. The balance in AOCI at September 30, 2017 and 2016 was $0 and $(35), respectively.
The Company
capitalizes costs associated with the issuance of debt and amortizes them as additional interest expense over the lives of
the debt on a straight-line basis, which approximates the effective interest method. The Company believes the difference
between the straight-line basis and the effective interest method is not material to the consolidated financial statements.
Debt issuance costs of $64 and $10, as of September 30, 2017 and 2016, respectively, were netted with long-term debt less
current portion on the consolidated balance sheets. Upon prepayment of the related debt, the Company accelerates the
recognition of an appropriate amount of the costs as refinancing or extinguishment of debt.
Certain amounts in the
fiscal 2016 consolidated financial statements have been reclassified to conform to the fiscal 2017 presentation without affecting
previously reported net income or stockholders’ equity.
|
(p)
|
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. With the help of external consultants, the Company is in the process of 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
with no material effect on the 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 this guidance in the first fiscal quarter of 2017 with no material effect on the 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 September 30, 2017 and 2016 of $64 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. 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.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which addresses eight specific cash flow
issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified
in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15,
2017, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated
financial statements.
In January 2017, the
FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairments
by eliminating Step 2 from the goodwill impairment test. Under the previous guidance an impairment of goodwill exists when the
carrying amount of goodwill exceeds its implied fair value, whereas under the new guidance a goodwill impairment loss would be
recognized if the carrying amount of the reporting unit exceeds its fair value, limited to the total amount of goodwill allocated
to that reporting unit. The ASU is effective for annual and any interim impairment tests for periods beginning after December
15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January
1, 2017. We are currently evaluating the impact this standard will have on our consolidated financial statements.
In January 2017, the FASB
issued ASU 2017-01,
Business Combinations – Clarifying the definition of a business
(Topic 805). This ASU
clarifies the definition of a business with the objective of providing a more robust framework to evaluate whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance will be effective for fiscal years
beginning after December 15, 2017, including interim periods within that fiscal year, with early adoption permitted. The amendments
are to be applied prospectively to business combinations that occur after the effective date.
|
3.
|
SALE OF PREFERRED SHARES AND WARRANTS (not in thousands)
|
On May 11, 2011, we completed
a registered public offering of 5,506 units at a price of $1,000 per unit. Each unit consisted of one 6% Series A convertible preferred
share which is convertible into 500 common shares, one Class A Warrant to purchase 250 common shares at an exercise price of $2.00
per share, and one Class B Warrant to purchase 250 common shares at an exercise price of $2.00 per share. 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.
The Series A preferred
shares were valued using the common shares available upon conversion of all preferred shares of 2,753,000 and the closing market
price of our stock on May 11, 2011 of $1.86. As of September 30, 2017, 4,471 preferred shares have been converted into 2,639,108
common shares and 217,366 common shares have been issued for quarterly preferred dividends for remaining outstanding, unconverted
preferred shares. As of September 30, 2017, 577,897 warrants have been exercised. At September 30, 2017, 1,035 preferred shares
remained outstanding. All dividends have been paid according to the agreement.
For
the year ended September 30, 2016, the Company recognized income of $189 due to the change in the estimated fair value of the Company’s
warrants. This income was recorded as a decrease in fair value of warrant liability on the Company’s consolidated statements
of operations and comprehensive income (loss) for the respective periods.
|
4.
|
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 209 vested options and 592 common shares issuable
upon conversion of preferred shares were not considered in computing diluted income (loss) per share for the year ended September
30, 2016, because they were anti-dilutive.
The following table reconciles
our computation of basic net income (loss) per share to diluted net income (loss) per share:
|
|
Years Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
884
|
|
|
$
|
(3,230
|
)
|
Weighted average common shares outstanding
|
|
|
8,178
|
|
|
|
8,107
|
|
Basic net income (loss) per share
|
|
$
|
0.11
|
|
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) applicable to common shareholders
|
|
$
|
884
|
|
|
$
|
(3,230
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
8,178
|
|
|
|
8,107
|
|
Plus: Incremental shares from assumed conversions:
|
|
|
|
|
|
|
|
|
Series A preferred shares
|
|
|
545
|
|
|
|
—
|
|
Dilutive stock options/shares
|
|
|
10
|
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
|
|
8,733
|
|
|
|
8,107
|
|
Diluted net income (loss) per share
|
|
$
|
0.10
|
|
|
$
|
(0.40
|
)
|
Inventories at September 30 consisted of
the following:
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
761
|
|
|
$
|
1,190
|
|
Work in progress
|
|
|
135
|
|
|
|
267
|
|
Finished goods
|
|
|
228
|
|
|
|
284
|
|
|
|
$
|
1,124
|
|
|
$
|
1,741
|
|
Obsolescence reserve
|
|
|
(211
|
)
|
|
|
(288
|
)
|
|
|
$
|
913
|
|
|
$
|
1,453
|
|
The total amount of equipment
capitalized under capital lease obligations as of September 30, 2017 and 2016 was $6,195. Accumulated amortization on capital leases
at September 30, 2017 and 2016 was $6,007 and $5,880, respectively. Amortization of assets acquired through capital leases is included
in depreciation expense.
In fiscal 2016, we had
two new capital lease additions of $303 for laboratory software at our West Lafayette facility. Future minimum lease payments on
capital leases at September 30, 2017 for the next five years are as follows:
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
129
|
|
|
$
|
7
|
|
|
$
|
136
|
|
2019
|
|
|
68
|
|
|
|
1
|
|
|
|
69
|
|
2020
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2021
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2022
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
197
|
|
|
$
|
8
|
|
|
$
|
205
|
|
We lease office space and
equipment under non-cancelable operating leases that terminate at various dates through 2021. Certain of these leases contain renewal
options. Total rental expense under these leases was $78 and $96 in fiscal 2017 and 2016, respectively. The UK building lease discussed
in Note 12 expires in 2023 but includes an opt out provision after 7 years, which occurred in our fourth fiscal quarter of 2015
and was exercised.
Future minimum lease payments,
exclusive of rent related to the UK restructuring discussed in Note 13, for the following fiscal years under operating leases at
September 30, 2017 are as follows:
2018
|
|
$
|
24
|
|
2019
|
|
|
24
|
|
2020
|
|
|
19
|
|
2021
|
|
|
7
|
|
2022
|
|
|
—
|
|
|
|
$
|
74
|
|
We lease a portion
of our headquarters’ building in West Lafayette, Indiana to Cook Biotech, Inc. (Tenant) as part of the Lease Agreement signed
in January 2015. The Lease Agreement has an initial term ending December 31, 2024 with escalating rents each year. The Tenant took
full possession of the space on May 1, 2015. We recognize the escalating rents on a straight-line basis as a reduction to general
and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss) and lease rent receivable
on the Consolidated Balance Sheets. The cash rent received is recorded to the customer account and as a reduction to the 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 in other accounts receivable by the end of the agreement on December 31, 2024. As of September
30, 2017, the rents recognized amounted to $1,536 and cash rent received amounted to $1,449. Future rental income recognized and
cash rents received for the next five years are as follows:
|
|
Straight line
rents to be
recognized
|
|
|
Cash rent
to be
received
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
636
|
|
|
$
|
609
|
|
2019
|
|
|
636
|
|
|
|
621
|
|
2020
|
|
|
636
|
|
|
|
633
|
|
2021
|
|
|
636
|
|
|
|
646
|
|
2022
|
|
|
636
|
|
|
|
659
|
|
|
|
$
|
3,180
|
|
|
$
|
3,168
|
|
Long-term debt consisted of the following
at September 30:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Term loan payable to a bank, payable in monthly principal installments of $65. Interest is variable at LIBOR plus 325 basis points, which was 3.4 % at September 30, 2016. Collateralized by underlying property. Due July 31, 2017.
|
|
$
|
—
|
|
|
$
|
3,666
|
|
|
|
|
|
|
|
|
|
|
Term loan payable to a bank, payable in monthly principal and interest installments of $33. Interest is fixed at 3.99%. Collateralized by underlying property. Due June 23, 2022.
|
|
|
4,446
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
|
224
|
|
|
|
3,666
|
|
|
|
|
|
|
|
|
|
|
Long term total
|
|
$
|
4,222
|
|
|
$
|
—
|
|
Cash interest payments
of $230 and $312 were made in 2017 and 2016, respectively. The following table summarizes the annual principal payments under our
term loan:
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
224
|
|
|
$
|
233
|
|
|
$
|
242
|
|
|
$
|
252
|
|
|
$
|
3,495
|
|
|
$
|
4,446
|
|
New Credit Facility
On June 23, 2017, we
entered into a new Credit Agreement (the “Credit Agreement”) with First Internet Bank of Indiana (“FIB”).
The Credit Agreement includes both a term loan and a revolving line of credit and is secured by mortgages on our facilities and
personal property in West Lafayette and Evansville, Indiana. We used the proceeds from the term loan to satisfy our indebtedness
with Huntington Bank described below and terminated the related interest rate swap.
The term loan for $4,500
bears interest at a fixed rate of 3.99%, with monthly principal and interest payments of approximately $33. The term loan matures
in June 2022. The balance on the term loan at September 30, 2017 was $4,446. The revolving line of credit for up to $2,000 matures
in June 2019 and bears interest at the Prime Rate (generally defined as the highest rate identified as the “Prime Rate”
in The Wall Street Journal “Money Rates” column on the date the interest rate is to be determined, or if that date
is not a publication date, on the publication date immediately preceding) less Twenty-five (25) Basis Points (0.25%). The balance
on the revolving line of credit at September 30, 2017 was $0. We must pay accrued and unpaid interest on the outstanding balance
under the credit line on a monthly basis.
The Credit Agreement
contains various restrictive covenants, including restrictions on the Company’s ability to dispose of assets, make acquisitions
or investments, incur debt or liens, make distributions to shareholders or repurchase outstanding stock, enter into related party
transactions and make capital expenditures, other than upon satisfaction of the conditions set forth in the Credit Agreement. The
Credit Agreement also requires us to maintain (i) a minimum debt service coverage ratio of not less than 1.20 to 1.00 for the quarters
ending September 30, 2017 and December 31, 2017 and of not less than 1.25 to 1.0 for the quarters thereafter and (ii) beginning
with the fourth quarter of fiscal 2017 ending September 30, 2017, a debt to equity ratio of not greater than 2.50 to 1.00 until
maturity. Upon an event of default, which includes certain customary events such as, among other things, a failure to make required
payments when due, a failure to comply with covenants, certain bankruptcy and insolvency events, and defaults under other material
indebtedness, FIB may cease advancing funds, increase the interest rate on outstanding balances, accelerate amounts outstanding,
terminate the agreement and foreclose on all collateral.
We incurred $69 of
costs in June 2017 related to the Credit Agreement that was partially amortized in the third and fourth fiscal quarters of 2017
with the remainder to be amortized through June 2022.
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 included both a term loan and a revolving loan and was 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 most of the first nine months of fiscal 2017 we operated either in default
of, or under forbearance arrangements with respect to, the Agreement.
Under a series of forbearance
arrangements, Huntington Bank agreed during the relevant forbearance periods 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 to continue to make advances under the Agreement.
In exchange for Huntington
Bank’s agreement to forbear from exercising its rights and remedies under the Agreement, the Company agreed to, among other
things: (i) amend the maturity dates for the term and revolving loans under the Agreement (the last such amendment 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 periods, (iii) provide to Huntington Bank certain cash flow forecasts and other financial information, (iv)
comply with a minimum cash flow covenant, (v) engage the services of a financial consultant and cause the financial consultant
to provide Huntington Bank such information regarding its efforts as reasonably requested, and (vi) pay to Huntington Bank certain
fees, including a forbearance fee in the amount of $227, $27 of which was paid at the execution of the last 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. The agreement provided that 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 believed that it was more likely than not that we would have to pay the
full fee of $200, we accrued for the fees from the last forbearance agreement net of accumulated amortization in the Term loan,
net of debt issuance costs on the condensed consolidated balance sheets in the second fiscal quarter of 2017. This accrual was
reduced by $100 in the third quarter of fiscal 2017 because the loan to Huntington Bank was paid in full prior to July 14, 2017.
We incurred a total
of $56 of costs related to certain of our forbearance arrangements that was amortized in the first, second and third quarters of
fiscal 2017.
Interest Rate Swap
We entered into an
interest rate swap agreement with respect to the loans with Huntington Bank 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 were
recorded in Accumulated Other Comprehensive Income to the extent effective. The interest rate swap was terminated as a result of
the new credit facility described above and the balance was reduced to zero as of September 30, 2017.
For the fiscal years
ended September 30, 2017 and 2016, respectively, we amortized $160 and $153 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 September 30, 2017 and 2016, the unamortized portion of debt issuance costs related
to our respective credit facilities was $64 and $10, respectively, and was included in Long-term Debt, less current portion on
the condensed consolidated balance sheets.
Significant components of our deferred tax
assets and liabilities as of September 30 are as follows:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
137
|
|
|
$
|
209
|
|
Accrued compensation and vacation
|
|
|
169
|
|
|
|
90
|
|
Accrued expenses and other
|
|
|
357
|
|
|
|
427
|
|
Domestic net operating loss carryforwards
|
|
|
5,142
|
|
|
|
5,365
|
|
Stock compensation expense
|
|
|
9
|
|
|
|
19
|
|
AMT credit carryover
|
|
|
76
|
|
|
|
55
|
|
Total deferred tax assets
|
|
|
5,890
|
|
|
|
6,165
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(128
|
)
|
|
|
(64
|
)
|
Unrealized gain/loss - warrant liability
|
|
|
—
|
|
|
|
—
|
|
Basis difference for fixed assets
|
|
|
(383
|
)
|
|
|
(412
|
)
|
Total deferred tax liabilities
|
|
|
(511
|
)
|
|
|
(476
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
|
5,379
|
|
|
|
5,689
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for net deferred tax assets
|
|
|
(5,379
|
)
|
|
|
(5,689
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
—
|
|
|
$
|
—
|
|
Significant components
of the provision (benefit) for income taxes are as follows as of the year ended September 30:
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
21
|
|
|
$
|
(20
|
)
|
State and local
|
|
|
3
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
State and local
|
|
|
—
|
|
|
|
—
|
|
Income tax expense
|
|
$
|
24
|
|
|
$
|
(14
|
)
|
The effective income tax rate on continuing
operations varied from the statutory federal income tax rate as follows:
|
|
2017
|
|
|
2016
|
|
Federal statutory income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Increases (decreases):
|
|
|
|
|
|
|
|
|
State and local income taxes, net of Federal tax benefit, if applicable
|
|
|
0.2
|
%
|
|
|
(0.1
|
)%
|
Nondeductible goodwill impairment
|
|
|
—
|
|
|
|
(10.2
|
)%
|
Other nondeductible expenses
|
|
|
1.3
|
%
|
|
|
(0.8
|
)%
|
Valuation allowance changes
|
|
|
(32.9
|
)%
|
|
|
(22.5
|
)%
|
Effective income tax rate
|
|
|
2.6
|
%
|
|
|
0.4
|
%
|
In fiscal 2016, an
impairment of goodwill in the amount of $971 was recorded that was not deductible for tax purposes. Therefore, no tax benefit was
recorded.
Realization of deferred
tax assets associated with the net operating loss carryforward and credit carryforward is dependent upon generating sufficient
taxable income prior to their expiration. The valuation allowance for our domestic operations in fiscal 2017 and 2016 was $5,379
and $5,689, respectively. Payments made in fiscal 2017 and 2016 for income taxes amounted to $17 and $3, respectively.
At September 30, 2017,
we had domestic net operating loss carryforwards of approximately $12,809 for federal and $17,566 for state, which expire from
September 30, 2018 through 2031. Further, we have an alternative minimum tax credit carryforward of approximately $76 available
to offset future federal income taxes. This credit has an unlimited carryforward period.
We may recognize the
tax benefit from an uncertain tax position only if it more likely than not to be sustained upon regulatory examination based on
the technical merits of the position. The amount of the benefit for which an exposure exists is measured 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 September 30, 2017 and 2016, a $16 liability remained for other uncertain income tax positions.
A reconciliation of
the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
2017
|
|
|
2016
|
|
Balance at beginning of year
|
|
$
|
16
|
|
|
$
|
16
|
|
Additions based on tax positions related to the current year
|
|
|
-
|
|
|
|
-
|
|
Additions for tax positions or prior years
|
|
|
-
|
|
|
|
-
|
|
Reductions for tax positions of prior years
|
|
|
-
|
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
|
|
-
|
|
Balance at end of year
|
|
$
|
16
|
|
|
$
|
16
|
|
As noted in the table
above, there has been no change in our gross uncertain tax positions during fiscal 2017 based on a state tax position.
We are no longer subject
to U.S. federal tax examinations for years before 2013 or state and local for years before 2012, with limited exceptions. For federal
purposes, the tax attributes carried forward could be adjusted through the examination process and are subject to examination 3
years from the date of utilization.
We have assessed the
application of Internal Revenue Code Section 382 regarding certain limitations on the future usage of net operating losses. No
limitation applies as of September 30, 2017, and we will continue to monitor activities in the future.
Changes in Tax Laws
Affecting Future Periods
Changes in
tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future. In
December 2017, new federal tax law has (or is expected to be) issued. We are currently evaluating the effects of the new tax
laws. However, we don’t believe the changes will have a material effect on the consolidated financial statements.
|
9.
|
STOCK-BASED COMPENSATION
|
Summary of Stock Option Plans and Activity
In March 2008, our
shareholders approved the 2008 Stock Option Plan (the “Plan”) to replace the 1997 Outside Director Stock Option Plan
and the 1997 Employee Stock Option Plan. Future common shares will be granted from the 2008 Stock Option Plan. The purpose of the
Plan is to promote our long-term interests by providing a means of attracting and retaining officers, directors and key employees.
The Compensation Committee administers the Plan and approves the particular officers, directors or employees eligible for grants.
Under the Plan, employees are granted the option to purchase our common shares at fair market value on the date of the grant. Generally,
options granted vest and become exercisable in four equal installments commencing one year from date of grant and expire upon the
earlier of the employee’s termination of employment with us, or ten years from the date of grant. The Plan terminates in
fiscal 2018. The maximum number of common shares that may be granted under the Plan is 500 shares. At September 30, 2017, 278 shares
remained available for grants under the Plan.
The Compensation Committee
has also issued non-qualified stock option grants with vesting periods different from the Plan. As of September 30, 2017 and 2016,
respectively, total non-qualified stock options outstanding were 15.
No options were granted
in fiscal 2017. The weighted-average assumptions used to compute the fair value of options granted for the fiscal year ended September
30, 2016 were as follows:
|
|
2016
|
|
Risk-free interest rate
|
|
|
1.58
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Volatility of the expected market price of the Company’s common shares
|
|
|
97.50%-97.50
|
%
|
Expected life of the options (years)
|
|
|
8.0
|
|
A summary of our stock
option activity for all options and related information for the years ended September 30, 2017 and 2016, respectively, is as follows
(in thousands except for share prices):
|
|
Options
(shares)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - October 1, 2015
|
|
|
319
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3
|
)
|
|
$
|
1.14
|
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
10
|
|
|
$
|
0.94
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
Terminated
|
|
|
(64
|
)
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - September 30, 2016
|
|
|
262
|
|
|
$
|
1.76
|
|
|
$
|
1.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - October 1, 2016
|
|
|
262
|
|
|
$
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(72
|
)
|
|
$
|
1.23
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Terminated
|
|
|
(50
|
)
|
|
$
|
2.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - September 30, 2017
|
|
|
140
|
|
|
$
|
1.91
|
|
|
$
|
1.45
|
|
|
|
5.6
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
111
|
|
|
$
|
1.98
|
|
|
$
|
1.47
|
|
|
|
5.0
|
|
|
$
|
39
|
|
The aggregate intrinsic
value is the product of the total options outstanding and the net positive difference of our common share price on September 30,
2017 and the options’ exercise price.
As of September 30,
2017, our total unrecognized compensation cost related to non-vested stock options was $34 and is expected to be recognized over
a weighted-average service period of 1.1 years. As of September 30, 2017, there are 15 shares underlying outstanding options
that were granted outside of the Plan. Stock-based compensation expense for employee stock options for the years ended September
30, 2017 and 2016 was $19 and $45, respectively.
The following table
summarizes outstanding and exercisable options as of September 30, 2017 (in thousands except per share amounts):
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
|
|
|
Remaining
|
|
|
average
|
|
|
|
|
|
average
|
|
Exercise
Prices
|
|
Options
Outstanding
|
|
|
Contractual
Life (Yrs)
|
|
|
Exercise
Price
|
|
|
Options
Exercisable
|
|
|
Exercise
Price
|
|
$0.79 - $1.50
|
|
|
74
|
|
|
|
5.28
|
|
|
$
|
1.17
|
|
|
|
67
|
|
|
$
|
1.19
|
|
$1.51 - $4.00
|
|
|
50
|
|
|
|
7.60
|
|
|
$
|
1.96
|
|
|
|
28
|
|
|
$
|
2.03
|
|
$4.01 - $8.79
|
|
|
16
|
|
|
|
0.93
|
|
|
$
|
5.09
|
|
|
|
16
|
|
|
$
|
5.09
|
|
We have a 401(k)
Retirement Plan (the “Plan”) covering all employees over twenty-one years of age with at least one year of service.
Under the terms of the Plan, we match 50% of the first 6% of the employee contribution. The Plan also includes provisions for various
contributions which may be instituted at the discretion of the Board of Directors. The contribution made by the participant may
not exceed 30% of the participant’s annual wages. Contribution expense was $200 and $169 in fiscal 2017 and 2016, respectively.
We operate in two principal
segments – contract 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. We evaluate performance and allocate resources based on these segments. Certain of our assets are not directly attributable
to the Services or Products segments. These assets are grouped into the Corporate segment and include cash and cash equivalents,
deferred income taxes, refundable income taxes, debt issue costs and certain other assets. We do not allocate such items to the
principal segments because they are not used to evaluate their financial position. The accounting policies of these segments are
the same as those described in the summary of significant accounting policies.
|
|
Years Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
20,182
|
|
|
$
|
15,924
|
|
Products
|
|
|
4,060
|
|
|
|
4,517
|
|
|
|
$
|
24,242
|
|
|
$
|
20,441
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
1,755
|
|
|
$
|
(1,576
|
)
|
Products
|
|
|
(477
|
)
|
|
|
(1,464
|
)
|
|
|
$
|
1,278
|
|
|
$
|
(3,040
|
)
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(375
|
)
|
|
|
(399
|
)
|
Decrease in fair value of warrant liability
|
|
|
—
|
|
|
|
189
|
|
Other income
|
|
|
5
|
|
|
|
6
|
|
Income (loss) before income taxes
|
|
$
|
908
|
|
|
$
|
(3,244
|
)
|
|
|
Years Ended September 30,
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
2017
|
|
|
2016
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
12,512
|
|
|
$
|
12,413
|
|
|
Services
|
|
$
|
1,318
|
|
|
$
|
1,242
|
|
Products
|
|
|
4,807
|
|
|
|
5,562
|
|
|
Products
|
|
|
362
|
|
|
|
314
|
|
Corporate
|
|
|
3,098
|
|
|
|
3,164
|
|
|
|
|
$
|
1,680
|
|
|
$
|
1,556
|
|
|
|
$
|
20,417
|
|
|
$
|
21,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net:
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
38
|
|
|
$
|
38
|
|
|
Services
|
|
$
|
307
|
|
|
$
|
945
|
|
Products
|
|
|
—
|
|
|
|
—
|
|
|
Products
|
|
|
40
|
|
|
|
311
|
|
|
|
$
|
38
|
|
|
$
|
38
|
|
|
|
|
$
|
347
|
|
|
$
|
1,256
|
|
|
(b)
|
Geographic Information
|
|
|
Years Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Sales to External Customers:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
21,645
|
|
|
$
|
18,385
|
|
Other North America
|
|
|
266
|
|
|
|
297
|
|
Pacific Rim
|
|
|
1,395
|
|
|
|
1,148
|
|
Europe
|
|
|
774
|
|
|
|
447
|
|
Other
|
|
|
162
|
|
|
|
164
|
|
|
|
$
|
24,242
|
|
|
$
|
20,441
|
|
|
|
|
|
|
|
|
|
|
Long-lived Assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
15,024
|
|
|
$
|
16,201
|
|
|
|
$
|
15,024
|
|
|
$
|
16,201
|
|
In fiscal 2017, our
Services group continued its presence at several important existing customers. In fiscal 2017, one customer accounted for approximately
13.1% of total sales and 5.2% of total trade accounts receivable at September 30, 2017. In fiscal 2016, this customer accounted
for approximately 14.0% of total sales and 13.2% of total trade accounts receivable at September 30, 2016. The customer discussed
is included in our Services segment. There can be no assurance that our business will move away from dependence upon a limited
number of customer relationships.
As part of a fiscal
2012 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 September 30, 2017
and September 30, 2016, respectively, we had $1,117 reserved for the liability. The reserve is classified as a current liability
on the Consolidated Balance Sheets.
In
fiscal 2016 and the first quarter of fiscal 2017, t
he Company was self-insured for certain costs related to its employee
health plan. Costs resulting from noninsured losses were charged to income when incurred. The Company purchased
insurance which limited its exposure for individual claims to approximately $75 and had an aggregating specific deductible of $85
at September 30, 2016. The Company’s expense related to the plan was $1,531 for the year ended September 30, 2016.
In order to better control health costs in fiscal 2017, the Company moved to a fully-insured health plan, minimizing the claim
spikes we experienced in fiscal 2016. The Company’s total expense was $925 for fiscal 2017.
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14.
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RELATED-PARTY TRANSACTIONS
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The Company entered
into a consulting agreement with a shareholder during fiscal 2016. The Company incurred consulting fees and reimbursed travel costs
of $31 for the year ended September 30, 2016. The agreement was terminated on good terms on June 1, 2016. In April 2017, the Company
renewed the agreement with the shareholder, incurring $22 in fees and reimbursed travel costs in fiscal 2017.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Bioanalytical Systems, Inc.
We have audited the accompanying consolidated
balance sheets of Bioanalytical Systems, Inc. as of September 30, 2017 and 2016, and the related consolidated statements of operations
and comprehensive income (loss), stockholders’ equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Bioanalytical Systems, Inc. as
of September 30, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
/s/ RSM US LLP
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Indianapolis, Indiana
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December 22, 2017
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