BIOANALYTICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
933
|
|
|
$
|
434
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
Trade, net of allowance of $2,019 at December 31, 2017
and $2,404 at September 30, 2017
|
|
|
2,267
|
|
|
|
2,530
|
|
Unbilled revenues and other
|
|
|
450
|
|
|
|
615
|
|
Inventories, net
|
|
|
931
|
|
|
|
913
|
|
Prepaid expenses
|
|
|
987
|
|
|
|
814
|
|
Total current assets
|
|
|
5,568
|
|
|
|
5,306
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
14,740
|
|
|
|
14,965
|
|
Lease rent receivable
|
|
|
96
|
|
|
|
87
|
|
Deferred tax asset
|
|
|
68
|
|
|
|
-
|
|
Goodwill
|
|
|
38
|
|
|
|
38
|
|
Other assets
|
|
|
20
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,530
|
|
|
$
|
20,417
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,725
|
|
|
$
|
2,052
|
|
Restructuring liability
|
|
|
1,117
|
|
|
|
1,117
|
|
Accrued expenses
|
|
|
1,380
|
|
|
|
1,202
|
|
Customer advances
|
|
|
3,263
|
|
|
|
2,980
|
|
Income taxes payable
|
|
|
21
|
|
|
|
20
|
|
Revolving line of credit
|
|
|
-
|
|
|
|
-
|
|
Current portion of capital lease obligation
|
|
|
130
|
|
|
|
128
|
|
Current portion of long-term debt
|
|
|
226
|
|
|
|
224
|
|
Total current liabilities
|
|
|
7,862
|
|
|
|
7,723
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, less current portion
|
|
|
36
|
|
|
|
69
|
|
Long-term debt, less current portion, net of debt issuance costs
|
|
|
4,104
|
|
|
|
4,158
|
|
Total liabilities
|
|
|
12,002
|
|
|
|
11,950
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2017 and at September 30, 2017
|
|
|
1,035
|
|
|
|
1,035
|
|
Common shares, no par value:
|
|
|
|
|
|
|
|
|
Authorized 19,000,000 shares; 8,244,201 issued and
outstanding at December 31, 2017 and 8,243,896 at September 30, 2017
|
|
|
2,023
|
|
|
|
2,023
|
|
Additional paid-in capital
|
|
|
21,481
|
|
|
|
21,446
|
|
Accumulated deficit
|
|
|
(16,011
|
)
|
|
|
(16,037
|
)
|
Total shareholders’ equity
|
|
|
8,528
|
|
|
|
8,467
|
|
Total liabilities and shareholders’ equity
|
|
$
|
20,530
|
|
|
$
|
20,417
|
|
The accompanying notes are an integral
part of the condensed consolidated financial statements
BIOANALYTICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited)
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
4,525
|
|
|
$
|
5,264
|
|
Product revenue
|
|
|
852
|
|
|
|
910
|
|
Total revenue
|
|
|
5,377
|
|
|
|
6,174
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenue
|
|
|
3,273
|
|
|
|
3,750
|
|
Cost of product revenue
|
|
|
523
|
|
|
|
565
|
|
Total cost of revenue
|
|
|
3,796
|
|
|
|
4,315
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,581
|
|
|
|
1,859
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling
|
|
|
294
|
|
|
|
336
|
|
Research and development
|
|
|
139
|
|
|
|
104
|
|
General and administrative
|
|
|
1,137
|
|
|
|
1,325
|
|
Total operating expenses
|
|
|
1,570
|
|
|
|
1,765
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
11
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(52
|
)
|
|
|
(76
|
)
|
Other income
|
|
|
—
|
|
|
|
1
|
|
Net (loss) income before income taxes
|
|
|
(41
|
)
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefit) expense
|
|
|
(67
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
—
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
26
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Diluted net income per share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Weighted common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,244
|
|
|
|
8,107
|
|
Diluted
|
|
|
8,795
|
|
|
|
8,699
|
|
The accompanying notes are an integral
part of the condensed consolidated financial statements.
BIOANALYTICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In thousands)
(Unaudited)
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26
|
|
|
$
|
17
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
404
|
|
|
|
396
|
|
Employee stock compensation expense
|
|
|
34
|
|
|
|
10
|
|
(Gain)/Loss on disposal of property and equipment
|
|
|
1
|
|
|
|
(5
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
419
|
|
|
|
(623
|
)
|
Inventories
|
|
|
(18
|
)
|
|
|
86
|
|
Income tax accruals
|
|
|
(67
|
)
|
|
|
1
|
|
Prepaid expenses and other assets
|
|
|
(173
|
)
|
|
|
178
|
|
Accounts payable
|
|
|
(327
|
)
|
|
|
81
|
|
Accrued expenses
|
|
|
178
|
|
|
|
217
|
|
Customer advances
|
|
|
283
|
|
|
|
651
|
|
Net cash provided by operating activities
|
|
|
760
|
|
|
|
1,009
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(175
|
)
|
|
|
(105
|
)
|
Proceeds from sale of equipment
|
|
|
—
|
|
|
|
5
|
|
Net cash used in investing activities
|
|
|
(175
|
)
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payments of long-term debt
|
|
|
(55
|
)
|
|
|
(196
|
)
|
Payments of debt issuance costs
|
|
|
—
|
|
|
|
(17
|
)
|
Net (payments) borrowings on revolving line of credit
|
|
|
—
|
|
|
|
(761
|
)
|
Payments on capital lease obligations
|
|
|
(31
|
)
|
|
|
(34
|
)
|
Net cash used in financing activities
|
|
|
(86
|
)
|
|
|
(1,008
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
499
|
|
|
|
(99
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
434
|
|
|
|
386
|
|
Cash and cash equivalents at end of period
|
|
$
|
933
|
|
|
$
|
287
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
48
|
|
|
$
|
57
|
|
The accompanying notes are an integral
part of the condensed consolidated financial statements.
BIOANALYTICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Amounts in thousands except per share
data or as otherwise indicated)
(Unaudited)
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.
We have prepared the
accompanying unaudited interim condensed consolidated financial statements pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles (“GAAP”), and therefore should be read
in conjunction with our audited consolidated financial statements, and the notes thereto, included in the Company’s annual
report on Form 10-K for the year ended September 30, 2017. Certain amounts in the fiscal 2017 consolidated financial statements
have been reclassified to conform to the fiscal 2018 presentation without affecting previously reported net income or stockholders’
equity. In the opinion of management, the condensed consolidated financial statements for the three months ended December 31, 2017
and 2016 include all adjustments which are necessary for a fair presentation of the results of the interim periods and of our financial
position at December 31, 2017. The results of operations for the three months ended December 31, 2017 may not be indicative of
the results for the year ending September 30, 2018.
2.
STOCK-BASED
COMPENSATION
The Company’s
2008 Stock Option Plan (“the Plan”) is used to promote our long-term interests by providing a means of attracting and
retaining officers, directors and key employees and aligning their interests with those of our shareholders. The Plan is described
more fully in Note 9 in the Notes to the Consolidated Financial Statements in our Form 10-K for the fiscal year ended September
30, 2017. All options granted under the Plan had an exercise price equal to the market value of the underlying common shares on
the date of grant. We expense the estimated fair value of stock options over the vesting periods of the grants. We recognize expense
for awards subject to graded vesting using the straight-line attribution method, reduced for estimated forfeitures. Forfeitures
are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment is recognized
at that time. Stock based compensation expense for the three months ended December 31, 2017 and 2016 was $34 and $10, respectively.
A summary of our stock
option activity for the three months ended December 31, 2017 is as follows (in thousands except for share prices):
|
|
Options
(shares)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - October 1, 2017
|
|
|
140
|
|
|
$
|
1.91
|
|
|
$
|
1.45
|
|
Exercised
|
|
|
(1
|
)
|
|
$
|
1.40
|
|
|
$
|
1.15
|
|
Granted
|
|
|
198
|
|
|
$
|
1.94
|
|
|
$
|
1.52
|
|
Forfeited
|
|
|
(11
|
)
|
|
$
|
4.80
|
|
|
|
|
|
Outstanding - December 31, 2017
|
|
|
326
|
|
|
$
|
1.83
|
|
|
$
|
1.45
|
|
The weighted-average
assumptions used to compute the fair value of the options granted in the three months ended December 31, 2017 were as follows:
Risk-free interest rate
|
|
|
2.31
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Volatility of the expected market price
|
|
|
83.70
|
%-
|
of the Company's common shares
|
|
|
83.70
|
%
|
Expected life of the options (years)
|
|
|
8.0
|
|
As of December 31, 2017, our total unrecognized
compensation cost related to non-vested stock options was $284 and is expected to be recognized over a weighted-average service
period of 1.6 years.
3.
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: Series A preferred shares issued in May 2011 in connection with our 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 were not considered in computing
diluted income per share for the three months ended December 31, 2016 because they were anti-dilutive.
The following table reconciles our computation
of basic income per share to diluted income per share:
|
|
Three Months Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
|
$
|
26
|
|
|
$
|
17
|
|
Weighted average common shares outstanding
|
|
|
8,244
|
|
|
|
8,107
|
|
Basic net income per share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
Diluted net income applicable to common shareholders
|
|
$
|
26
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
8,244
|
|
|
|
8,107
|
|
Plus: Incremental shares from assumed conversions:
|
|
|
|
|
|
|
|
|
Series A preferred shares
|
|
|
518
|
|
|
|
592
|
|
Dilutive stock options/shares
|
|
|
33
|
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
|
|
8,795
|
|
|
|
8,699
|
|
Diluted net income per share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
4.
INVENTORIES
Inventories consisted of the following:
|
|
December 31, 2017
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
764
|
|
|
$
|
761
|
|
Work in progress
|
|
|
163
|
|
|
|
135
|
|
Finished goods
|
|
|
230
|
|
|
|
228
|
|
|
|
|
1,157
|
|
|
$
|
1,124
|
|
Obsolescence reserve
|
|
|
(226
|
)
|
|
|
(211
|
)
|
|
|
$
|
931
|
|
|
$
|
913
|
|
5.
SEGMENT
INFORMATION
We operate in two principal
segments - research services and research products. Our Services segment provides research and development support on a contract
basis directly to pharmaceutical companies. Our Products segment provides liquid chromatography, electrochemical and physiological
monitoring products to pharmaceutical companies, universities, government research centers and medical research institutions. Our
accounting policies in these segments are the same as those described in the summary of significant accounting policies found in
Note 2 to Consolidated Financial Statements in our annual report on Form 10-K for the fiscal year ended September 30, 2017.
|
|
Three Months Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
4,525
|
|
|
$
|
5,264
|
|
Product
|
|
|
852
|
|
|
|
910
|
|
|
|
$
|
5,377
|
|
|
$
|
6,174
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
182
|
|
|
$
|
273
|
|
Product
|
|
|
(171
|
)
|
|
|
(179
|
)
|
|
|
$
|
11
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(52
|
)
|
|
|
(76
|
)
|
Other income
|
|
|
—
|
|
|
|
1
|
|
Income (loss) before income taxes
|
|
$
|
(41
|
)
|
|
$
|
19
|
|
6.
INCOME
TAXES
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.
On December 22, 2017,
the United States (“U.S.”) enacted significant changes to the U.S. tax law following the passage and signing of H.R.1,
“An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year
2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”). The Tax Act included significant
changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%.
Accordingly, the Company’s
income tax provision as of December 31, 2017 reflects the current year impacts of the U.S. Tax Act on the estimated annual effective
tax rate. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%. The impact from the permanent reduction to the
U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018 (the “Effective Date”). When a
U.S. federal tax rate change occurs during a fiscal year, taxpayers are required to compute a weighted daily average rate for the
fiscal year of enactment and as a result the Company calculated a U.S. federal statutory income tax rate of 24.5% for the current
fiscal year ending September 30, 2018.
The difference between
the newly enacted federal statutory rate of 24.5% and our effective rate of 162.19% is due to changes in our valuation allowance
on our net deferred tax assets along with realizing the deferred tax asset associated with the AMT credit carryforward. The impact
of the newly enacted federal statutory rate as a result of the Tax Act to the net deferred tax assets is a provisional amount of
approximately a $1,600 decrease with any offsetting decrease to the valuation allowance. The amount is provisional because the
final number cannot be calculated until the underlying timing differences are known rather than estimated.
We recognize the tax
benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical
merits of the position. We measure the amount of the accrual for which an exposure exists as the largest amount of benefit determined
on a cumulative probability basis that we believe is more likely than not to be realized upon ultimate settlement of the position.
At December 31, 2017
and September 30, 2017, we had a $16 liability for uncertain income tax positions.
We record interest
and penalties accrued in relation to uncertain income tax positions as a component of income tax expense. Any changes in the liability
for uncertain tax positions would impact our effective tax rate. We do not expect the total amount of unrecognized tax benefits
to significantly change in the next twelve months.
We file income tax
returns in the U.S. and several U.S. States. We remain subject to examination by taxing authorities in the jurisdictions in which
we have filed returns for years after 2012.
7.
DEBT
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 December 31, 2017 was $4,391. 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 December 31, 2017 and 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 second half of fiscal 2017 and the first
quarter of fiscal 2018 with the remainder to be amortized through June 2022. For the three months ended December 31, 2017 and 2016,
we amortized $3 and $21, respectively, into interest expense on the condensed consolidated statements of operations and comprehensive
income (loss). These noncash charges are included in depreciation and amortization on the consolidated statements of cash flows.
As of December 31, 2017 and September 30, 2017, the unamortized portion of debt issuance costs related to our credit facility was
$61 and $64, respectively, and was included in Long-term Debt, less current portion on the condensed consolidated balance sheets.
Former 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, $27 of which was paid at the execution of the last forbearance agreement and an additional $100
was paid in June 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.
Former 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 of June 23,
2017 as a result of the new credit facility described above and the balance was reduced to zero.
8.
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 December 31, 2017
and September 30, 2017, respectively, we had $1,117 reserved for the liability. The reserve is classified as a current liability
on the Consolidated Balance Sheets.
9.
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 July 2015, the FASB
issued an amendment to the accounting guidance related to the measurement of inventory. The amendment revises inventory calculations
so as to be measured at the lower of cost and net realizable value as compared to the lower of cost or market. Subsequent measurement
is unchanged for inventory measured using last-in, first-out (LIFO) or the retail inventory method. The Company adopted this guidance
in the first quarter of fiscal 2018 with no material effect on the condensed 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 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.
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 2017-01,
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 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains
statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Those statements appear in a number of places in this Report and may include, but are not limited to, statements regarding our
intent, belief or current expectations with respect to (i) our strategic plans; (ii) trends in the demand for our products and
services; (iii) trends in the industries that consume our products and services; (iv) our ability to develop new products and services;
(v) our ability to make capital expenditures and finance operations; (vi) global economic conditions, especially as they impact
our markets; (vii) our cash position; (viii) our ability to integrate a new sales and marketing team; (ix) our ability to service
our outstanding indebtedness and (x) our expectations regarding the volume of new bookings, pricing, gross profit margins and liquidity.
Readers are cautioned that forward-looking statements are not guarantees of future performance and involve risks and uncertainties.
Actual results may differ materially from those in the forward-looking statements as a result of various factors, many of which
are beyond our control.
In addition, we have
based these forward-looking statements on our current expectations and projections about future events. Although we believe that
the assumptions on which the forward-looking statements contained herein are based are reasonable, actual events may differ from
those assumptions, and as a result, the forward-looking statements based upon those assumptions may not accurately project future
events. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial
statements and notes thereto included or incorporated by reference elsewhere in this Report. In addition to the historical information
contained herein, the discussions in this Report may contain forward-looking statements that may be affected by risks and uncertainties,
including those discussed in Item 1A, Risk Factors contained in our annual report on Form 10-K for the fiscal year ended September
30, 2017. Our actual results could differ materially from those discussed in the forward-looking statements.
Amounts in this Item 2 are in thousands,
unless otherwise indicated.
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 pharmaceutical development. 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. For example, in November 2017 we announced
plans to expand our toxicology facility in Mt. Vernon, Indiana, near Evansville. 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 through operations and to obtain additional capital
if and as needed through 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. In the first three months of fiscal 2018, we experienced a 14.0% decrease
in revenues in our Services segment and a 6.4% decrease in revenues for our Products segment as compared to the first quarter of
fiscal 2017. Our Services revenue was negatively impacted by an unfavorable study mix for preclinical services and fewer samples
to assay for bioanalytical analysis. These negative factors were partially offset by an increase in the number of studies for pharmaceutical
analysis as well as our continued efforts to collect archive revenues in fiscal 2018. The revenue decline in our Products segment
was mainly due to lower maintenance and services revenues, as well as a decline in sales of our Culex automated
in vivo
sampling systems as compared to the first quarter of fiscal 2017.
We review various metrics
to evaluate our financial performance, including revenue, margins and earnings. In the first three months of fiscal 2018, total
revenues decreased 12.9%, gross profit decreased 15.0% and operating expenses were lower by 11.0% as compared to same period in
fiscal 2017. The decreased revenues and margins contributed to the lower reported operating income of $11 for the first three months
of fiscal 2018 compared to operating income of $94 for the first three months of fiscal 2017. For a detailed discussion of our
revenue, margins, earnings and other financial results for the three months ended December 31, 2017, see “Results of Operations
– 2018 compared to 2017 below.
As of December 31,
2017, we had $933 of cash and cash equivalents as compared to $434 of cash and cash equivalents at the end of fiscal 2017. In first
three months of fiscal 2018, we generated $760 in cash from operations as compared to $1,009 in the same period in fiscal 2017.
Total capital expenditures increased in the first three months of fiscal 2018 to $175 from $105 in the first three months of fiscal
2017. In addition, accounts payable decreased by $327 and customer advances increased $283 compared to prior fiscal year. We had
a zero balance on our line of credit as of December 31, 2017.
We believe our fiscal
2018 first quarter financial results do not fully reflect all our efforts toward implementing key management initiatives, and we
remain focused on executing these initiatives aimed at growing revenue, reducing costs and generating additional cash flow. We
further believe that our Credit Agreement with First Internet Bank provides an important baseline source of liquidity to continue
to implement relevant initiatives. In fiscal 2017, we welcomed the Company’s founder as a scientific advisor to management
and benefit from his market presence and scientific knowledge. We continue to focus 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 build on these
accomplishments in fiscal 2018 in order to grow our business and recruit and retain talent.
During fiscal 2018,
we intend to increase our investment in Products research and development in order to upgrade current products and to identify
potential new products. We also intend to further develop and expand our relationships with distributors and resellers to boost
sales in our Products 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 sales and development of our Products and to solidify
relationships with our customers and prospective partners. We believe these measures will prepare us for growth in the long term.
In our Services segment,
we are investing in laboratory equipment to add efficiencies and capabilities in areas of possible growth. We also plan to invest
in the recruitment of additional talent and equipment upgrades in order to expand our discovery services capabilities. Further,
we continue to explore avenues through which to expand service offerings to meet customer demand. Consistent with that aim, in
November 2017, we announced plans to expand our toxicology facility in Mt. Vernon, Indiana, near Evansville. Finally, we will continue
the practice of charging for archive services as an additional revenue stream.
Our long-term strategic
objective remains to maximize the Company’s intrinsic value per share. In order to achieve that end, we will focus on, among
other items, productivity, generating free cash flow, and the strategies and initiatives mentioned above.
Results of Operations
The following table
summarizes our condensed consolidated statement of operations as a percentage of total revenues for the periods shown:
|
|
Three Months Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Service revenue
|
|
|
84.1
|
%
|
|
|
85.3
|
%
|
Product revenue
|
|
|
15.9
|
|
|
|
14.7
|
|
Total revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
Cost of Service revenue
(a)
|
|
|
72.3
|
|
|
|
71.2
|
|
Cost of Product revenue
(a)
|
|
|
61.4
|
|
|
|
62.1
|
|
Total cost of revenue
|
|
|
70.6
|
|
|
|
69.9
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
29.4
|
|
|
|
30.1
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
29.2
|
|
|
|
28.6
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
0.2
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(1.0
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(0.8
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefit)
|
|
|
(1.3
|
)
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
0.5
|
%
|
|
|
0.3
|
%
|
|
(a)
|
Percentage of service and product revenues, respectively
|
Three Months Ended December 31, 2017
Compared to Three Months Ended December 31, 2016
Service and Product Revenues
Revenues for the quarter ended December
31, 2017 decreased 12.9% to $5,377 compared to $6,174 for the same period last fiscal year.
Our Service revenue
decreased 14.0% to $4,525 in the first quarter of fiscal 2018 compared to $5,264 for the prior year period. Preclinical services
revenues decreased $501 due an unfavorable mix of studies in the first fiscal quarter of 2018. Other laboratory services revenues
were positively impacted by higher pharmaceutical analysis revenues, which were slightly offset by lower discovery services revenues
in the first quarter of fiscal 2018 versus the comparable period in fiscal 2017. Also, in fiscal 2017 we instituted the practice
of uniformly charging archive fees to clients where contracts allow. Archive revenue added $60 to Other laboratory services revenue
in the first fiscal quarter of 2018, as compared to $8 in the first fiscal quarter of 2017. Bioanalytical analysis revenues declined
by $284 due to fewer samples received and analyzed in the first quarter of fiscal 2018.
|
|
Three Months Ended
December 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
Bioanalytical analysis
|
|
$
|
1,031
|
|
|
$
|
1,315
|
|
|
$
|
(284
|
)
|
|
|
(21.6
|
)%
|
Preclinical services
|
|
|
3,051
|
|
|
|
3,552
|
|
|
|
(501
|
)
|
|
|
(14.1
|
)%
|
Other laboratory services
|
|
|
443
|
|
|
|
397
|
|
|
|
46
|
|
|
|
11.6
|
%
|
|
|
$
|
4,525
|
|
|
$
|
5,264
|
|
|
$
|
(739
|
)
|
|
|
|
|
Sales in our Products
segment decreased 6.4% in the first quarter of fiscal 2018 to $852 from $910 in the same period of the prior fiscal year. The majority
of the decrease stems from lower maintenance and services revenues, included in Other instruments, as well as a decline in sales
of our Culex automated
in vivo
sampling systems. These factors were partially offset by an increase in analytical instruments
revenues in the first fiscal quarter of 2018.
|
|
Three Months Ended
December 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
%
|
|
Culex, in-vivo sampling systems
|
|
$
|
361
|
|
|
$
|
388
|
|
|
$
|
(27
|
)
|
|
|
(7.0
|
)%
|
Analytical instruments
|
|
|
355
|
|
|
|
298
|
|
|
|
57
|
|
|
|
19.1
|
%
|
Other instruments
|
|
|
136
|
|
|
|
224
|
|
|
|
(88
|
)
|
|
|
(39.3
|
)%
|
|
|
$
|
852
|
|
|
$
|
910
|
|
|
$
|
(58
|
)
|
|
|
|
|
Cost of Revenues
Cost of revenues for
the first quarter of fiscal 2018 was $3,796 or 70.6% of revenue, compared to $4,315, or 69.9% of revenue for the prior-year period.
Cost of Service revenue
as a percentage of Service revenue increased to 72.3% during the first quarter of fiscal 2018 from 71.2% in the comparable period
in fiscal 2017. The principal cause of this increase was the decline in revenues, which led to decreased absorption of the fixed
costs in our Service segment. A significant portion of our costs of productive capacity in the Service segment are fixed. Thus,
decreases in revenues led to increases in costs as a percentage of revenue.
Cost of Products revenue
as a percentage of Products revenue in the first quarter of fiscal 2018 decreased to 61.4% from 62.1% in the comparable prior year
period. This decrease is mainly due to the mix of product sales during the first quarter of fiscal 2018.
Operating Expenses
Selling expenses for
the three months ended December 30, 2017 decreased 12.5% to $294 from $336 for the comparable period last fiscal year. This decrease
is mainly due to lower salaries and benefits from the loss of sales employees plus lower costs for outside services and sales promotions
in the first fiscal quarter of 2018 compared to the comparable period in fiscal 2017.
Research and development
expenses for the first quarter of fiscal 2018 increased 33.7% over the comparable period last fiscal year to $139 from $104. The
increase was primarily due to higher consulting expenses and costs for operating supplies related to product development.
General and administrative
expenses for the first quarter of fiscal 2018 decreased 14.2% to $1,137 from $1,325 for the comparable prior-year period. The principal
reason for the decrease was lower salaries and benefits expense attributable to severance expense related to the separation of
our former Chief Executive Officer incurred during the first quarter of fiscal 2017, which we did not incur in the comparable fiscal
2018 period. Also in the first fiscal quarter of 2018, lower consulting services expenses were partially offset by higher stock
option expense attributable to grants of options to our directors and certain of our employees in October 2017.
Other Income (Expense)
Other expense for the
first quarter of fiscal 2018 was $52, as compared to other expense of $75 for the first quarter of fiscal 2017. The primary reason
for the change in expense was the decrease in interest expense under our new credit agreement with First Internet Bank, as described
below.
Income Taxes
Our effective tax rate
for the quarters ended December 31, 2017 and 2016 was 162.19% and 6.5%, respectively. The current year benefit primarily relates
to an Alternative Minimum Tax (AMT) credit carryforward that will be refundable due to AMT being repealed for corporations. This
will be refundable for any tax year beginning after 2017 and before 2022 in an amount equal to 50% (100% for tax years beginning
in 2021) of the excess minimum tax credit for the tax year, over the amount of the credit allowable for the year against regular
tax liability.
Net Income
As a result of the
factors described above, net income for the quarter ended December 31, 2017 amounted to $26, compared to net income of $17 in the
comparable fiscal 2017 period.
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 December 31, 2017
and September 30, 2017, 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 December 31, 2017,
we had cash and cash equivalents of $933, compared to $434 at September 30, 2017.
Net cash provided by
operating activities was $760 for the three months ended December 31, 2017 compared to cash provided by operating activities of
$1,009 for the three months ended December 31, 2016. The decrease in cash provided by operating activities in the first three months
of fiscal 2018 partially resulted from a lower operating income versus the prior year period. Contributing factors to our cash
provided by operations in the first three months of fiscal 2018 were noncash charges of $404 for depreciation and amortization,
a net increase in customer advances of $283 and in accrued expenses of $178 as well as a net decrease in accounts receivable of
$419. These items were partially offset by a net decrease in accounts payable of $327.
Days’ sales in
accounts receivable decreased to 47 days at December 31, 2017 from 48 days at September 30, 2017 due to fewer extended collections
from certain customers and a decrease in unbilled revenues
.
It is not unusual to see a fluctuation in the Company's pattern
of days’ sales in accounts receivable. Customers may expedite or delay payments from period-to-period for a variety of reasons
including, but not limited to, the timing of capital raised to fund on-going research and development projects.
Included in operating
activities for the first three months of fiscal 2017 are non-cash charges of $396 for depreciation and a net increase in customer
advances of $651 and in accrued expenses of $217 as well as a net decrease in prepaid expenses of $178. These items were partially
offset by a net increase in accounts receivable of $623.
Investing activities
used $175 in the first three months of fiscal 2018 due mainly to capital expenditures as compared to $100 in the first three months
of fiscal 2017. The investing activity in fiscal 2018 consisted of investments in
building improvements
as well as laboratory and IT equipment and software
.
Financing activities
used $86 in the first three months of fiscal 2018, as compared to $1,008 used during the first three months of fiscal 2017. The
main uses of cash in the first three months of fiscal 2018 were for long-term debt payments of $55 and capital lease payments of
$31. The main uses of cash in the first quarter of fiscal 2017 were net payments on our line of credit of $761 as well as long-term
debt and capital lease payments of $196 and $34, respectively.
Capital Resources
Credit Facility
On June 23, 2017, we
entered into a 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, as more fully described in Note 7 to condensed consolidated financial statements.
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 December 31, 2017 was $4,391. 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 December 31, 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
and the first fiscal quarter of 2018 with the remainder to be amortized through June 2022.
The Company’s
sources of liquidity for the remainder of fiscal 2018 are expected to consist primarily of cash generated from operations, cash
on-hand and, if needed, borrowings under our revolving credit facility or as otherwise may be available. 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.