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, including as operating under the trade name “Inotiv” (“We,” “Our,” “Us,”
the “Company,” “BASi” and “Inotiv”) 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, 2019. In the opinion of management, the condensed consolidated financial
statements for the three months ended December 31, 2019 and 2018 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, 2019. The results of operations for the
three months ended December 31, 2019 may not be indicative of the results for the year ending September 30, 2020.
2.
|
STOCK-BASED COMPENSATION
|
The
Company’s 2008 Stock Option Plan (the “Plan”) was 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, 2019. In March 2018, our shareholders approved the amendment and restatement of
the Plan in the form of the Amended and Restated 2018 Equity Incentive Plan (the “Equity Plan”) and the Company currently
grants equity awards from the Equity Plan. The purpose of the Equity Plan is to promote our long-term interests by providing a
means of attracting and retaining officers, directors and key employees. The maximum number of common shares that may be granted
under the Equity Plan is 700 shares plus the remaining shares from the 2008 Stock Option Plan.
All options granted
under the Plan and the Equity Plan had an exercise price equal to the fair 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, 2019 was $81. Stock based compensation
expense for the three months ended December 31, 2018 was $25. The additional expense in the three months ending December 31,
2019 was due to the grants issued to our Chief Executive Officer in January 2019, option grants to all employees that were
issued in 2019 as well as option grants for employees related to the Smithers Avanza acquisition, as described in Note 10.
A summary of our stock
option activity for the three months ended December 31, 2019 is as follows (in thousands except for share prices):
|
|
Options
(shares)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Outstanding – October 1, 2019
|
|
|
776
|
|
|
$
|
1.61
|
|
|
$
|
1.22
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
11
|
|
|
$
|
4.64
|
|
|
$
|
3.14
|
|
Forfeited
|
|
|
(2
|
)
|
|
$
|
1.56
|
|
|
|
|
|
Outstanding - December 31, 2019
|
|
|
785
|
|
|
$
|
1.65
|
|
|
$
|
1.25
|
|
Exercisable at December 31, 2019
|
|
|
223
|
|
|
|
|
|
|
|
|
|
The weighted-average
assumptions used to compute the fair value of the options granted in the three months ended December 31, 2019 were as follows:
Risk-free interest rate
|
|
|
1.77
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
|
|
|
Volatility of the expected market price
of the Company's common shares
|
|
|
71.0%-71.5%
|
|
Expected life of the options (years)
|
|
|
8.0
|
|
As of December 31, 2019, our total
unrecognized compensation cost related to non-vested stock options was $452 and is expected to be recognized over a weighted-average
service period of 1.1 years.
During
the three months ended December 31, 2019, we granted a total of 54 restricted shares to members of the Company’s leadership
team. A summary of our restricted share activity for the three months ended December 31, 2019 is as follows:
|
|
Restricted Shares
|
|
|
|
|
|
|
Outstanding – September 30, 2019
|
|
|
20
|
|
Granted
|
|
|
54
|
|
Forfeited
|
|
|
—
|
|
Outstanding – December 31, 2019
|
|
|
74
|
|
As of December 31, 2019, our total
unrecognized compensation cost related to non-vested restricted shares was $208 and is expected to be recognized over a weighted-average
service period of 1.75 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 shares and the treasury stock method for stock options, respectively. Shares issuable upon exercise of 297 options
were not considered in computing diluted income (loss) per share for the three months ended December 31, 2018 because they
were anti-dilutive. Shares issuable upon exercise of 785 options were not considered in computing diluted income (loss) per share
for the three months ended December 31, 2019 because they were anti-dilutive.
The following table reconciles our computation
of basic net loss per share to diluted loss per share:
|
|
Three Months Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Basic net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shareholders
|
|
$
|
(1,426
|
)
|
|
$
|
(85
|
)
|
Weighted average common shares outstanding
|
|
|
10,669
|
|
|
|
10,245
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.01
|
)
|
Diluted net loss per share:
|
|
|
|
|
|
|
|
|
Diluted net loss applicable to common shareholders
|
|
$
|
(1,426
|
)
|
|
$
|
(85
|
)
|
Weighted average common shares outstanding
|
|
|
10,669
|
|
|
|
10,245
|
|
Plus: Incremental shares from assumed conversions:
|
|
|
|
|
|
|
|
|
Series A preferred shares
|
|
|
—
|
|
|
|
—
|
|
Dilutive stock options/shares
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
|
|
10,669
|
|
|
|
10,245
|
|
Diluted net loss per share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.01
|
)
|
Inventories consisted of the following:
|
|
December 31,
2019
|
|
|
September 30, 2019
|
|
Raw materials
|
|
$
|
784
|
|
|
$
|
858
|
|
Work in progress
|
|
|
87
|
|
|
|
89
|
|
Finished goods
|
|
|
371
|
|
|
|
346
|
|
|
|
|
1,242
|
|
|
|
1,293
|
|
Obsolescence reserve
|
|
|
(208
|
)
|
|
|
(198
|
)
|
|
|
$
|
1,034
|
|
|
$
|
1,095
|
|
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,
2019.
|
|
Three Months Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
12,142
|
|
|
$
|
7,735
|
|
Product
|
|
|
776
|
|
|
|
890
|
|
|
|
$
|
12,918
|
|
|
$
|
8,625
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
1,263
|
|
|
$
|
636
|
|
Product
|
|
|
(271
|
)
|
|
|
(80
|
)
|
Corporate
|
|
|
(2,012
|
)
|
|
|
(515
|
)
|
|
|
$
|
(1,020
|
)
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(311
|
)
|
|
|
(126
|
)
|
Other income
|
|
|
2
|
|
|
|
1
|
|
Loss before income taxes
|
|
$
|
(1,329
|
)
|
|
$
|
(84
|
)
|
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 21% for the current
fiscal year end September 30, 2019.
The difference between the enacted federal
statutory rate of 21% and our effective rate of (7.32) % for the quarterly period ended December 31, 2019 is due to changes
in our valuation allowance on our net deferred tax assets. The impact of the newly enacted federal statutory rate as a result of
the Tax Act to the net deferred tax assets is a $1,648 decrease with any offsetting decrease to the valuation allowance.
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 settlement of the position.
At December 31, 2019 and September 30,
2019, we had no 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 2013.
Credit Facility
On December 1,
2019, in connection with the PCRS Acquisition (as described in Note 10), we entered into an Amended and Restated Credit Agreement
(the “Credit Agreement”) with First Internet Bank of Indiana (“FIB”). The Credit Agreement includes five
term loans (the “Initial Term Loan,” “Second Term Loan,” “Third Term Loan,” “Fourth Term
Loan,” and “Fifth Term Loan,” respectively), a revolving line of credit (the “Revolving Facility”),
a construction draw loan (the “Construction Draw Loan”), an equipment draw loan (the “Equipment Draw Loan”),
and two capital expenditure lines of credit (the “Initial Capex Line” and the “Second Capex Line,” respectively).
The Initial Term Loan
for $4,500 bears interest at a fixed rate of 3.99%, with monthly principal and interest payments of approximately $33. The Initial
Term Loan matures June 23, 2022. The balance on the Initial Term Loan at December 31, 2019 was $3,930. We used the proceeds
from the Initial Term Loan to satisfy our indebtedness with Huntington Bank and terminated the related interest rate swap.
The Second Term Loan
for $5,500 was used to fund a portion of the cash consideration for the Seventh Wave Acquisition (as described in Note 10). Amounts
outstanding under the Second Term Loan bear interest at a fixed per annum rate of 5.06%, with monthly principal and interest payments
equal to $78. The Second Term Loan matures July 2, 2023 and the balance on the Second Term Loan at December 31, 2019
was $4,541.
The Third Term Loan
for $1,271 was used to fund the cash consideration for the Smithers Avanza Acquisition (as described in Note 10). Amounts outstanding
under the Third Term Loan bear interest at a fixed per annum rate of 4.63%. The Third Term Loan required monthly interest only
payments until December 1, 2019, from which time payments of principal and interest in monthly installments of $20 are required,
with all accrued but unpaid interest, cost and expenses due and payable at the maturity date. The Third Term Loan matures November 1,
2025 and the balance on the Third Term Loan at December 31, 2019 was $1,255.
The Fourth Term Loan
in the principal amount of $1,500 has a maturity of June 1, 2025. Interest accrues on the Fourth Term Loan at a fixed per
annum rate equal to 4%, with interest payments only commencing January 1, 2020 through June 1, 2020, with monthly payments
of principal and interest thereafter through maturity. The balance on the Fourth Term Loan at December 31, 2019 was $1,500.
The Fifth Term loan
in the principal amount of $1,939 has a maturity of December 1, 2024. Interest accrues on the Fifth Term Loan at a fixed per
annum rate equal to 4%, with payments of principal and interest due monthly through maturity. The balance on the Fifth Term Loan
at December 31, 2019 was $1,939. We entered into the Fourth Term Loan and the Fifth Term Loan in connection with the PCRS
Acquisition.
The Revolving Facility
provides a line of credit for up to $5,000, which the Company may borrow from time to time, subject to the terms of the Credit
Agreement, including as may be limited by the amount of the Company’s outstanding eligible receivables. The Revolving Facility
has a maturity of January 31, 2021 and requires monthly accrued and unpaid interest payments only until maturity at a floating
per annum rate equal to the greater of (a) 4%, or (b) the sum of the Prime Rate plus Zero Basis Points (0.0%), which
rate shall change concurrently with the Prime Rate. The balance on the Revolving Facility was $725 as of December 31, 2019.
The Construction Draw
Loan provides for borrowings up to a principal amount not to exceed $4,445 and the Equipment Draw Loan provides for borrowings
up to a principal amount not to exceed $1,429. The Construction Draw Loan and Equipment Draw Loan each mature on March 28,
2025. As of December 31, 2019, there was a $4,247 balance on the Construction Draw Loan and a $1,237 balance on the Equipment
Draw Loan.
Subject to certain
conditions precedent, the Construction Draw Loan and an Equipment Draw Loan each permit the Company to obtain advances aggregating
up to the maximum principal amount available for such loan through March 28, 2020. Amounts outstanding under these loans
bear interest at a fixed per annum rate of 5.20%. The Construction Draw Loan and the Equipment Draw Loan each require monthly
payments of accrued interest on amounts outstanding through March 28, 2020, and thereafter monthly payments of principal
and interest on amounts then outstanding through maturity. We have utilized funds from the Construction Draw Loan and the Equipment
Draw Loan in connection with the Evansville facility expansion.
The Initial Capex Line
provides for borrowings up to the principal amount of $1,100, which the Company may borrow from time to time, subject to the terms
of the Credit Agreement. The Initial Capex Line matures on June 30, 2020, and as of December 31, 2019, had a balance
of $948. Interest accrues on the principal balance of the Initial Capex Line at a floating per annum rate equal to the sum of the
Prime Rate plus Fifty Basis Points (0.5%), which rate shall change concurrently with the Prime Rate. The Company is required to
pay accrued but unpaid interest on the Initial Capex Line on a monthly basis until June 30, 2020, at which time the entire
balance of the Capex Line, together with accrued but unpaid interest, costs and expenses, shall be due and payable in full.
The Second Capex Line
provides for borrowings up to the principal amount of $3,000, subject to the terms of the Credit Agreement, with a maturity of
December 31, 2020 and interest payments only until maturity at a floating per annum rate equal to the greater of (a) 4%,
or (b) the sum of the Prime Rate plus Fifty Basis Points (0.5%), which rate shall change concurrently with the Prime Rate.
At December 31, 2019, the balance on the Second Capex Line was $435.
The Company’s
obligations under the Credit Agreement are guaranteed by BAS Evansville, Inc. (“BASEV”), Seventh Wave Laboratories,
LLC, BASi Gaithersburg LLC, as well as Bronco Research Services LLC (“Bronco”), each a wholly owned subsidiary of the
Company (collectively, the "Guarantors"). The Company’s obligations under the Credit Agreement and the Guarantor's
obligations under their respective guaranties are secured by first priority security interests in substantially all of the assets
of the Company and the Guarantors, respectively, mortgages on the Company’s, BASEV’s and Bronco’s facilities
in West Lafayette, Indiana, Evansville, Indiana, and Fort Collins, Colorado, respectively, and pledges of the Company’s
ownership interests in its subsidiaries.
The Credit Agreement
includes financial covenants consisting of (i) a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less
than 1.25 to 1.0, tested quarterly and measured on a trailing twelve (12) month basis and (ii) beginning March 31, 2020
a Cash Flow Leverage Ratio (as defined in the Credit Agreement), tested quarterly, as follows: not to exceed (a) as of March 31,
2020, 5.00 to 1.00, (b) as of June 30, 2020, 4.50 to 1.00, (c) as of September 30, 2020, 4.25 to 1.00 and (d) as
of December 31, 2020 and each quarter thereafter, 4.00 to 1.00. 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 has
also agreed to obtain a life insurance policy in an amount not less than $5,000 for its President and Chief Executive Officer and
to provide FIB an assignment of such life insurance policy as collateral.
In addition to the
indebtedness under our Credit Agreement, as part of the Smithers Avanza Acquisition, we have an unsecured promissory note payable
to the Smithers Avanza Seller in the initial principal amount of $810 made by BASi Gaithersburg and guaranteed by the Company.
The promissory note bears interest at 6.5% with monthly payments and maturity date of May 1, 2022. As part of the PCRS Acquisition,
we also have an unsecured promissory note payable to the Preclinical Research Services Seller in the initial principal amount of
$800. The promissory note bears interest at 4.5% with monthly payments and a maturity date of December 1, 2024.
Long term debt is detailed
in the table below.
|
|
As of:
|
|
|
|
December 31, 2019
|
|
|
September 30, 2019
|
|
Initial term loan
|
|
$
|
3,930
|
|
|
$
|
3,990
|
|
Subsequent term loan
|
|
|
4,541
|
|
|
|
4,715
|
|
Third term loan
|
|
|
1,255
|
|
|
|
1,271
|
|
New term loan
|
|
|
1,500
|
|
|
|
—
|
|
PCRS building loan
|
|
|
1,939
|
|
|
|
—
|
|
Subtotal term loans
|
|
|
13,165
|
|
|
|
9,662
|
|
|
|
|
|
|
|
|
|
|
Construction and Equipment loans
|
|
|
5,484
|
|
|
|
4,301
|
|
Seller Note – Smithers Avanza
|
|
|
810
|
|
|
|
810
|
|
Seller Note – Preclinical Research Services
|
|
|
800
|
|
|
|
—
|
|
|
|
|
20,259
|
|
|
|
15,087
|
|
Less: Current portion
|
|
|
(1,153
|
)
|
|
|
(1,109
|
)
|
Less: Debt issue costs not amortized
|
|
|
(302
|
)
|
|
|
(207
|
)
|
Total Long-term debt
|
|
$
|
18,804
|
|
|
$
|
13,771
|
|
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 had a $1,117 reserve for lease related costs and for legal and professional fees
and other costs to remove improvements previously made to the facility. During the first quarter of fiscal 2020, the Company
released a portion of the reserve for lease related liabilities that were no longer owed due to the statute of limitations. At
December 31, 2019 and September 30, 2019, respectively, we had $304 and $349 reserved for the remaining liability. The
reserve is classified as a current liability on the condensed consolidated balance sheets.
9.
|
NEW ACCOUNTING PRONOUNCEMENTS
|
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.
On October 1,
2019, the Company adopted ASC 842 Leases (ASU No.2016-02) and all the related amendments to its lease contracts using the modified
retrospective method. The effective date was used as the Company’s date of initial application with no restatement of prior
periods. As such prior periods continue to be reported under the accounting standards in effect for those periods. The Company
recorded upon adoption a right-of -use asset and lease liability on the consolidated condensed balance sheet of $9,558 and $9,686,
respectively. The lease liability reflects the present value of the Company’s estimated future minimum lease payments over
the term of the lease, which includes options that are reasonably certain to be exercised, discounted utilizing a collateralized
incremental borrowing rate. The impact of the new lease standard does not affect the Company’s cash flows. See Note 12 Leases
for additional information.
In June 2016,
the FASB issued ASU 2016-13 “Financial Instruments (Topic 326) Measurement of Credit Losses on Financial Instrument”
“CECL”). ASU 2016-13 requires an allowance for expected credit losses on financial assets be recognized
as early as day one of the instrument. This ASU departs from the incurred loss model which means the probability threshold
is removed. It considers more forward-looking information and requires the entity to estimate its credit losses as far
as it can reasonably estimate. This ASU is effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. Early adoption is permitted. The Company is assessing this pronouncement
and does not expect a material impact to the financial statements.
10.
|
BUSINESS COMBINATIONS
|
Smithers Avanza Toxicology Services LLC acquisition
Overview
On
May 1, 2019, the Company, through its wholly-owned subsidiary BASi Gaithersburg LLC (f/k/a Oriole Toxicology Services LLC)
(the “ Smithers Avanza Purchaser”), acquired (the “Smithers Avanza Acquisition”) from Smithers Avanza Toxicology
Services LLC (the “Smithers Avanza Seller”), a consulting-based contract research laboratory located in Gaithersburg,
Maryland, substantially all of the assets used by the Smithers Avanza Seller in connection with the performance of in-vivo mammalian
toxicology CRO services for pharmaceuticals (small molecules and biologics), vaccines, agro and industrial chemicals, under the
terms and conditions of an Asset Purchase Agreement, dated May 1, 2019, among the Smithers Avanza Purchaser, the Company,
the Smithers Avanza Seller and the member of the Smithers Avanza Seller (the “Smithers Avanza Purchase Agreement”).
The total consideration for the Smithers Avanza Acquisition was $2,595, which consisted of $1,271 in cash, subject to certain adjustments
and an indemnity escrow of $125, 200 of the Company’s common shares valued at $394 using the closing price of the
Company’s common shares on April 30, 2019 and an unsecured promissory note in the initial principal amount of $810 made
by the Smithers Avanza Purchaser and guaranteed by the Company. The promissory note bears interest at 6.5%. The Company funded
the cash portion of the purchase price for the Smithers Avanza Acquisition with cash on hand and the net proceeds from the refinancing
of its credit arrangements with FIB.
The Smithers Avanza
Purchase Agreement contains customary representations, warranties, covenants (including non-competition requirements applicable
to the selling parties for a 5-year period) and indemnification provisions. As contemplated by the Smithers Avanza Purchase Agreement,
on May 1, 2019 the Smithers Avanza Purchaser assumed amended lease arrangements for certain premises in Gaithersburg, Maryland
(the “Lease Arrangements”). Under the Lease Arrangements, the Smithers Avanza Purchaser agreed to lease the premises
for a term of 5 years and 8 months, with two 5 year extensions at the Smithers Avanza Purchaser’s option. Annual minimum
rental payments under the initial term of the Lease Arrangements range from $400 to $600, provided that the Lease Arrangements
provide the Smithers Avanza Purchaser with the option to purchase the premises. The Lease Arrangements include customary rights
upon a default by landlord or tenant.
Accounting for the Transaction
The Company accounts
for acquisitions in accordance with guidance found in ASC 805, Business Combinations. The guidance requires consideration given,
including contingent consideration, assets acquired, and liabilities assumed to be valued at their fair market values at the acquisition
date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived
intangible asset; (2) acquisition costs will generally be expensed as incurred, (3) restructuring costs associated with
a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. ASC 805
requires that any excess of purchase price over fair value of assets acquired, including identifiable intangibles and liabilities
assumed, be recognized as goodwill. Results are included in the Company’s results from the acquisition date of May 1,
2019.
The Company’s
allocation of the $2,595 purchase price to Smithers Avanza’s tangible and identifiable intangible assets acquired and liabilities
assumed, based on their estimated fair values as of May 1, 2019, and is included in the table below. Goodwill, which is derived
from the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive
portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is
deductible for tax purposes. The purchase price allocation as of September 30, 2019 was as follows:
|
|
Allocation as of
September 30,
2019
|
|
Assets acquired and liabilities assumed:
|
|
|
|
|
Receivables
|
|
$
|
1,128
|
|
Property and equipment
|
|
|
1,564
|
|
Prepaid expenses
|
|
|
147
|
|
Goodwill
|
|
|
545
|
|
Accrued expenses
|
|
|
(219
|
)
|
Customer advances
|
|
|
(570
|
)
|
|
|
$
|
2,595
|
|
The allocation of the
purchase price is based on valuations performed to determine the fair value of such assets and liabilities as of the acquisition
date. Goodwill from this transaction is allocated to the Company’s Services segment. Smithers Avanza recorded revenues of
$2,695 and net income of $31 for the three month period ending December 31, 2019.
PCRS acquisition
Overview
On
November 8, 2019, the Company and Bronco Research Services LLC, a wholly owned subsidiary of the Company (the “PCRS
Purchaser”), entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Pre-Clinical Research Services, Inc.,
a Colorado corporation (the “PCRS Seller”), and its shareholder. Pursuant to the Purchase Agreement, on December 1,
2019, the Company indirectly acquired (the “PCRS Acquisition”) substantially all of the assets of PCRS Seller used
or useful by PCRS Seller in connection with PCRS Seller's provision of GLP and non-GLP preclinical testing for the pharmaceutical
and medical device industries. The total consideration for the PCRS Acquisition was $5,857, which consisted of $1,500 in
cash, subject to certain adjustments, 240 of the Company’s common shares valued at $1,133 using the closing price of the
Company’s common shares on November 29, 2019 and an unsecured promissory note in the initial principal amount of $800
made by PCRS Purchaser. The promissory note bears interest at 4.5%. The Company also purchased certain real property located in
Fort Collins, Colorado, comprising the main facility for the PCRS Seller’s business and additional property located next
to the facility available for future expansion, for $2,500. The Company funded the cash portion of the purchase price for the PCRS
Acquisition with cash on hand and the net proceeds from the refinancing of its credit arrangements with FIB, as described in Note
7. As contemplated by the Purchase Agreement, the Company also entered into a lease arrangement for an ancillary property used
by Seller’s business, located in Livermore, Colorado.
Accounting for the Transaction
The Company accounts
for acquisitions in accordance with guidance found in ASC 805, Business Combinations. The guidance requires consideration given,
including contingent consideration, assets acquired and liabilities assumed to be valued at their fair market values at the acquisition
date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived
intangible asset; (2) acquisition costs will generally be expensed as incurred, (3) restructuring costs associated with
a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. ASC 805
requires that any excess of purchase price over fair value of assets acquired, including identifiable intangibles and liabilities
assumed, be recognized as goodwill. Results are included in the Company’s results from the acquisition date of December 1,
2019.
The Company’s
allocation of the $5,857 purchase price to PCRS’s tangible and identifiable intangible assets acquired and liabilities assumed,
based on their estimated fair values as of December 1, 2019, is included in the table below. Goodwill, which is derived from
the enhanced scientific expertise, expanded client base and our ability to provide broader service solutions through a comprehensive
portfolio, is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is
deductible for tax purposes. The preliminary purchase price allocation as of December 31, 2019 is as follows:
|
|
Preliminary
Allocation as of
December 31,
2019
|
|
Assets acquired and liabilities assumed:
|
|
|
|
|
Receivables
|
|
$
|
578
|
|
Property and equipment
|
|
|
2,666
|
|
Unbilled revenues
|
|
|
162
|
|
Prepaid expenses
|
|
|
27
|
|
Goodwill
|
|
|
3,002
|
|
Accounts payable
|
|
|
(109
|
)
|
Accrued expenses
|
|
|
(118
|
)
|
Customer advances
|
|
|
(351
|
)
|
|
|
$
|
5,857
|
The preliminary allocation
of the purchase price is based on valuations performed to determine the fair value of such assets and liabilities as of the acquisition
date. Goodwill from this transaction is allocated to the Company’s Services segment. The Company incurred transaction costs
of $214 for the three months ended December 31, 2019 related to the PCRS Acquisition. These costs were expensed as incurred
and were primarily recorded as selling, general, and administrative expenses on the Company’s consolidated statements of
operations and comprehensive loss. PCRS recorded revenues of $381 and net income of $66 for the three month period ending
December 31, 2019.
Pro Forma Results
The
Company’s unaudited pro forma results of operations for the three months ended December 31, 2018 assuming the Smithers
Avanza Acquisition and the PCRS Acquisition had occurred as of October 1, 2018 are presented for comparative purposes below.
These amounts are based on available information of the results of operations of the Smithers Avanza Seller’s operations
and the PCRS Seller’s operations prior to the acquisition date and are not necessarily indicative of what the results of
operations would have been had the Smithers Avanza Acquisition and PCRS Acquisition been completed on October 1, 2018.
The unaudited pro forma
information is as follows:
|
|
Three Months
Ended
|
|
|
|
December 31,
2018
|
|
Total revenues
|
|
$
|
11,345
|
|
Net loss
|
|
|
(1,173
|
)
|
|
|
|
|
|
Pro forma basic net loss per share
|
|
$
|
(0.11
|
)
|
Pro forma diluted net loss per share
|
|
$
|
(0.11
|
)
|
In accordance with
ASC 606, which the Company adopted as of October 1, 2018 using the modified retrospective approach, the Company disaggregates
its revenue from clients into two revenue streams, service revenue and product revenue. At contract inception the Company assesses
the services promised in the contract with the clients to identify performance obligations in the arrangements.
Service revenue
The Company enters
into contracts with clients to provide drug discovery and development services with payments based on mainly fixed-fee arrangements.
The Company also offers free archive storage services on certain contracts. Clients can also enter into separate archive storage
contracts after the expiration of the free storage period.
The Company’s
drug discovery and development services contracts that include a free storage period are considered a single performance obligation
because the Company provides a highly integrated service. The inclusion of free storage fees in the measurement of progress under
the discovery and development service contracts creates a timing difference between the amounts the Company is entitled to receive
in reimbursement of cost incurred and amount of revenue recognized on such costs, which is recognized as deferred revenue and classified
as client advances on the condensed consolidated balance sheet.
The Company’s
fixed fee arrangements may involve bioanalytical and pharmaceutical method development and validation, nonclinical research services
and the analysis of bioanalytical and pharmaceutical samples. For bioanalytical and pharmaceutical method validation services and
nonclinical research services, revenue is recognized over time using the input method based on the ratio of direct costs incurred,
including hours, to total estimated direct costs since this best depicts the transfer of assets to the client over the life of
the contract. For contracts that involve method development or the analysis of bioanalytical and pharmaceutical samples, revenue
is recognized over time when samples are analyzed or when services are performed. The Company generally bills for services on a
milestone basis. These contracts represent a single performance obligation and due to the Company’s right to payment for
work performed, revenue is recognized over time. Research services contract fees received upon acceptance are deferred until earned
and classified within customer advances on the condensed consolidated balance sheet. Unbilled revenues represent revenues earned
under contracts in advance of billings.
Archive services provide
climate controlled archiving for client’s data and samples. The archive revenue is recognized over time, generally when the
service is provided. These arrangements typically include only one performance obligation. Amounts related to future archiving
or prepaid archiving contracts for clients 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.
Certain costs are incurred
in obtaining new contracts for our services business. Since these costs would otherwise be amortized within one year or less due
to the average length of contracts, the Company chose to adopt the practical expedient and expense these incremental costs as incurred.
Product revenue
The Company’s
products can be sold to multiple clients and have alternative use. Both the transaction sales price and shipping terms are agreed
upon in the client order. For these products, all revenue is recognized at a point in time, generally when title of the product
and control is transferred to the client based upon shipping terms. These arrangements typically include only one performance obligation.
In situations which the Company is responsible for shipping before control is transferred to the client, the Company elected the
practical expedient to consider the shipment as a fulfillment activity and not a separate performance obligation. Certain products
have maintenance agreements available for clients to purchase. These are typically billed in advance and are accounted for as deferred
revenue and recognized ratably over the applicable maintenance period. Certain products manufactured by the Company have a standard
limited one year warranty offered. Warranty expenses, though, are immaterial; thus, we have not established a separate warranty
liability.
The following table
presents changes in the Company’s contract liabilities for the quarter ended December 31, 2019.
|
|
Balance at
September 30,
2019
|
|
Additions
|
|
Deductions
|
|
Balance at
December 31,
2019
|
|
Contract liabilities: Customer advances
|
|
$
|
6,726
|
|
$
|
14,058
|
|
$
|
(11,206
|
)
|
$
|
9,578
|
|
The Company has various
operating and finance leases for facilities and equipment. Facilities leases provide office, laboratory, warehouse, or land, the
company uses to conduct its operations. Facilities leases range in duration from two to ten years, with either renewal options
for additional terms as the initial lease term expires, or purchase options. Facilities leases are considered as either operating
or financing leases.
Equipment leases provide
for office equipment, laboratory equipment or services the company uses to conduct its operations. Equipment leases range in duration
from 27 to 60 months, with either subsequent annual renewals, additional terms as the initial lease term expires, or purchase options.
Effective October 1,
2019 the Company adopted ASC 842 Leases using a modified retrospective transition approach which applies the standard to leases
existing at the effective date with no restatement of prior periods. The Company’s operating leases have been included in
operating lease right-of--use assets, current portion of operating lease liabilities and long-term portion of operating lease liabilities
in the consolidated balance sheet. Right-of-use assets represent the Company’s right to use an underlying asset for the lease
term and lease liabilities represent its obligation to make lease payments arising from the leases.
The Company’s
finance leases are included in property, plant and equipment and current portion of long-term debt.
The Company elected
to apply the following practical expedients and accounting policy elections permitted by the standard at transition:
|
•
|
The Company has elected that it will not reassess contracts that have expired or existed at the
date of adoption for 1) leases under the new definition of a lease, 2) lease classification, 3) whether previously capitalized
initial direct costs would qualify for capitalization under the standard.
|
|
•
|
The Company elected not to separate lease and non-lease components.
|
|
•
|
The Company elected not to assess whether any land easements are, or contain, leases.
|
|
•
|
The Company elected to record leases with an initial term of 12 months or less directly in the
condensed consolidated statement of comprehensive loss.
|
Right-of-use lease assets and lease liabilities
that are reported in the Company’s condensed consolidated balance sheets are as follows:
|
|
As of
|
|
|
|
December 31, 2019
|
|
Operating right-of-use assets, net
|
|
$
|
4,739
|
|
|
|
|
|
|
Current portion of operating lease liabilities
|
|
|
864
|
|
Long-term operating lease liabilities
|
|
|
4,044
|
|
Total operating lease liabilities
|
|
$
|
4,908
|
|
Finance right-of-use assets, net
|
|
|
4,641
|
|
|
|
|
|
|
Current portion of finance lease liabilities
|
|
|
4,616
|
|
Long-term finance lease liabilities
|
|
|
17
|
|
Total finance lease liabilities
|
|
$
|
4,633
|
|
During the three months
ended December 31, 2019, the Company had operating lease and finance lease amortizations of $210 and $32 respectively. Finance
lease interest recorded in the quarter was $67.
Lease expense for lease
payments is recognized on a straight-line basis over the lease term. The components of lease expense related to the Company’s
lease for the first quarter ended December 31, 2019 were:
|
|
As of
|
|
|
|
December 31, 2019
|
|
Operating lease costs:
|
|
|
|
|
Fixed operating lease costs
|
|
$
|
214
|
|
Short-term lease costs
|
|
|
14
|
|
Variable lease costs
|
|
|
1
|
|
Sublease income
|
|
|
(159
|
)
|
Finance lease costs:
|
|
|
|
|
Amortization of right-of-use asset expense
|
|
|
32
|
|
Interest on finance lease liability
|
|
|
67
|
|
Total lease cost
|
|
$
|
169
|
|
The Company serves
as lessor to a sublessee in one facility through the end of calendar year 2024. The gross rental income and underlying lease expense
are presented gross in the Company’s statement of financial position. The Company received rental income of $159 during the
first fiscal quarter of 2020.
Supplemental cash flow information related
to leases was as follows:
|
|
Three months Ended
|
|
|
|
December 31, 2019
|
|
Cash flows included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
58
|
|
Operating cash flows from finance leases
|
|
|
32
|
|
Finance cash flows from finance leases
|
|
|
37
|
|
|
|
|
|
|
Non-cash lease activity:
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
377
|
|
The weighted average
remaining lease term and discount rate for the Company’s operating and finance leases as of December 31, 2019 were:
|
|
As of
|
|
|
|
December 31, 2019
|
|
Weighted-average remaining lease term (in years)
|
|
|
|
|
Operating lease
|
|
|
64.95
|
|
Finance lease
|
|
|
7.09
|
|
|
|
|
|
|
Weighted-average discount rate (in percentages)
|
|
|
|
|
Operating lease
|
|
|
5.22
|
|
Finance lease
|
|
|
5.95
|
|
Lease duration was
determined utilizing renewal options that the Company is reasonably certain to execute.
As of December 31,
2019, maturities of operating and finance lease liabilities for each of the following five years and a total thereafter were as
follows:
|
|
Operating Leases
|
|
|
Finance Leases
|
|
2020
|
|
$
|
886
|
|
|
$
|
4,749
|
|
2021
|
|
|
890
|
|
|
|
17
|
|
2022
|
|
|
965
|
|
|
|
-
|
|
2023
|
|
|
969
|
|
|
|
-
|
|
2024
|
|
|
1,504
|
|
|
|
-
|
|
Thereafter
|
|
|
508
|
|
|
|
-
|
|
Total minimum future lease payments
|
|
|
5,722
|
|
|
|
4,766
|
|
Less interest
|
|
|
(814
|
)
|
|
|
(133
|
)
|
Total lease liability
|
|
|
4,908
|
|
|
|
4,633
|
|
On January 27,
2020, the Company entered into a new Employment Agreement (the “Employment Agreement”) with Robert Leasure, Jr.
The Employment Agreement replaces Mr. Leasure’s prior employment agreement, which expired on December 31, 2019.
Pursuant to the Employment
Agreement, Mr. Leasure agrees to continue to serve as the President and Chief Executive Officer of the Company for a term
ending on December 31, 2020, subject to extension for successive one-year periods thereafter upon the mutual agreement of
the parties. Under the Employment Agreement, Mr. Leasure will (i) be entitled to receive an annual base salary of $370,000,
(ii) have an annual incentive opportunity of up to 50% of his base salary and (iii) be entitled to vacation in accordance
with Company policy and reimbursement for ordinary and necessary business expenses. Mr. Leasure will also be entitled to participate
in the Company’s benefit plans and programs provided to Company executives generally, subject to eligibility requirements
and other terms and conditions of those plans. Also under the terms of the Employment Agreement and under the Company’s 2018
Equity Incentive Plan (the “Plan”), on the effective date of the Employment Agreement, Mr. Leasure received (i) 13,000
restricted common shares of the Company and (ii) options to purchase 45,000 of the Company’s common shares, in each
case subject to vesting and forfeiture, including in the event of Mr. Leasure’s termination by the Company for cause
or Mr. Leasure’s resignation other than for good reason (each as defined in the Employment Agreement).
The Employment Agreement
provides for certain non-competition, non-solicitation and confidentiality undertakings. Should Mr. Leasure’s employment
be terminated by reason of Mr. Leasure’s death, by the Company without cause or in the event of Mr. Leasure’s
disability (as defined in the Employment Agreement), or by Mr. Leasure for good reason, Mr. Leasure or his estate would
be entitled to his base salary and a prorated portion of his annual incentive award for the year in which termination occurs, in
each case through the effective date of the termination of his employment. If Mr. Leasure’s employment is terminated
by the Company other than for cause, or by Mr. Leasure for good reason, in either case within 12 months after a change in
control (as defined in the Plan) (i) the Company would pay to Mr. Leasure in a lump sum, as severance compensation, an
amount equal to one times his base salary then in effect plus one times his annual incentive compensation paid for the Company’s
last calendar year, (ii) all unvested outstanding options to purchase the Company’s common shares, unvested awards of
restricted shares and unvested awards of restricted share units held by Mr. Leasure would vest immediately prior to the termination
and, in the case of any such options, remain exercisable for a period of 30 days following the effective date of the termination,
and (iii) Mr. Leasure would be entitled to receive, a pro-rata portion of the number of performance shares that would
have been earned by Mr. Leasure if the performance conditions related thereto were satisfied at the target level for such
awards and Mr. Leasure had been employed on the date required to earn such shares.