Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
As of February 5, 2021, 11,131,256 of the
registrant's common shares were outstanding.
BIOANALYTICAL SYSTEMS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
|
|
December 31,
2020
|
|
|
September 30,
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,155
|
|
|
$
|
1,406
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
Trade, net of allowance of $561 at December 31, 2020 and September 30, 2020
|
|
|
8,937
|
|
|
|
8,681
|
|
Unbilled revenues and other
|
|
|
2,448
|
|
|
|
2,142
|
|
Inventories, net
|
|
|
876
|
|
|
|
700
|
|
Prepaid expenses
|
|
|
2,546
|
|
|
|
2,371
|
|
Total current assets
|
|
|
15,962
|
|
|
|
15,300
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
29,316
|
|
|
|
28,729
|
|
Operating lease right-of use assets, net
|
|
|
4,093
|
|
|
|
4,001
|
|
Finance lease right-of-use assets, net
|
|
|
4,742
|
|
|
|
4,778
|
|
Goodwill
|
|
|
4,368
|
|
|
|
4,368
|
|
Other intangible assets, net
|
|
|
4,104
|
|
|
|
4,261
|
|
Lease rent receivable
|
|
|
131
|
|
|
|
75
|
|
Other assets
|
|
|
82
|
|
|
|
81
|
|
Total assets
|
|
$
|
62,798
|
|
|
$
|
61,593
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,630
|
|
|
$
|
3,196
|
|
Restructuring liability
|
|
|
178
|
|
|
|
168
|
|
Accrued expenses
|
|
|
1,599
|
|
|
|
2,688
|
|
Customer advances
|
|
|
13,635
|
|
|
|
11,392
|
|
Capex lines of credit
|
|
|
3,000
|
|
|
|
2,613
|
|
Current portion on long-term operating lease
|
|
|
949
|
|
|
|
866
|
|
Current portion of long-term finance lease
|
|
|
4,693
|
|
|
|
4,728
|
|
Current portion of long-term debt
|
|
|
6,877
|
|
|
|
5,991
|
|
Total current liabilities
|
|
|
34,561
|
|
|
|
31,642
|
|
Long-term operating leases, net
|
|
|
3,358
|
|
|
|
3,344
|
|
Long-term finance leases, net
|
|
|
40
|
|
|
|
44
|
|
Long-term debt, less current portion, net of debt issuance costs
|
|
|
17,208
|
|
|
|
18,826
|
|
Deferred tax liabilities
|
|
|
175
|
|
|
|
141
|
|
Total liabilities
|
|
|
55,342
|
|
|
|
53,997
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred shares, authorized 1,000,000 shares, no par value:
|
|
|
|
|
|
|
|
|
25 Series A shares at $1,000 stated value issued and outstanding at December 31, 2020 and at September 30, 2020
|
|
|
25
|
|
|
|
25
|
|
Common shares, no par value:
|
|
|
|
|
|
|
|
|
Authorized 19,000,000 shares; 11,117,999 issued and outstanding at December 31, 2020 and 10,977,675 at September 30, 2020
|
|
|
2,741
|
|
|
|
2,706
|
|
Additional paid-in capital
|
|
|
26,966
|
|
|
|
26,775
|
|
Accumulated deficit
|
|
|
(22,276
|
)
|
|
|
(21,910
|
)
|
Total shareholders’ equity
|
|
|
7,456
|
|
|
|
7,596
|
|
Total liabilities and shareholders’ equity
|
|
$
|
62,798
|
|
|
$
|
61,593
|
|
The accompanying notes are an integral
part of the condensed consolidated financial statements
BIOANALYTICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
|
|
Three Months Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Service revenue
|
|
$
|
17,032
|
|
|
$
|
12,142
|
|
Product revenue
|
|
|
853
|
|
|
|
776
|
|
Total revenue
|
|
|
17,885
|
|
|
|
12,918
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenue
|
|
|
11,597
|
|
|
|
8,911
|
|
Cost of product revenue
|
|
|
411
|
|
|
|
530
|
|
Total cost of revenue
|
|
|
12,008
|
|
|
|
9,441
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,877
|
|
|
|
3,477
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling
|
|
|
625
|
|
|
|
882
|
|
Research and development
|
|
|
196
|
|
|
|
162
|
|
General and administrative
|
|
|
5,042
|
|
|
|
3,453
|
|
Total operating expenses
|
|
|
5,863
|
|
|
|
4,497
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
14
|
|
|
|
(1,020
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(347
|
)
|
|
|
(311
|
)
|
Other income
|
|
|
—
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(333
|
)
|
|
|
(1,329
|
)
|
|
|
|
|
|
|
|
|
|
Income taxes expense
|
|
|
33
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(366
|
)
|
|
$
|
(1,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.13
|
)
|
Diluted net loss per share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
Weighted common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,016
|
|
|
|
10,669
|
|
Diluted
|
|
|
11,016
|
|
|
|
10,669
|
|
The accompanying notes are an integral
part of the condensed consolidated financial statements.
BIOANALYTICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
(In thousands, except number of shares)
(Unaudited)
|
|
Preferred Shares
|
|
|
Common Shares
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Total
Shareholders’
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance at September 30, 2020
|
|
|
25
|
|
|
$
|
25
|
|
|
|
10,977,675
|
|
|
$
|
2,706
|
|
|
$
|
26,775
|
|
|
$
|
(21,910
|
)
|
|
$
|
7,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(366
|
)
|
|
|
(366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option exercises
|
|
|
|
|
|
|
|
|
|
|
23,350
|
|
|
|
6
|
|
|
|
39
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
116,974
|
|
|
|
29
|
|
|
|
152
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
|
25
|
|
|
$
|
25
|
|
|
|
11,117,999
|
|
|
$
|
2,741
|
|
|
$
|
26,966
|
|
|
$
|
(22,276
|
)
|
|
$
|
7,456
|
|
|
|
Preferred Shares
|
|
|
Common Shares
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Total
Shareholders’
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance at September 30, 2019
|
|
|
35
|
|
|
$
|
35
|
|
|
|
10,510,694
|
|
|
$
|
2,589
|
|
|
$
|
25,183
|
|
|
$
|
(17,097
|
)
|
|
$
|
10,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of accounting standard
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,426
|
)
|
|
|
(1,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued in acquisition
|
|
|
|
|
|
|
|
|
|
|
240,000
|
|
|
|
60
|
|
|
|
1,073
|
|
|
|
|
|
|
|
1,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
54,363
|
|
|
|
14
|
|
|
|
67
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
35
|
|
|
$
|
35
|
|
|
|
10,805,057
|
|
|
$
|
2,663
|
|
|
$
|
26,323
|
|
|
$
|
(18,651
|
)
|
|
$
|
10,370
|
|
The accompanying
notes are an integral part of the consolidated financial statements.
BIOANALYTICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In thousands)
(Unaudited)
|
|
Three Months Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(366
|
)
|
|
$
|
(1,426
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities, net of acquisition:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,065
|
|
|
|
732
|
|
Amortization finance lease
|
|
|
37
|
|
|
|
32
|
|
Change on operating lease
|
|
|
5
|
|
|
|
—
|
|
Employee stock compensation expense
|
|
|
181
|
|
|
|
81
|
|
Provision for doubtful accounts
|
|
|
72
|
|
|
|
—
|
|
Unrealized foreign currency gains
|
|
|
9
|
|
|
|
18
|
|
Financing lease interest expense
|
|
|
69
|
|
|
|
67
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(634
|
)
|
|
|
(1,013
|
)
|
Inventories
|
|
|
(176
|
)
|
|
|
61
|
|
Income tax accruals
|
|
|
33
|
|
|
|
97
|
|
Prepaid expenses and other assets
|
|
|
(231
|
)
|
|
|
(774
|
)
|
Accounts payable
|
|
|
435
|
|
|
|
479
|
|
Accrued expenses
|
|
|
(1,089
|
)
|
|
|
597
|
|
Customer advances
|
|
|
2,242
|
|
|
|
2,501
|
|
Net cash provided by operating activities
|
|
|
1,652
|
|
|
|
1,452
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,474
|
)
|
|
|
(2,165
|
)
|
Cash paid in acquisition
|
|
|
—
|
|
|
|
(3,931
|
)
|
Net cash used in investing activities
|
|
|
(1,474
|
)
|
|
|
(6,096
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payments on finance lease liability
|
|
|
(108
|
)
|
|
|
(104
|
)
|
Payments of long-term debt
|
|
|
(712
|
)
|
|
|
(250
|
)
|
Payments of debt issuance costs
|
|
|
(40
|
)
|
|
|
(110
|
)
|
Payments on revolving line of credit
|
|
|
—
|
|
|
|
(10,531
|
)
|
Borrowings on revolving line of credit
|
|
|
—
|
|
|
|
10,194
|
|
Borrowing on construction loans
|
|
|
—
|
|
|
|
1,183
|
|
Borrowing on capex lines of credit
|
|
|
387
|
|
|
|
728
|
|
Proceeds from exercise of stock options
|
|
|
44
|
|
|
|
—
|
|
Borrowing on long-term loan
|
|
|
—
|
|
|
|
3,439
|
|
Net cash (used in) provided by
financing activities
|
|
|
(429
|
)
|
|
|
4,549
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash, cash equivalents, and restricted cash
|
|
|
(251
|
)
|
|
|
(95
|
)
|
Cash, cash equivalents, and restricted cash at beginning of period
|
|
|
1,406
|
|
|
|
606
|
|
Cash, cash equivalents, and restricted cash at end of period
|
|
$
|
1,155
|
|
|
$
|
511
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
256
|
|
|
$
|
270
|
|
|
|
|
|
|
|
|
|
|
Preclinical Research Services acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
|
—
|
|
|
$
|
6,442
|
|
Liabilities assumed
|
|
|
—
|
|
|
|
(1,378
|
)
|
Common shares issued
|
|
|
—
|
|
|
|
(1,133
|
)
|
Cash paid
|
|
|
—
|
|
|
$
|
3,931
|
|
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, 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, chemical, and medical device development, biomedical research
and government-sponsored research. The Company also manufactures 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, 2020. In the opinion of management, the condensed consolidated financial statements
for the three months ended December 31, 2020 and 2019 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, 2020. The results of operations for the three months
ended December 31, 2020 may not be indicative of the results for the year ending September 30, 2021.
|
2.
|
STOCK-BASED COMPENSATION
|
In March 2008,
the Company’s shareholders approved the 2008 Stock Option Plan (the “Plan”) to replace the 1997 Outside Director
Stock Option Plan and the 1997 Employee Stock Option Plan. The purpose of the Plan was to promote our long-term interests by providing
a means of attracting and retaining officers, directors and key employees. The Compensation Committee administered the Plan and
approved the particular officers, directors or employees eligible for grants. Under the Plan, employees were granted options to
purchase our common shares at an exercise price equal to the fair market value of the common shares of the end of the trading day
prior to the date of the grant. Generally, options granted vest and become exercisable in three equal installments commencing one
year from date of grant and expire upon the earlier of the employee’s termination of employment with us, or ten years from
the date of grant. Restricted shares are valued as the average of the high and low on the day prior to the date of the grant. 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, 2020.
In March 2018, the
Company’s shareholders approved the amendment and restatement of the Plan in the form of the Amended and Restated 2018 Equity
Incentive Plan and in March 2020 our shareholders approved a further amendment to increase the number of shares issuable under
the amended and restated plan by 700 and to make corresponding changes to the number of shares issuable as incentive options and
as restricted stock or pursuant to restricted stock units (as amended, the “Equity Plan”). 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 new common shares that may be granted under
the Equity Plan is 700 shares plus the remaining shares from the 2008 Stock Option Plan. At December 31, 2020, 680 shares
remained available for grants under the Plan.
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. The Company adopted a change in accounting policy effective October 1, 2020 for forfeitures.
Prior to October 1, 2020, stock-based compensation expense was reduced for estimated forfeitures, and if necessary, an adjustment
was recognized in future periods if actual forfeitures differed from those estimates. The accounting change was made prospectively;
therefore, stock-based compensation for equity grants subsequent to October 1, 2020, will not be reduced for estimated forfeitures
as expense will be adjusted in the period that a forfeiture occurs. The Company feels that this accounting change will more accurately
account for expense relating to forfeitures. The Company has assessed the cumulative effect of this change in accounting policy
and has deemed the impact to be immaterial; therefore, an adjustment has not been recorded to beginning retained earnings. Stock
based compensation expense for the three months ended December 31, 2020 was $181. Stock based compensation expense for the three
months ended December 31, 2019 was $81.
A summary of our stock
option activity for the three months ended December 31, 2020 is as follows (in thousands except for share prices):
|
|
Options
(shares)
|
|
|
Weighted-
Average
Exercise Price
|
|
Outstanding – October 1, 2020
|
|
|
712
|
|
|
$
|
2.21
|
|
Granted
|
|
|
22
|
|
|
$
|
5.19
|
|
Exercised
|
|
|
(23
|
)
|
|
$
|
1.90
|
|
Forfeited
|
|
|
(5
|
)
|
|
$
|
3.41
|
|
Expired
|
|
|
(1
|
)
|
|
$
|
1.78
|
|
Outstanding – December 31, 2020
|
|
|
704
|
|
|
$
|
2.31
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2020
|
|
|
318
|
|
|
$
|
1.75
|
|
The weighted average
estimated fair value of stock options granted for the three months ended December 31, 2020 and December 31, 2019 were $3.41 and
$3.14, respectively. The weighted-average assumptions used to compute the fair value of the options granted in the three months
ended December 31, 2020 were as follows:
Risk-free interest rate
|
|
|
0.41
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Volatility of the expected market price of the Company's common shares
|
|
|
76.56
|
%
|
Expected life of the options (years)
|
|
|
5.95
|
|
As of December 31, 2020, our total unrecognized
compensation cost related to non-vested stock options was $515 and is expected to be recognized over a weighted-average service
period of 2.0 years.
During the three months
ended December 31, 2020, we granted a total of 117 restricted shares to members of the Company’s leadership team, including
40 restricted shares granted on December 29, 2020 to the CEO under his employment agreement. A summary of our restricted share
activity for the three months ended December 31, 2020 is as follows:
|
|
Restricted Shares
|
|
|
Weighted-
Average Grant Date Fair Value
|
|
Outstanding – September 30, 2020
|
|
|
128
|
|
|
$
|
3.88
|
|
Granted
|
|
|
117
|
|
|
$
|
7.86
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding – December 31, 2020
|
|
|
245
|
|
|
$
|
5.77
|
|
As of December 31, 2020, our total unrecognized
compensation cost related to non-vested restricted shares was $1,160 and is expected to be recognized over a weighted-average service
period of 2.1 years.
|
3.
|
INCOME (LOSS) PER SHARE
|
The Company computes
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 704 options and 12 common
shares issuable upon conversion of preferred shares were not considered in computing diluted income (loss) per share for the three
months ended December 31, 2020, because they were anti-dilutive. Shares issuable upon exercise of 785 options and 17 common shares
issuable upon conversion of preferred shares were not considered in computing diluted income (loss) per share for the three months
ended December 31, 2019, because they were anti-dilutive.
Computation of basic net loss per share
is shown in the following table:
|
|
Three
Months Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Basic net loss per share:
|
|
|
|
|
|
|
|
|
Net loss applicable to common shareholders
|
|
$
|
(366
|
)
|
|
$
|
(1,426
|
)
|
Weighted average common shares outstanding
|
|
|
11,016
|
|
|
|
10,669
|
|
Basic net loss per share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.13
|
)
|
Inventories consisted of the following:
|
|
December
31,
2020
|
|
|
September 30,
2020
|
|
Raw materials
|
|
$
|
573
|
|
|
$
|
577
|
|
Work in progress
|
|
|
67
|
|
|
|
70
|
|
Finished goods
|
|
|
396
|
|
|
|
230
|
|
|
|
|
1,036
|
|
|
|
877
|
|
Obsolescence reserve
|
|
|
(160
|
)
|
|
|
(177
|
)
|
|
|
$
|
876
|
|
|
$
|
700
|
|
The Company operates
in two principal segments - research services and research products. The Services segment provides research and development support
on a contract basis directly to pharmaceutical companies. The Products segment provides liquid chromatography, electrochemical
and physiological monitoring products to pharmaceutical companies, universities, government research centers and medical research
institutions. The accounting policies of these segments are the same as those described in the summary of significant accounting
policies found in Note 2 to the Consolidated Financial Statements in our annual report on Form 10-K for the fiscal year ended September
30, 2020.
|
|
Three
Months Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
17,032
|
|
|
$
|
12,142
|
|
Product
|
|
|
853
|
|
|
|
776
|
|
|
|
$
|
17,885
|
|
|
$
|
12,918
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
3,111
|
|
|
$
|
1,263
|
|
Product
|
|
|
167
|
|
|
|
(271
|
)
|
Corporate
|
|
|
(3,264
|
)
|
|
|
(2,012
|
)
|
|
|
$
|
14
|
|
|
$
|
(1,020
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(347
|
)
|
|
|
(311
|
)
|
Other income
|
|
|
—
|
|
|
|
2
|
|
Loss before income taxes
|
|
$
|
(333
|
)
|
|
$
|
(1,329
|
)
|
|
|
|
|
|
|
|
|
|
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.
The difference between
the enacted federal statutory rate of 21% and our effective rate of (9.89) % for the quarterly period ended December 31, 2020 is
due to changes in our valuation allowance on our net deferred tax assets.
We recognize the tax benefit from an uncertain
tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position.
We measure the amount of the accrual for which an exposure exists as the largest amount of benefit determined on a cumulative probability
basis that we believe is more likely than not to be realized upon settlement of the position.
At December 31, 2020 and September 30, 2020,
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 2014.
On March 27, 2020,
President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, due to the coronavirus pandemic. Among other
things, the legislation provides tax relief for businesses. The Company is still assessing the tax benefit, if any, that it could
receive under this legislation. The Company received a Payroll Protection Program (“PPP”) loan of $5,051 and applied for forgiveness of $4,851. Based on satisfaction
of requirements under the CARES Act for forgiveness, the Company recorded a deferred tax asset for nondeductible expense relating
to the PPP funds of $1,276 at September 30, 2020.
On December 27, 2020,
the Consolidated Appropriations Act, 2021 was signed into law, clarifying that business expenses paid out of PPP forgivable loan
funds may in fact be fully deducted for federal income tax purposes. Based on this clarification in the bill, the Company reversed
the $1,276 deferred tax asset related to PPP loan expenses, along with the corresponding valuation allowance for the same amount,
as of December 31, 2020.
Credit Facility
On December 1,
2019, the Company entered into an Amended and Restated Credit Agreement (as has been amended from time to time, 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
instruments (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, 2020 was $3,686. 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. 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, 2020 was $3,820.
The Third Term Loan
for $1,271 was used to fund the cash consideration for the Smithers Avanza acquisition. 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, 2020 was $1,067.
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 having commenced 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, 2020 was
$1,356.
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, 2020 was $1,875. 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
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 Company did not have an outstanding balance on the Revolving Facility as of December 31, 2020. On December
18, 2020, the parties amended the Revolving Facility to extend its maturity through May 31, 2021.
The Construction Draw
Loan provided for borrowings up to a principal amount not to exceed $4,445 and the Equipment Draw Loan provided 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, 2020, there was a $4,123 balance on the Construction Draw Loan and a $1,185 balance on the Equipment
Draw Loan.
Subject to certain
conditions precedent, the Construction Draw Loan and the Equipment Draw Loan each permitted 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 required 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
previously provided for borrowings up to the principal amount of $1,100, which the Company could borrow from time to time, subject
to the terms of the Credit Agreement. On March 27, 2020, the parties amended the Initial Capex Line to eliminate the revolving
nature of the line in favor of a term loan in the principal amount of $948, equivalent to the amount of borrowings then outstanding
on the Initial Capex Line. As amended, the Initial Capex Line matures on June 30, 2025, and as of December 31, 2020,
had a balance of $872. Interest accrues on the principal balance of the Initial Capex Line at a fixed per annum rate equal to 4%.
The Company was required to pay accrued but unpaid interest on the Initial Capex Line on a monthly basis until June 30, 2020.
Commencing August 1, 2020, and on the first day of each monthly period thereafter until and including on the maturity date,
the Initial Capex Line requires payments of principal and interest in monthly installments equal to $17.
The Second Capex Line previously provided for borrowings up
to the principal amount of $3,000, which the Company could borrow from time to time, subject to the terms of the Credit Agreement.
On December 18, 2020, the parties amended the Second Capex Line to eliminate the revolving nature of the line in favor of a term
loan in the principal amount of $3,000, equivalent to the amount of borrowings then outstanding on the Second Capex Line. As amended,
the Second Capex Line matures on December 31, 2025. Interest accrues on the principal balance of the Second Capex Line at a fixed
per annum rate equal to 4.25%. Commencing January 31, 2021, and on the last day of each monthly period thereafter until and including
on the maturity date, the Second Capex Line requires payments of principal and interest in monthly installments equal to $55.
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 Company entered
into a Credit Agreement modification on December 18, 2020 with FIB. Based in part on the impact of COVID-19 on the Company’s
operations and financial performance, FIB, among other things, agreed to suspend testing of the Fixed Charge Coverage Ratio under
the Credit Agreement for the December 31, 2020 compliance period. The December 18, 2020 modification, also revised the Company’s
covenant calculations on a go-forward basis, as described below. Absent these suspensions and modifications, the Company would
not have been in compliance with the covenants for the December 31, 2020 measurement period.
As amended, (i) beginning
March 31, 2021, the Company is required to maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement), tested
quarterly, of not less than (a) as of March 31, 2021 1.05 to 1.0, (b) as of June 30, 2021 1.10 to 1.00 and (c) as of September
30, 2021 and for each quarter thereafter 1.20 to 1.00 and (ii) the Company is required to maintain a Cash Flow Leverage Ratio (as
defined in the Credit Agreement), tested quarterly, not to exceed (a) as of December 31, 2020, 6.00 to 1.00, (b) as of March 31,
2021, 5.75 to 1.00, (c) as of June 30, 2021, 5.00 to 1.00 and (d) as of September 30, 2021 and for each quarter thereafter, 4.25
to 1.00. The Fixed Charge Coverage Ratio and Cash Flow Leverage Ratio are measured on a trailing twelve (12) month basis, provided,
however, that in the case of Fixed Charge Coverage Ratio calculations for the remainder of fiscal 2021 (i) the measurement period
for the quarter ending March 31, 2021 includes only the quarter ending March 31, 2021, (ii) the measurement period for the quarter
ending June 30, 2021 includes only the quarters ending March 31, 2021 and June 30, 2021 and (iii) the measurement period for the
quarter ending September 30, 2021 includes only the quarters ending March 31, 2021, June 30, 2021 and September 30, 2021.
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. At December 31, 2020,
the balance on the note payable to the Smithers Avanza seller was $570. As part of the PCRS acquisition, we also have an unsecured
promissory note payable to the PCRS 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. At December 31, 2020, the balance on the note payable
to the PCRS seller was $735.
On April 23, 2020,
the Company was granted a loan (the “Loan”) from Huntington National Bank in the aggregate amount of $5,051, pursuant
to the Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The principal
and accrued interest under the Loan is to be repaid in eighteen installments of $283 beginning on November 16, 2020 and continuing
monthly until the final payment is due on April 16, 2022. The bank is not requiring payments of principal or interest pending
the loan forgiveness decision. The Company has applied for forgiveness of the loan in the amount of $4,851.
Long term debt is detailed
in the table below.
|
|
As of:
|
|
|
|
December 31,
2020
|
|
|
September 30,
2020
|
|
Initial term loan
|
|
$
|
3,686
|
|
|
$
|
3,748
|
|
Second term loan
|
|
|
3,820
|
|
|
|
4,004
|
|
Third term loan
|
|
|
1,067
|
|
|
|
1,115
|
|
Fourth term loan
|
|
|
1,356
|
|
|
|
1,425
|
|
Fifth term loan
|
|
|
1,875
|
|
|
|
1,891
|
|
Initial Capex line
|
|
|
872
|
|
|
|
920
|
|
Subtotal term loans
|
|
|
12,676
|
|
|
|
13,103
|
|
Construction and equipment loans
|
|
|
5,308
|
|
|
|
5,496
|
|
Seller Note – Smithers Avanza
|
|
|
570
|
|
|
|
650
|
|
Seller Note – Pre-Clinical Research Services
|
|
|
735
|
|
|
|
752
|
|
Paycheck protection program loan
|
|
|
5,051
|
|
|
|
5,051
|
|
|
|
|
24,340
|
|
|
|
25,052
|
|
Less: Current portion
|
|
|
(6,877
|
)
|
|
|
(5,991
|
)
|
Less: Debt issue costs not amortized
|
|
|
(255
|
)
|
|
|
(235
|
)
|
Total Long-term debt
|
|
$
|
17,208
|
|
|
$
|
18,826
|
|
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. At December 31, 2020 and September 30, 2020, respectively,
we had $178 and $168 reserved for the remaining liability. The reserve is classified as a current liability on the condensed consolidated
balance sheets.
|
9.
|
NEW ACCOUNTING PRONOUNCEMENTS
|
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 to 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 update became effective for the
Company on October 1, 2020. The adoption of this guidance did not have a material impact on the Company’s consolidated financial
statements
|
10.
|
BUSINESS COMBINATIONS
|
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.
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
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 purchase price allocation as of December 31, 2020 is as follows:
|
|
Allocation as of
December 31, 2020
|
|
Assets acquired and liabilities assumed:
|
|
|
|
|
Receivables
|
|
$
|
578
|
|
Property and equipment
|
|
|
2,836
|
|
Unbilled receivables
|
|
|
162
|
|
Prepaid expenses
|
|
|
27
|
|
Intangible assets
|
|
|
2,081
|
|
Goodwill
|
|
|
751
|
|
Accounts payable
|
|
|
(109
|
)
|
Accrued expenses
|
|
|
(118
|
)
|
Customer advances
|
|
|
(351
|
)
|
|
|
$
|
5,857
|
|
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. PCRS recorded revenues of $1,838 and
net income of $401 for the three month period ending December 31, 2020.
Pro Forma Results
The Company’s
unaudited pro forma results of operations for the three months ended December 31, 2020 assuming the PCRS Acquisition had occurred
as of October 1, 2019 are presented for comparative purposes below. These amounts are based on available information of the results
of operations of 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 PCRS Acquisition been completed on October 1, 2018.
The unaudited pro forma
information is as follows:
|
|
Three Months Ended
|
|
|
|
December 31, 2019
|
|
Total revenues
|
|
$
|
13,835
|
|
|
|
|
|
|
Net loss
|
|
|
(1,299
|
)
|
|
|
|
|
|
Pro forma basic net loss per share
|
|
$
|
(0.12
|
)
|
Pro forma diluted net loss per share
|
|
$
|
(0.12
|
)
|
In accordance with
Accounting Standards Codification (“ASC”) 606, the Company disaggregates its revenue from clients into three revenue
streams, service revenue, product revenue, and royalties. 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 archive storage services to our clients.
The
Company’s fixed fee arrangements may involve nonclinical research services (toxicology, pathology, pharmacology), 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 to total estimated direct costs. For contracts that
involve in-life study conduct, 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 sheets. 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 include 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.
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. Certain products have maintenance agreements available for clients to purchase. These are typically billed
in advance and are accounted for as deferred revenue, are recognized ratably over the applicable maintenance period and are included
in customer advances on the condensed consolidated balance sheet.
Royalty revenue
The
Company has an agreement with Teva Pharmaceuticals (formerly Biocraft Laboratories, Inc,) which manufactures and markets pharmaceutical
products. The Company receives royalties in accordance with sales of certain pharmaceuticals that Teva manufactures and sells.
The royalties are received on a quarterly basis and the revenue is recognized over the quarter. Royalty revenue is included in
service revenue on the condensed consolidated statement of operations. Total revenue recognized was $59 and $256 in the
three months ended December 31, 2020 and 2019, respectively.
The following table
presents changes in the Company’s contract assets and contract liabilities for the three months ended December 31, 2020.
|
|
Balance at
September 30,
2020
|
|
|
Additions
|
|
|
Deductions
|
|
|
Balance at
December 31,
2020
|
|
Contract Assets: Unbilled receivables
|
|
$
|
1,879
|
|
|
$
|
720
|
|
|
$
|
(420
|
)
|
|
$
|
2,179
|
|
Contract liabilities: Customer advances
|
|
$
|
11,392
|
|
|
$
|
35,042
|
|
|
$
|
(32,799
|
)
|
|
$
|
13,635
|
|
The Company records
a right-of-use (“ROU”) asset and lease liability for substantially all leases for which it is a lessee, in accordance
with ASU 842. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease
expense for the leases on a straight-line basis over the lease term. At inception of a contract, the Company considers all relevant
facts and circumstances to assess whether or not the contract represents a lease by determining whether or not the contract conveys
the right to control the use of an identified asset, either explicit or implicit, for a period of time in exchange for consideration.
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 30 to 60 months, with either subsequent annual renewals, additional terms as the initial lease term expires, or purchase options.
Right-of-use
lease assets and lease liabilities that are reported in the Company’s condensed consolidated balance sheets are as
follows:
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Operating right-of-use assets, net
|
|
$
|
4,093
|
|
|
$
|
4,739
|
|
|
|
|
|
|
|
|
|
|
Current portion of operating lease liabilities
|
|
|
949
|
|
|
|
864
|
|
Long-term operating lease liabilities
|
|
|
3,358
|
|
|
|
4,044
|
|
Total operating lease liabilities
|
|
$
|
4,307
|
|
|
$
|
4,908
|
|
Finance right-of-use assets, net
|
|
|
4,742
|
|
|
|
4,641
|
|
|
|
|
|
|
|
|
|
|
Current portion of finance lease liabilities
|
|
|
4,693
|
|
|
|
4,616
|
|
Long-term finance lease liabilities
|
|
|
40
|
|
|
|
17
|
|
Total finance lease liabilities
|
|
$
|
4,733
|
|
|
$
|
4,633
|
|
During
the three months ended December 31, 2020, the Company had operating lease of $232 and finance lease amortizations of $37. Finance
lease interest recorded in the quarter was $69.
One of the operating
leases contains a variable lease component based on revenue for one component of the Company. The total variable payments for this
lease for the three months ended December 31, 2020 was $76.
Lease costs included
in the condensed consolidated statements of operations consist of the following:
|
|
Three months ended
December 31, 2020
|
|
|
Three months ended
December 31, 2019
|
|
Operating lease costs:
|
|
|
|
|
|
|
|
|
Fixed operating lease costs
|
|
$
|
229
|
|
|
$
|
214
|
|
Short-term lease costs
|
|
|
10
|
|
|
|
14
|
|
Variable lease costs
|
|
|
2
|
|
|
|
1
|
|
Lease income
|
|
|
(160
|
)
|
|
|
(159
|
)
|
Finance lease costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use asset expense
|
|
|
37
|
|
|
|
32
|
|
Interest on finance lease liability
|
|
|
69
|
|
|
|
67
|
|
Total lease cost
|
|
$
|
187
|
|
|
$
|
169
|
|
The Company serves
as lessor to a lessee 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 condensed consolidated balance sheet. The Company received rental income of $160 and
$159 during the three months ended December 31, 2020 and December 31, 2019, respectively.
Supplemental cash flow information related
to leases was as follows:
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Cash flows included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
229
|
|
|
$
|
58
|
|
Operating cash flows from finance leases
|
|
|
69
|
|
|
|
32
|
|
Finance cash flows from finance leases
|
|
|
108
|
|
|
|
104
|
|
Non-cash lease activity:
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
448
|
|
|
$
|
377
|
|
The weighted average
remaining lease term and discount rate for the Company’s operating and finance leases as of December 31, 2020 were:
|
|
Three months
Ended
|
|
|
Three months Ended
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Weighted-average remaining lease term (in years)
|
|
|
|
|
|
|
|
|
Operating lease
|
|
|
4.51
|
|
|
|
5.41
|
|
Finance lease
|
|
|
0.88
|
|
|
|
0.58
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate (in percentages)
|
|
|
|
|
|
|
|
|
Operating lease
|
|
|
5.22
|
%
|
|
|
5.22
|
%
|
Finance lease
|
|
|
5.84
|
%
|
|
|
5.95
|
%
|
Lease duration was
determined utilizing renewal options that the Company is reasonably certain to execute.
As of December 31,
2020, maturities of operating and finance lease liabilities for each of the following five fiscal years and a total thereafter
were as follows:
|
|
Operating Leases
|
|
|
Finance Leases
|
|
2021 (remainder of fiscal year)
|
|
$
|
731
|
|
|
$
|
4,821
|
|
2022
|
|
|
1,029
|
|
|
|
19
|
|
2023
|
|
|
1,063
|
|
|
|
13
|
|
2024
|
|
|
1,062
|
|
|
|
13
|
|
2025
|
|
|
609
|
|
|
|
5
|
|
Thereafter
|
|
|
377
|
|
|
|
-
|
|
Total minimum future lease payments
|
|
|
4,871
|
|
|
|
4,871
|
|
Less interest
|
|
|
(564
|
)
|
|
|
(138
|
)
|
Total lease liability
|
|
|
4,307
|
|
|
|
4,733
|
|
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 successfully integrate the operations and personnel of Seventh Wave,
Smithers Avanza, and Pre-Clinical Research Services; (ix) our ability to effectively manage current expansion efforts in Evansville
and any future expansion or acquisition initiatives undertaken by the Company; (x) our ability to develop and build infrastructure
and teams to manage growth and projects; (xi) our ability to continue to retain and hire key talent; (xii) our ability to market
our services and products under relevant brand names; (xiii) our ability to service our outstanding indebtedness, (xiv) our expectations
regarding the volume of new bookings, pricing, gross profit margins and liquidity and (xv) the impact of COVID-19 on the economy,
demand for our services and products and our operations, including the measures taken by governmental authorities to address the
pandemic, which may precipitate or exacerbate other risks and/or uncertainties. 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, 2020. 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.
Recent Developments and Executive Summary
During recent periods,
we have undertaken significant internal and external growth initiatives. We acquired the business of Seventh Wave Laboratories,
LLC, in July 2018 (the “Seventh Wave Acquisition”), undertook the expansion of our facilities in Evansville, Indiana,
which we began using for operations in March of 2020, acquired the toxicology business of Smithers Avanza on May 1, 2019
(the “Smithers Avanza Acquisition”), acquired the preclinical testing business of Pre-Clinical Research Services, as
well as related real property, on December 1, 2019 (the “PCRS Acquisition”), and obtained funding to support these
initiatives and other improvements to our laboratories, facilities and equipment in order to support future growth and enhance
our scientific capabilities, client service offerings and client experiences. In addition, we have made significant investments
in upgrading facilities and equipment, added additional services to provide our clients and filled critical leadership and scientific
positions. Over the last year, we have also improved our infrastructure and platform to support future growth and additional potential
acquisitions. These improvements included establishing the new trade name and brand Inotiv for our combined service businesses,
installing new accounting software systems, investments in our information technology platforms, building program management functions
to enhance management and communication with clients and multi-site programs, further enhancements to client services and improving
the client experience. We believe these internal infrastructure initiatives, investments, acquisitions and recruiting efforts,
combined with our existing team and the continuing development of our sales and marketing team, have led and will continue to lead
to growth in revenue and the ability to improve the service offerings to our clients. We recognize the recent investments in growth,
continuing development of a strong leadership team, improving our platform, recruiting new employees, enhancing and building our
scientific strength and adding services are critical to meeting the future expectations of our clients, employees and shareholders.
We believe the actions taken and investments made in recent periods form a solid foundation upon which we can build.
Our financial results
for the three months ended December 31, 2020 were positively impacted by increases in sales and gross margins from the acquisitions
and internal growth the Company has experienced in the Service business. During the current quarter, we saw a decrease in operating
expenses as a percentage of revenue compared to the same quarter in the prior year. In addition, the financial results were positively
impacted by the Products segment of the business as expense reductions were implemented in last half of fiscal year 2020 and there
were improved margins on existing sales.
Notwithstanding the
COVID-19 pandemic, we have maintained our operations. As part of the “essential critical infrastructure” industry,
we believe we continue to have a special responsibility to maintain business continuity and a normal work schedule to the greatest
extent practicable. We are doing the important work of supporting our clients in their efforts towards drug discovery and development,
including working with multiple clients, at our multiple sites, on a variety of therapy or vaccine candidates for COVID-19 and
many other lifesaving medicines.
Our team has implemented
measures to promote a safe working environment and mitigate risk related to COVID-19, including allowing for work-from-home arrangements
where possible, while continuing to support each other and our clients. Among other initiatives related to COVID-19, the Company
applied for and accepted funds from the SBA Payroll Protection Program (“PPP”) as part of the CARES Act. The PPP loan
was received in April 2020 in the amount of $5,051. The funds were used over the eight weeks following the receipt of the
funds for payroll, utility and rent expenses, in step with our business continuity measures and as allowed under the PPP. The Company
applied for forgiveness of the PPP loan in the amount of $4,851, which represents qualified expenses. The PPP debt is recorded
as a liability on the balance sheet.
In order to further
establish our brand, including in the context of exploring external growth opportunities, we have proposed adopting Inotiv, Inc.
as our formal corporate name at the 2021 annual meeting of shareholders scheduled for March 18, 2021.
Business Overview
The Company provides
drug discovery and development services to the pharmaceutical, chemical, and medical device industries, and sells analytical instruments
to the pharmaceutical development and contract research industries. Our mission is to provide drug and product developers with
superior scientific research and innovative analytical instrumentation in order to bring revolutionary new drugs and products to
market quickly and safely. Our strategy is to provide services that will generate high-quality and timely data in support of new
drug and product approval or expand their use. Our clients and partners include pharmaceutical, biotechnology, biomedical device,
academic and government organizations. We provide innovative technologies and products and a commitment to quality to help clients
and partners accelerate the development of safe and effective drugs and products and maximize the returns on their research and
development investments. We believe that we offer an efficient, variable-cost alternative to our clients’ internal drug and
product development programs. Outsourcing development work to reduce overhead and speed product approvals through the Food and
Drug Administration ("FDA") and other regulatory authorities is an established alternative to in-house product development
efforts. We derive our revenues from sales of our research services and instruments, both of which are focused on evaluating drug
and product safety and efficacy. The Company has been involved in the research of drug and products to treat diseases in numerous
therapeutic areas for over 45 years since its formation as a corporation organized in Indiana in 1974.
We support both the
non-clinical and clinical development needs of researchers and clinicians for primarily small molecule drug candidates, but also
including biotherapeutics and devices. We believe that our scientists have the skills in analytical instrumentation development,
chemistry, computer software development, histology, pathology, physiology, medicine, surgery, analytical chemistry, drug metabolism,
pharmacokinetics, and toxicology to make the services and products we provide increasingly valuable to our current and potential
clients. Our principal clients are scientists engaged in analytical chemistry, drug safety evaluation, clinical trials, drug metabolism
studies, pharmacokinetics and basic research from small start-up biotechnology companies to some of the largest global pharmaceutical
companies. We are committed to bringing scientific expertise, quality and speed to every drug discovery and development program
to help our clients develop safe and effective life-changing therapies.
Developments within
the industries we serve have a direct, and sometimes material, impact on our operations. Currently, many large pharmaceutical companies
have major "blockbuster" drugs that are nearing the end of their patent protections. This puts significant pressure on
these companies both to acquire or develop new drugs with large market opportunity, and to re-evaluate their cost structures and
the time-to-market of their products. Contract research organizations 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 product 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.
A significant portion
of innovation in the pharmaceutical industry is now driven by smaller, venture capital funded drug discovery 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 pharmaceutical companies, the industry is still characterized by smaller entities. These
developmental companies generally do not have the resources to perform much of their research within their organizations and are
therefore dependent on the CRO industry for both their research and for guidance in preparing their regulatory submissions. These
companies have provided significant new opportunities for the CRO industry, including the Company. We believe that the Company is ideally
positioned to serve these clients as they look for alternatives to the large CROs that cater primarily to the large pharmaceutical
company segment of the marketplace.
We review various metrics
to evaluate our financial performance, including revenue, margins and earnings. In the three months ended December 31, 2020, total
revenues increased to $17,885 from $12,918, a 38.5% increase as compared to the three months ended December 31, 2019, including
incremental PCRS related revenues, given the December 1, 2019 closing for the PCRS acquisition. Gross profit increased to $5,877
from $3,477, a 69.1% increase. Operating expenses were higher by 30.4% in the three months ended December 31, 2020 compared to
the three months ended December 31, 2019. The most notable growth in operating expenses is employee-related costs, including benefits
and incentive programs, and additional expenses related to operations acquired in the PCRS Acquisition.
As of December 31,
2020, we had $1,155 of cash and cash equivalents as compared to $1,406 of cash and cash equivalents at the end of fiscal 2020.
In the first three months of fiscal 2021, we generated $1,652 in cash from operations as compared to $1,452 in the fiscal 2020
period. Capital expenditures for investments in laboratory equipment to increase capacity and improvements to our Fort Collins
facility during the first three months of fiscal 2021 totaled $1,474, which is a decrease from $2,165 in the first three months
of fiscal 2020.
As of December 31,
2020, we did not have an outstanding balance on our $5,000 general line of credit, we had a $3,000 balance on our $3,000 capex
line of credit. As described herein, we incurred indebtedness in connection with financing the Seventh Wave Acquisition, the Smithers
Avanza Acquisition and the PCRS Acquisition and the expansion of facilities and services. Please refer to the Liquidity and Capital
Resources section herein for a description of our Amended and Restated Credit Agreement.
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,
|
|
|
|
2020
|
|
|
2019
|
|
Service revenue
|
|
|
95.2
|
%
|
|
|
94.0
|
%
|
Product revenue
|
|
|
4.8
|
|
|
|
6.0
|
|
Total revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
Cost of Service revenue (a)
|
|
|
68.1
|
|
|
|
73.4
|
|
Cost of Product revenue (a)
|
|
|
48.2
|
|
|
|
68.2
|
|
Total cost of revenue
|
|
|
67.1
|
|
|
|
73.1
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
32.9
|
|
|
|
26.9
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
32.8
|
|
|
|
34.8
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
0.1
|
|
|
|
(7.9
|
)
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(2.0
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1.9
|
)
|
|
|
(10.3
|
)
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
0.1
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2.0
|
)%
|
|
|
(11.0
|
)%
|
|
(a)
|
Percentage of service and product revenues, respectively
|
Three Months Ended December 31, 2020
Compared to Three Months Ended December 31, 2019
Service and Product Revenues
Revenues for the quarter ended December
31, 2020 increased 38.5% to $17,885 compared to $12,918 for the same period last fiscal year.
Our Service
revenue increased 40.3% to $17,032 in the three months ended December 31, 2020 compared to $12,142 for the three months ended
December 31, 2019. Nonclinical services revenue increased $3,559 in the three months ended December 31, 2020 due to an
expansion at our Evansville location, as well as incremental revenues attributable to the PCRS Acquisition of $479.
Bioanalytical analysis revenues increased by $323 in the first quarter of fiscal 2020, mainly due to a higher number of
samples received and analyzed. Other laboratory services revenues were positively impacted by a full quarter of revenue from
the PCRS Acquisition resulting in incremental revenue of $977 in the three months ended December 31, 2020 as compared to the
three months ended December 31, 2019.
|
|
Three Months Ended
December 31,
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
%
|
|
Bioanalytical analysis
|
|
$
|
1,650
|
|
|
$
|
1,327
|
|
|
$
|
323
|
|
|
|
24.3
|
%
|
Nonclinical services
|
|
|
13,687
|
|
|
|
10,128
|
|
|
|
3,559
|
|
|
|
35.1
|
%
|
Other laboratory services
|
|
|
1,695
|
|
|
|
687
|
|
|
|
1,008
|
|
|
|
146.7
|
%
|
|
|
$
|
17,032
|
|
|
$
|
12,142
|
|
|
$
|
4,890
|
|
|
|
|
|
Sales in our Products
segment increased 9.9% in the three months ended December 31, 2020 to $853 from $776 for the three months ended December 31, 2019.
The majority of the increase in the first fiscal quarter of 2021 stems from higher sales of Culex in-vivo sampling systems and
analytical instruments, partially offset by a decrease in other instruments.
|
|
Three Months Ended
December 31,
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
%
|
|
Culex, in-vivo sampling systems
|
|
$
|
261
|
|
|
$
|
176
|
|
|
$
|
85
|
|
|
|
48.3
|
%
|
Analytical instruments
|
|
|
504
|
|
|
|
389
|
|
|
|
115
|
|
|
|
29.6
|
%
|
Other instruments
|
|
|
88
|
|
|
|
211
|
|
|
|
(123
|
)
|
|
|
(58.3
|
)%
|
|
|
$
|
853
|
|
|
$
|
776
|
|
|
$
|
77
|
|
|
|
|
|
Cost of Revenues
Cost
of revenues for the three months ended December 31, 2020 was $12,007 or 67.1% of revenue, compared to $9,441, or 73.1% of
revenue for the three months ended December 31, 2019.
Cost of Service revenue
as a percentage of Service revenue decreased to 68.1% during the three months ended December 31, 2020 from 73.4% in the three months
ended December 31, 2019, reflecting operating leverage and the greater utilization of recently expanded capacity.
Cost of Products
revenue as a percentage of Products revenue in the three months ended December 31, 2020 decreased to 48.2% from 68.2% in the
comparable prior year period due to expense reductions implemented in the last half of fiscal 2020 and improved margins on
existing sales.
Operating Expenses
Selling expenses for
the three months ended December 31, 2020 decreased 29.1% to $625 from $882 for the three months ended December 31, 2019. This decrease
is mainly due to the reduction of non-recurring costs of nearly $140 that was related to the launch of our new trade name Inotiv,
as well as a decrease in trade show and travel expenses due to the COVID-19 pandemic, as our sales and marketing teams have been
conducting meetings virtually.
Research and development
expenses for the three months ended December 31, 2020 increased 21.0% over the three months ended December 31, 2019 to $196 from
$162. The increase was primarily due to internal development investments of $118 for new services, partially offset by lower development
costs in the Product segment.
General and administrative
expenses for the three months ended December 31, 2020 increased 46.0% to $5,042 from $3,453 for the three months ended December
31, 2019. The increase was mainly driven by increased employee-related costs, including benefits and non-cash stock compensation,
as we continue to grow and expand our business, as well as additional expenses from the PCRS acquisition, such as depreciation
and amortization expenses.
Other Income (Expense)
Other expense for the
first quarter of fiscal 2020 was $347, as compared to other expense of $309 for the first quarter of fiscal 2020. The primary reason
for the change in expense was the increase in interest expense under the PPP loan received in April 2020 and our credit arrangements
with First Internet Bank (“FIB”). We entered into new financing arrangements with FIB, including as part of the PCRS
Acquisition.
Net Income/Loss
As a result of the
above described factors, we had a net loss of $366 for the three months ended December 31, 2020 as compared to a net loss of $1,426
during the three months ended December 31, 2019.
Income Taxes
Our effective
income tax rate for the three months ended December 31, 2020 and 2019 was (9.89)% and (7.32)%, respectively. The expense
recorded for each period was $33 and $97, respectively, and relates primarily to certain credits that arise when deferred tax
liabilities that are created by indefinite-lived assets cannot be used as a source of taxable income to support the
realization of deferred tax assets for valuation allowance purposes. The tax expense associated with such certain credits is
required to be recorded.
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 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. At December 31, 2020 and September 30, 2020, respectively,
we had $178 and $168 reserved for the remaining liability. The reserve is classified as a current liability on the condensed consolidated
balance sheets.
Liquidity and Capital Resources
Comparative Cash Flow Analysis
At December 31, 2020,
we had cash and cash equivalents of $1,155, compared to $1,406 at September 30, 2020.
Net cash provided by
operating activities was $1,652 for the three months ended December 31, 2020 compared to net cash provided by operating activities
of $1,452 for the three months ended December 31, 2019. Contributing factors to our net cash provided by operations in the first
three months of fiscal 2021 were noncash charges of $1,065 for depreciation and amortization, $36 of amortization of finance lease,
a net increase in customer advances of $2,242, as a result of increasing orders, and an increase in accounts payable of $435. These
items were partially offset by an increase of $634 in accounts receivable, a net increase in prepaid expenses of $229, and a decrease
in accrued expenses of $1,087.
Days’ sales in
accounts receivable decreased to 49 days at December 31, 2020 from 56 days at September 30, 2020. It is not unusual to see a fluctuation
in the Company's pattern of days’ sales in accounts receivable as invoicing is based on billing milestones and may not be
consistent with the timing of revenue recognition. Clients 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 2020 are noncash charges of $732 for depreciation and amortization, $32 of amortization
of finance lease, a net increase in customer advances of $2,501, as a result of increasing orders, an increase in accrued expenses
of $597, and an increase in accounts payable of $479. These items were partially offset by an increase of $1,013 in accounts receivable
and a net increase in prepaid expenses of $774.
Investing activities
used $1,474 in the first three months of fiscal 2021 for capital expenditures as compared to $6,096 in the first three months of
fiscal 2020, which included $2,165 of capital expenditures and $3,931 cash paid for the PCRS Acquisition. The capital additions
during the first quarter of fiscal 2021 consisted of investments in laboratory equipment to increase capacity and improvements
in our Fort Collins facility.
Financing activities
used $429 in the first three months of fiscal 2021, as compared to cash provided of $4,549 during the first three months of fiscal
2020. The use of cash in the first quarter of fiscal 2021 consisted of payments on long-term debt of $712, financing lease payments
of $108 and debt issuance costs of $40, which were partially offset from net cash borrowed against the capex line of credit of
$387 and proceeds from the exercise of stock options of $44. The main sources of cash in the first three months of fiscal 2020
were from borrowings on the long-term loan of $3,439, and borrowings on the Construction loans and Capex lines of credit of $1,183
and $728, respectively. These items were partially offset by a net payment against the Revolving Facility of $337, long-term loan
payments of $250, finance lease payment of $104 and payment of debt issuance cost of $110.
Capital Resources
Credit Facility
On December 1,
2019, we entered into an Amended and Restated Credit Agreement (as has been amended from time to time, 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 instruments (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, 2020 was $3,686. 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. 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, 2020 was $3,820.
The Third Term Loan
for $1,271 was used to fund the cash consideration for the Smithers Avanza Acquisition. 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, 2020 was $1,067.
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 having commenced 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, 2020 was $1,356.
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, 2020 was $1,875. 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
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 Company did not have an outstanding balance on the Revolving Facility as of December 31, 2020. On December 18,
2020, the parties amended the Revolving Facility to extend its maturity through May 31, 2021.
The Construction Draw
Loan provided for borrowings up to a principal amount not to exceed $4,445 and the Equipment Draw Loan provided 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, 2020, there was a $4,123 balance on the Construction Draw Loan and a $1,185 balance on the Equipment Draw
Loan.
Subject to certain
conditions precedent, the Construction Draw Loan and the Equipment Draw Loan each permitted 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 required 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
previously provided for borrowings up to the principal amount of $1,100, which the Company could borrow from time to time, subject
to the terms of the Credit Agreement. On March 27, 2020, the parties amended the Initial Capex Line to eliminate the revolving
nature of the line in favor of a term loan in the principal amount of $948, equivalent to the amount of borrowings then outstanding
on the Initial Capex Line. As amended, the Initial Capex Line matures on June 30, 2025, and as of December 31, 2020, had a
balance of $869. Interest accrues on the principal balance of the Initial Capex Line at a fixed per annum rate equal to 4%. The
Company was required to pay accrued but unpaid interest on the Initial Capex Line on a monthly basis until June 30, 2020.
Commencing August 1, 2020, and on the first day of each monthly period thereafter until and including on the maturity date,
the Initial Capex Line requires payments of principal and interest in monthly installments equal to $17.
The Second Capex Line
previously provided for borrowings up to the principal amount of $3,000, which the Company could borrow from time to time, subject
to the terms of the Credit Agreement. On December 18, 2020, the parties amended the Second Capex Line to eliminate the revolving
nature of the line in favor of a term loan in the principal amount of $3,000, equivalent to the amount of borrowings then outstanding
on the Second Capex Line. As amended, the Second Capex Line matures on December 31, 2025. Interest accrues on the principal balance
of the Second Capex Line at a fixed per annum rate equal to 4.25%. Commencing January 31, 2021, and on the last day of each monthly
period thereafter until and including on the maturity date, the Second Capex Line requires payments of principal and interest in
monthly installments equal to $55.
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 Company entered
into a Credit Agreement modification on December 18, 2020 with FIB. Based in part on the impact of COVID-19 on the Company’s
operations and financial performance, FIB, among other things, agreed to suspended testing of the Fixed Charge Coverage Ratio under
the Credit Agreement for the December 31, 2020 compliance period. The December 18, 2020 modification, also revised the Company’s
covenant calculations on a go-forward basis, as described below. Absent these suspensions and modifications, the Company would
not have been in compliance with the covenants for the December 31, 2020 measurement period.
As amended, (i) beginning
March 31, 2021, the Company is required to maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement), tested
quarterly, of not less than (a) as of March 31, 2021 1.05 to 1.0, (b) as of June 30, 2021 1.10 to 1.00 and (c) as of September
30, 2021 and for each quarter thereafter 1.20 to 1.00 and (ii) the Company is required to maintain a Cash Flow Leverage Ratio (as
defined in the Credit Agreement), tested quarterly, not to exceed (a) as of December 31, 2020, 6.00 to 1.00, (b) as of March 31,
2021, 5.75 to 1.00, (c) as of June 30, 2021, 5.00 to 1.00 and (d) as of September 30, 2021 and for each quarter thereafter, 4.25
to 1.00. The Fixed Charge Coverage Ratio and Cash Flow Leverage Ratio are measured on a trailing twelve (12) month basis, provided,
however, that in the case of Fixed Charge Coverage Ratio calculations for the remainder of fiscal 2021 (i) the measurement period
for the quarter ending March 31, 2021 includes only the quarter ending March 31, 2021, (ii) the measurement period for the quarter
ending June 30, 2021 includes only the quarters ending March 31, 2021 and June 30, 2021 and (iii) the measurement period for the
quarter ending September 30, 2021 includes only the quarters ending March 31, 2021, June 30, 2021 and September 30, 2021.
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. At December 31, 2020, the
balance on the note payable to the Smithers Avanza Seller was $570. As part of the PCRS Acquisition, we also have an unsecured
promissory note payable to the PCRS 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. At December 31, 2020, the balance on the note payable to the
PCRS Seller was $735.
On April 23, 2020,
we were granted a loan (the “Loan”) from Huntington National Bank in the aggregate amount of $5,051, pursuant to the
Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The principal and
accrued interest under the Loan is to be repaid in eighteen installments of $283 beginning on November 16, 2020 and continuing
monthly until the final payment is due on April 16, 2022. The bank is not requiring payments of principal or interest pending
the loan forgiveness decision. We have applied for forgiveness of the loan in the amount of $4,851.
On January 28,
2015, the Company entered into a lease agreement with Cook Biotech, Inc. The lease agreement has and will provide the Company
with additional cash in the range of approximately $50 per month during the first year of the initial term to approximately $57
per month during the final year of the initial term.
The Company’s
sources of liquidity for fiscal 2021 are expected to consist primarily of cash generated from operations, cash on-hand, and additional
borrowings available under our Credit Agreement. Research services are capital intensive. The investment in equipment, facilities
and human capital 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. 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 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. Positive
cash flow and access to capital will be important to our ability to make such investments. 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.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
A smaller reporting company is not required
to provide the information required by this Item 3.
ITEM 4 - CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure
controls and procedures that are designed to provide reasonable assurance that information, which is required to be disclosed timely,
is accumulated and communicated to management in a timely fashion. In designing and evaluating such controls and procedures, we
recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. Our management is necessarily required to use judgment in evaluating controls and procedures.
Management performs
periodic evaluations to determine if our disclosure controls and procedures are effective to provide reasonable assurance that
information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of
1934, as amended, is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that
such information is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms.
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period
covered by this report was performed under the supervision and with the participation of management, which resulted in a determination
by our Chief Executive Officer and Chief Financial Officer that our disclosure controls and procedures were effective as of December
31, 2020.
Changes in Internal Controls
There
were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act, during the first quarter of fiscal 2021 that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.