For the quarterly period ended
OR
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended OR |
OR
 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to _____________
Commission File Number 0-23357
BIOANALYTICAL SYSTEMS, INC.
(Exact name of the registrant as specified in its charter)
INDIANA (State or other jurisdiction of incorporation or organization) 2701 KENT AVENUE WEST LAFAYETTE, IN (Address of principal executive offices) | 35-1345024 (I.R.S. Employer Identification No.) 47906 (Zip code) |
(765) 463-4527
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer Non-accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
YES NO
As of April 30,July 31, 2006, 4,892,127 common shares of the registrant were outstanding.
PAGE NUMBER
| PAGE NUMBER |
| PART I | FINANCIAL INFORMATION | |
| Item 1 | Condensed Consolidated Financial Statements (Unaudited): |
| Condensed Consolidated Balance Sheets as of and | ||
| September 30, 2005 | 3 | |
| Condensed Consolidated Statements of Operations for the Three | ||
| Months and | 4 | |
| Condensed Consolidated Statements of Cash Flows for the Nine Months | ||
| Ended | 5 | |
| Notes to Condensed Consolidated Financial Statements | 6 | |
| Item 2 | Management's Discussion and Analysis of Financial Condition and | |
| Results of Operations | 10 | |
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 16 |
| Item 4 | Controls and Procedures | 16 |
| PART II | OTHER INFORMATION |
| Item | 17 | |
| Item 6 | Exhibits | 17 |
| SIGNATURES | 18 |
2
PART I—Financial Information
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
| June 30, 2006 | September 30, 2005 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2006 | September 30, 2005 | |||||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 1,038 | $ | 1,254 | $ | 777 | $ | 1,254 | ||||||||
| Accounts receivable | ||||||||||||||||
| Trade | 8,401 | 10,352 | 7,690 | 10,352 | ||||||||||||
| Unbilled revenues and other | 2,009 | 2,677 | 1,752 | 2,677 | ||||||||||||
| Inventories | 2,207 | 2,041 | 1,889 | 2,041 | ||||||||||||
| Deferred income taxes | 481 | 381 | 510 | 381 | ||||||||||||
| Refundable income taxes | 276 | — | 1,017 | — | ||||||||||||
| Prepaid expenses | 583 | 430 | 602 | 430 | ||||||||||||
| Total current assets | 14,995 | 17,135 | 14,237 | 17,135 | ||||||||||||
| Property and equipment, net | 27,009 | 26,565 | 26,656 | 26,565 | ||||||||||||
| Goodwill | 2,238 | 1,445 | 1,854 | 1,445 | ||||||||||||
| Intangible assets, net | 1,050 | 2,156 | 374 | 2,156 | ||||||||||||
| Debt issue costs | 265 | 280 | 254 | 280 | ||||||||||||
| Other assets | 268 | 257 | 264 | 257 | ||||||||||||
| Total assets | $ | 45,825 | $ | 47,838 | $ | 43,639 | $ | 47,838 | ||||||||
| Liabilities and shareholders' equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 1,239 | $ | 1,681 | $ | 1,356 | $ | 1,681 | ||||||||
| Accrued expenses | 2,277 | 2,791 | 2,286 | 2,791 | ||||||||||||
| Income Tax Payable | — | 31 | ||||||||||||||
| Income Taxes Payable | — | 31 | ||||||||||||||
| Customer advances | 4,478 | 5,974 | 4,756 | 5,974 | ||||||||||||
| Revolving line of credit | 1,569 | 920 | — | 920 | ||||||||||||
| Current portion of capital lease obligation | 187 | 278 | 506 | 278 | ||||||||||||
| Current portion of long-term debt | 710 | 700 | 715 | 700 | ||||||||||||
| Total current liabilities | 10,460 | 12,375 | 9,619 | 12,375 | ||||||||||||
| Capital lease obligation, less current portion | 1,250 | 807 | 1,747 | 807 | ||||||||||||
| Long-term debt, less current portion | 8,370 | 8,579 | 8,278 | 8,579 | ||||||||||||
| Subordinated debt, long-term | 4,477 | 4,829 | 4,477 | 4,829 | ||||||||||||
| Deferred income taxes | 1,651 | 1,651 | 1,512 | 1,651 | ||||||||||||
| Shareholders' equity: | ||||||||||||||||
| Preferred shares: Authorized shares - 1,000, | ||||||||||||||||
| Preferred shares: Authorized shares - 1,000 | ||||||||||||||||
| Issued and outstanding shares - none | — | — | — | — | ||||||||||||
| Common shares: Authorized shares - 19,000, | ||||||||||||||||
| Issued and outstanding shares - 4,892 at March 31, 2006 | ||||||||||||||||
| Common shares: Authorized shares - 19,000 | ||||||||||||||||
| Issued and outstanding shares - 4,892 at June 30, 2006 | ||||||||||||||||
| and 4,871 at September 30, 2005 | 1,182 | 1,177 | 1,182 | 1,177 | ||||||||||||
| Additional paid-in capital | 11,496 | 11,268 | 11,567 | 11,268 | ||||||||||||
| Retained earnings | 7,016 | 7,194 | 5,341 | 7,194 | ||||||||||||
| Accumulated other comprehensive loss | (77 | ) | (42 | ) | (84 | ) | (42 | ) | ||||||||
| Total shareholders' equity | 19,617 | 19,597 | 18,006 | 19,597 | ||||||||||||
| Total liabilities and shareholders' equity | $ | 45,825 | $ | 47,838 | $ | 43,639 | $ | 47,838 | ||||||||
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended March 31, | Six Months Ended March 31, | Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||
| Service revenue | $ | 10,053 | $ | 7,543 | $ | 17,592 | $ | 14,832 | $ | 7,956 | $ | 9,078 | $ | 25,548 | $ | 23,910 | ||||||||||||
| Product revenue | 2,364 | 1,596 | 4,669 | 4,001 | 2,082 | 2,226 | 6,751 | 6,226 | ||||||||||||||||||||
| Total revenue | 12,417 | 9,139 | 22,261 | 18,833 | 10,038 | 11,304 | 32,299 | 30,136 | ||||||||||||||||||||
| Cost of service revenue | 6,758 | 6,056 | 12,622 | 11,271 | 6,343 | 5,434 | 18,965 | 16,570 | ||||||||||||||||||||
| Cost of product revenue | 725 | 657 | 1,560 | 1,509 | 1,165 | 844 | 2,725 | 2,352 | ||||||||||||||||||||
| Total cost of revenue | 7,483 | 6,713 | 14,182 | 12,780 | 7,508 | 6,278 | 21,690 | 18,922 | ||||||||||||||||||||
| Gross profit | 4,934 | 2,426 | 8,079 | 6,053 | 2,530 | 5,026 | 10,609 | 11,214 | ||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||
| Selling | 680 | 626 | 1,413 | 1,202 | 625 | 718 | 2,038 | 1,919 | ||||||||||||||||||||
| Research and development | 201 | 173 | 639 | 392 | 350 | 261 | 989 | 653 | ||||||||||||||||||||
| General and administrative | 2,886 | 2,615 | 5,771 | 4,542 | 3,834 | 3,115 | 9,605 | 7,781 | ||||||||||||||||||||
| Total operating expenses | 3,767 | 3,414 | 7,823 | 6,136 | 4,809 | 4,094 | 12,632 | 10,353 | ||||||||||||||||||||
| Operating income (loss) | 1,167 | (988 | ) | 256 | (83 | ) | ||||||||||||||||||||||
| Operating (loss) income | (2,279 | ) | 932 | (2,023 | ) | 861 | ||||||||||||||||||||||
| Interest income | 2 | 2 | 4 | 4 | 2 | 2 | 6 | 7 | ||||||||||||||||||||
| Interest expense | (248 | ) | (257 | ) | (508 | ) | (532 | ) | (272 | ) | (250 | ) | (780 | ) | (782 | ) | ||||||||||||
| Other expense | — | (28 | ) | — | (22 | ) | ||||||||||||||||||||||
| Other income | — | 78 | — | 56 | ||||||||||||||||||||||||
| Gain on sale of property and equipment | — | 34 | — | 21 | ||||||||||||||||||||||||
| Income (loss) before income taxes | 921 | (1,271 | ) | (248 | ) | (633 | ) | (2,549 | ) | 796 | (2,797 | ) | 163 | |||||||||||||||
| Income taxes | 383 | (375 | ) | (70 | ) | (140 | ) | |||||||||||||||||||||
| Income tax (benefit) expense | (874 | ) | 440 | (944 | ) | 300 | ||||||||||||||||||||||
| Net income (loss) | $ | 538 | $ | (896 | ) | $ | (178 | ) | $ | (493 | ) | $ | (1,675 | ) | $ | 356 | $ | (1,853 | ) | $ | (137 | ) | ||||||
| Net income (loss) per share: | ||||||||||||||||||||||||||||
| Basic | $ | 0.11 | $ | (0.18 | ) | $ | (0.04 | ) | $ | (0.10 | ) | $ | (0.34 | ) | $ | 0.07 | $ | (0.38 | ) | $ | (0.03 | ) | ||||||
| Diluted | $ | 0.11 | $ | (0.18 | ) | $ | (0.04 | ) | $ | (0.10 | ) | $ | (0.34 | ) | $ | 0.07 | $ | (0.38 | ) | $ | (0.03 | ) | ||||||
| Weighted common and common equivalent | ||||||||||||||||||||||||||||
| shares outstanding: | ||||||||||||||||||||||||||||
| Basic | 4,875 | 4,870 | 4,873 | 4,870 | 4,892 | 4,871 | 4,879 | 4,870 | ||||||||||||||||||||
| Diluted | 4,971 | 4,870 | 4,873 | 4,870 | 4,892 | 5,020 | 4,879 | 4,870 | ||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended June 30, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Six Months Ended March 31, | 2006 | 2005 | ||||||||||||||
| 2006 | 2005 | |||||||||||||||
| Operating activities | ||||||||||||||||
| Net loss | $ | (178 | ) | $ | (493 | ) | $ | (1,853 | ) | $ | (137 | ) | ||||
| Adjustments to reconcile net loss to net | ||||||||||||||||
| cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization | 1,702 | 1,429 | 3,069 | 2,462 | ||||||||||||
| Loss on sale of property and equipment | — | 12 | ||||||||||||||
| Impairment of intangible assets | 968 | |||||||||||||||
| Gain on sale of property and equipment | — | (21 | ) | |||||||||||||
| Employee stock option expense | 210 | — | ||||||||||||||
| Deferred income taxes | (100 | ) | (145 | ) | (268 | ) | — | |||||||||
| Employee stock option expense | 139 | — | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable | 2,619 | (1,662 | ) | 3,587 | (5,569 | ) | ||||||||||
| Inventories | (166 | ) | (689 | ) | 152 | (673 | ) | |||||||||
| Prepaid expenses and other assets | (175 | ) | (231 | ) | (194 | ) | (100 | ) | ||||||||
| Accounts payable | (442 | ) | (466 | ) | (325 | ) | (295 | ) | ||||||||
| Refundable income taxes | (307 | ) | (137 | ) | (1,048 | ) | 211 | |||||||||
| Accrued expenses | (514 | ) | 28 | (505 | ) | (106 | ) | |||||||||
| Customer advances | (1,496 | ) | 1,317 | (1,218 | ) | 3,522 | ||||||||||
| Net cash provided (used) by operating activities | 1,082 | (1,037 | ) | 2,575 | (706 | ) | ||||||||||
| Investing activities | ||||||||||||||||
| Capital expenditures | (1,332 | ) | (1,029 | ) | (1,286 | ) | (1,631 | ) | ||||||||
| Proceeds from sale of property and equipment | 45 | 5,866 | 45 | 5,887 | ||||||||||||
| Net cash provided (used) by investing activities | (1,287 | ) | 4,837 | (1,241 | ) | 4,256 | ||||||||||
| Financing activities | ||||||||||||||||
| Borrowings on line of credit | 8,805 | 6,968 | 11,360 | 6,968 | ||||||||||||
| Payments on line of credit | (8,156 | ) | (9,794 | ) | (12,280 | ) | (9,794 | ) | ||||||||
| Exercise of stock options | 94 | 5 | ||||||||||||||
| Payments on capital lease obligations | (168 | ) | (53 | ) | (305 | ) | (113 | ) | ||||||||
| Proceeds from exercise of stock options | 94 | — | ||||||||||||||
| Payments of long-term debt | (551 | ) | (621 | ) | (638 | ) | (703 | ) | ||||||||
| Net cash provided (used) by financing activities | 24 | (3,500 | ) | |||||||||||||
| Net cash used by financing activities | (1,769 | ) | (3,637 | ) | ||||||||||||
| Effects of exchange rate changes | (35 | ) | 242 | (42 | ) | 325 | ||||||||||
| Net increase (decrease) in cash and cash equivalents | (216 | ) | 542 | (477 | ) | 238 | ||||||||||
| Cash and cash equivalents at beginning of period | 1,254 | 773 | 1,254 | 773 | ||||||||||||
| Cash and cash equivalents at end of period | $ | 1,038 | $ | 1,315 | $ | 777 | $ | 1,011 | ||||||||
| Assets acquired utilizing capital leases | $ | 1,500 | $ | 1,112 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
BIOANALYTICAL SYSTEMS, INC. AND SUBSIDIARIESNOTESSUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of the Business and Basis of Presentation
Bioanalytical Systems, Inc. and its subsidiaries (“We,” the “Company”“the Company” or “BASi”) engage in laboratory services and other services related to pharmaceutical development. We also manufacture scientific instruments for medical research, which we sell with related software for use in industrial, governmental and academic laboratories. 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, for the year ended September 30, 2005. In the opinion of management, the condensed consolidated financial statements for the three and sixnine months ended March 31,June 30, 2006 and 2005 include all adjustments which are necessary for a fair presentation of the results of the interim periods and of our financial position at March 31,June 30, 2006. The results of operations for the three and sixnine months ended March 31,June 30, 2006 are not necessarily indicative of the results for the year ending September 30, 2006.2005.
All amounts in the condensed consolidated financial statements and the notes thereto are presented in thousands, except for per share data or where otherwise noted.
2. Stock Based Compensation
The Company has an Employee Stock Option Plan whereby options to purchase the Company's common shares at fair market value can be granted to our employees. Options granted become exercisable in four equal installments beginning two years after the date of grant, and expire upon the earlier of the employee's termination of employment with the Company, or ten years from the date of grant. The plan terminates in fiscal 2008.
The Company established an Outside Director Stock Option Plan whereby options to purchase the Company's common shares at fair market value can be granted to outside directors. Options granted become exercisable in four equal installments beginning two years after the date of grant and expire upon the earlier of the director's termination of board service with the Company, or ten years from the date of grant. The plan terminates in fiscal 2008.
On October 1, 2005, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS 123R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors under our stock option plans, based on fair values. Previously, we had not recognized expenses for employee stock options.
We adopted FAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of October 1, 2005, the first day of the our fiscal year. Our Condensed Consolidated Financial Statements as of March 31,June 30, 2006, and for the three and sixnine month periods then ended, reflect the impact of FAS 123R. In accordance with the modified prospective transition method, our Condensed Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include the impact of FAS 123R. Stock-based compensation expense for employee stock options recognized under FAS 123R for the three months and sixnine months ended March 31,June 30, 2006 was $71,000 and $139,000,$210,000, respectively. We did not record any tax benefit related to these options.
FAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Statement of Operations. Prior to the adoption of FAS 123R, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS 123).Compensation. Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company’s Consolidated Statement of Operations.
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.period, reduced for estimated forfeitures. Stock-based compensation expense recognized in the our Condensed Consolidated Statement of Operations for the quarter and sixnine months ended March 31,June 30, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested as of October 1, 2005, based on the grant date fair value estimated in accordance with the provisions of FAS 123R. There have been no awards granted since the beginning of our fiscal year. Compensation expense for all share-based payment awards are recognized using the straight-line single option approach. Stock-based compensation expense is based on awards ultimately expected to vest and has been reduced for estimated forfeitures.
6
With the adoption of FAS 123R, we continued to use a binomial option-pricing model as our method of valuation for share-based awards. For additional information regarding assumptions used for grants made in periods prior to the current fiscal year, see Note 1(k) to our financials statements in our form 10-K for the year ended September 30, 2005.
The key assumptions in computing our stock based compensation expense at the date of grants were:
| 2005 | 2004 | 2003 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Risk-free interest rate | 3 | .00% | 3 | .50% | 5 | .50% | |||||
| Dividend yield | 0 | .00% | 0 | .00% | 0 | .00% | |||||
| Volatility factor of the expected market | |||||||||||
| price of the Company's common stock | 0 | .668 | 0 | .724 | 0 | .14 | |||||
| Expected life of the options (years) | 7 | .0 | 7 | .0 | 7 | .0 | |||||
6
The following table presents the effect on earnings and earnings per share had we applied the same treatment to stock-based employee compensation in the periods ended March 31,June 30, 2005:
| Three Months Ended March 31, | Six Months Ended March 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2005 | |||||||
| Net loss as reported | $ | (896 | ) | $ | (493 | ) | ||
| Deduct: Total stock-based employee | ||||||||
| compensation expense determined under the | ||||||||
| fair value based method for all awards, | ||||||||
| net of related tax effects | (50 | ) | (93 | ) | ||||
| Pro forma net loss | $ | (946 | ) | $ | (586 | ) | ||
| Loss per share: | ||||||||
| Basic and diluted — as reported | $ | (0.1 | 8) | $ | (0.1 | 0) | ||
| Basic and diluted — pro forma | $ | (0.1 | 9) | $ | (0.1 | 2) | ||
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2005 | |||||||
| Net income (loss) as reported | $ | 356 | $ | (137 | ) | |||
| Deduct: Total stock-based employee | ||||||||
| compensation expense determined under the | ||||||||
| fair value based method for all awards, | ||||||||
| net of related tax effects | (37 | ) | (130 | ) | ||||
| Pro forma net income (loss) | $ | 319 | $ | (267 | ) | |||
| Income (loss) per share: | ||||||||
| Basic and diluted - as reported | $ | 0.07 | $ | (0.03 | ) | |||
| Basic - pro forma | $ | 0.07 | $ | (0.05 | ) | |||
| Diluted - pro forma | $ | 0.06 | $ | (0.05 | ) | |||
| A summary of our stock option activity and related information for the quarter and |
| Three Months Ended March 31, 2006 | Six Months Ended March 31, 2006 | Three Months Ended June 30, 2006 | Nine Months Ended June 30, 2006 | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Options | Weighted average exercise price | Options | Weighted average exercise price | Options | Weighted average exercise price | Options | Weighted average exercise price | |||||||||||||||||||||||||||
| Outstanding — beginning of period | 454,753 | $ | 5.02 | 480,253 | $ | 4.95 | ||||||||||||||||||||||||||||
| Outstanding - beginning of period | 434 | $ | 4.96 | 480 | $ | 4.95 | ||||||||||||||||||||||||||||
| Exercised | (21,000 | ) | 4.50 | (21,000 | ) | 4.50 | — | — | (21 | ) | 4.50 | |||||||||||||||||||||||
| Granted | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Terminated | — | — | (25,500 | ) | 5.22 | (10 | ) | 3.32 | (35 | ) | 4.69 | |||||||||||||||||||||||
| Outstanding — end of period | 433,753 | $ | 4.96 | 433,753 | $ | 4.96 | ||||||||||||||||||||||||||||
| Outstanding - end of period | 424 | $ | 5.00 | 424 | $ | 5.00 | ||||||||||||||||||||||||||||
| The intrinsic value of options exercised in the nine months ended June 30, 2006 was $131. A summary of non vested options for the nine months ended June 30, 2006 is as follows: |
| Number | Weighted Average Grant Date Fair Value | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Non-vested Shares, beginning of year | 343 | $ | 4 | .96 | |||||
| Granted | — | ||||||||
| Vested | 49 | 4 | .88 | ||||||
| Forfeited | 15 | 4 | .67 | ||||||
| 272 | $ | 5 | .03 | ||||||
| The options on the 424 shares outstanding at June 30, 2006 had an aggregate intrinsic value of $550 and a weighted average contract term of 7.4 years. |
| At |
7
3. Intangible Assets
In fiscal 2003, we completed the acquisitions of LC Resources, Inc. and PharmaKinetics Laboratories, Inc. (“PKLB”). In valuing the intangibles acquired, we determined that the replacement cost, in a start-up situation, of establishing these two operations as FDA compliant research sites was $1,267 and recorded intangible assets of that amount. We determined that these assets had an indeterminate life, and accordingly did not amortize the assets. At the request of the staff of the Securities and Exchange Commission, we have re-examined the make-up of these assets, and have determined that of the total recorded, $793 related to the hiring and training of the in-place workforce. Financial Accounting Standard 141 requires that such assets be included in goodwill, accordingly we have reclassified that amount to goodwill at March 31,June 30, 2006. The remaining $474 of the intangible asset relatesrelated to the replacement costs of creating and documenting the operating systems and procedures, their validation and audit. The evolving nature of procedures in a regulated environment requires that we constantly monitor and update those procedures. Accordingly, we have revised our estimate of the useful life of that asset to a ten year life, and recorded $145 of amortization expense in Cost of Service Revenue duringServices of $12 in the periodquarter and $157 in the nine months ended March 31, 2006June 30, 2006.
7
PKLB, which now constitutes our Baltimore clinical research unit, has experienced losses since acquisition, including $690 and $1,980 in the three and nine months ended June 30, 2006. Although improvement had been achieved in operating results since acquisition prior to record amortizationthe current year, the acquisition of a major customer by a company that had other clinical study providers and subsequent cancellation of previously scheduled studies has seriously impacted current operating results. Establishing future profitable operations there will require additional sales effort to attract new customers. Consequently, we have determined that there is a permanent impairment of value of the intangible assets acquired, and have recorded a charge to general and administrative expenses of $968 to write off the goodwill of $383 and other intangible assets of $585 remaining from the acquisition. We also recorded a deferred tax benefit of $251 related to this intangible asset since the dates of acquisition over a ten year period.charge.
4. Income (Loss) per Share
We compute basic income andor loss per share using the weighted average number of common shares outstanding. We compute diluted income (loss) per share using the weighted average number of common and dilutive potential common shares outstanding. Because all potential common shares are anti-dilutive to loss per share, those shares are not included in the computation of diluted loss per share.
The following table reconciles our computation of basic incomeearnings (loss) per share to diluted incomeearnings (loss) per share:
| Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2006 | 2005 | ||||||||||||||||
| Shares: | |||||||||||||||||||
| Basic shares | 4,875 | 4,870 | 4,873 | 4,870 | |||||||||||||||
| Effect of dilutive securities | |||||||||||||||||||
| Options | 96 | — | — | — | |||||||||||||||
| Convertible Subordinated debt | — | — | — | — | |||||||||||||||
| Diluted shares | 4,971 | 4,870 | 4,873 | 4,870 | |||||||||||||||
| Basic and diluted net income (loss) | $ | 538 | $ | (896 | ) | $ | (178 | ) | $ | (493 | ) | ||||||||
| Basic earnings (loss) per share | $ | 0.11 | $ | (0.18 | ) | $ | (0.04 | ) | $ | (0.10 | ) | ||||||||
| Diluted earnings (loss) per share | $ | 0.11 | $ | (0.18 | ) | $ | (0.04 | ) | $ | (0.10 | ) | ||||||||
8
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2006 | 2005 | |||||||||||
| Shares: | ||||||||||||||
| Basic shares | 4,892 | 4,871 | 4,879 | 4,870 | ||||||||||
| Effect of dilutive securities | ||||||||||||||
| Options | — | 149 | — | — | ||||||||||
| Convertible subordinated debt | — | — | — | — | ||||||||||
| Diluted shares | 4,892 | 5,020 | 4,879 | 4,870 | ||||||||||
| Basic net income (loss) | $ | (1,675 | ) | $ | 356 | $ | (1,853 | ) | $ | (137 | ) | |||
| Diluted net income (loss) | $ | (1,675 | ) | $ | 356 | $ | (1,853 | ) | $ | (137 | ) | |||
| Basic earnings (loss) per share | $ | (0.34 | ) | $ | 0.07 | $ | ( 0.38 | ) | $ | ( 0.03 | ) | |||
| Diluted earnings (loss) per share | $ | (0.34 | ) | $ | 0.07 | $ | ( 0.38 | ) | $ | (0.03 | ) | |||
5. Inventories
Inventories consisted of the following:
| March 31, 2006 | September 30, 2005 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| June 30, 2006 | September 30, 2005 | |||||||||||||||
| Raw materials | $ | 1,428 | $ | 1,425 | $ | 1,410 | $ | 1,425 | ||||||||
| Work in progress | 523 | 375 | 271 | 375 | ||||||||||||
| Finished goods | 439 | 424 | 391 | 424 | ||||||||||||
| 2,390 | 2,224 | 2,072 | 2,224 | |||||||||||||
| Less LIFO reserve | (183 | ) | (183 | ) | (183 | ) | (183 | ) | ||||||||
| $ | 2,207 | $ | 2,041 | $ | 1,889 | $ | 2,041 | |||||||||
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6. Segment Information
We operate in two principal segments -— research services and research products. Our Services segment provides research and development support on a contract basis directly to pharmaceutical companies. Our Products segment provides liquid chromatography, electrochemical and physiological monitoring products to pharmaceutical companies, universities, government research centers and medical research institutions. Our accounting policies in these segments are the same as those described in the summary of significant accounting policies.
The following table presents operating results by segment:
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||||||
| Operating income (loss): | ||||||||||||||||||||||||||||||||
| Services | $ | 393 | $ | (307 | ) | $ | (459 | ) | $ | 304 | $ | (2,037 | ) | $ | 352 | $ | (2,496 | ) | $ | 656 | ||||||||||||
| Products | 774 | (681 | ) | 715 | (387 | ) | (242 | ) | 580 | 473 | 205 | |||||||||||||||||||||
| Total operating income (loss) | 1,167 | (988 | ) | 256 | (83 | ) | (2,279 | ) | 932 | (2,023 | ) | 861 | ||||||||||||||||||||
| Corporate expenses | (246 | ) | (283 | ) | (504 | ) | (550 | ) | (270 | ) | (136 | ) | (774 | ) | (698 | ) | ||||||||||||||||
| Income (loss) before income taxes | $ | 921 | $ | (1,271 | ) | $ | (248 | ) | $ | (633 | ) | $ | (2,549 | ) | $ | 796 | $ | (2,797 | ) | $ | 163 | |||||||||||
7. Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109(FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of our fiscal year beginning October 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q may contain “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and/or Section 21E of the Securities Exchange Act of 1934, as amended. Those statements may include, but are not limited to, discussions regarding BASi’s intent, belief or current expectations with respect to (i) BASi’s strategic plans; (ii) BASi’s future profitability; (iii) BASi’s capital requirements; (iv) industry trends affecting the Company’s financial condition or results of operations; (v) the Company’s sales or marketing plans; or (vi) BASi’s growth strategy. Investors in BASi’s Common Sharescommon shares are cautioned that reliance on any forward-looking statement involves risks and uncertainties, including the risk factors contained in Exhibit 99.1 to BASi’s annual report on Form 10-K for the year ended September 30, 2005. Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based upon those assumptions also could be incorrect. In light of the uncertainties inherent in any forward-looking statement, the inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that BASi’s plans and objectives will be achieved.
GENERAL
The business of Bioanalytical Systems, Inc. is very much dependent on the level of pharmaceutical and biotech companies’ efforts in new drug discovery and approval. Our Services segment is the direct beneficiary of these efforts, through their outsourcing of laboratory and analytical needs, and our Products segment is the indirect beneficiary, as increased drug development leads to capital expansion, providing opportunities to sell the equipment we produce and the consumable supplies we provide that support our products.
In our Annual Reportannual report on Form 10-K for the year ended September 30, 2005, we commented on the impacts and anticipated impacts developments in the pharmaceutical industry have on our businesses, as well as some of the potential risks. Those comments are still applicable, and are found under “General” in Part I, Item 2 of that report.
RESULTS OF OPERATIONS
The following table summarizes the consolidated statement of operations as a percentage of total revenues:
| Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended March 31, | Six Months Ended March 31, | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||
| Service revenue | 81 | .0% | 82 | .5% | 79 | .0% | 78 | .8% | 79 | .3 | 80 | .3 | 79 | .1 | 79 | .3 | ||||||||
| Product revenue | 19 | .0 | 17 | .5 | 21 | .0 | 21 | .2 | 20 | .7 | 19 | .7 | 20 | .9 | 20 | .7 | ||||||||
| Total revenue | 100 | .0 | 100 | .0 | 100 | .0 | 100 | .0 | 100 | .0 | 100 | .0 | 100 | .0 | 100 | .0 | ||||||||
| Cost of service revenue (a) | 67 | .2 | 80 | .3 | 71 | .8 | 76 | .0 | 79 | .7 | 59 | .9 | 74 | .2 | 69 | .3 | ||||||||
| Cost of product revenue (a) | 30 | .7 | 41 | .2 | 33 | .4 | 37 | .7 | 56 | .0 | 37 | .9 | 40 | .4 | 37 | .8 | ||||||||
| Total cost of revenue | 60 | .3 | 73 | .5 | 63 | .7 | 67 | .7 | 74 | .8 | 55 | .5 | 67 | .2 | 62 | .8 | ||||||||
| Gross profit | 39 | .7 | 26 | .5 | 36 | .3 | 32 | .1 | 25 | .2 | 44 | .5 | 32 | .8 | 37 | .2 | ||||||||
| Total operating expenses | 30 | .3 | 37 | .2 | 35 | .1 | 32 | .5 | 47 | .9 | 36 | .3 | 39 | .1 | 34 | .4 | ||||||||
| Operating income (loss) | 9 | .4 | (10 | .7) | 1 | .2 | (0 | .3) | (22 | .7) | 8 | .2 | (6 | .3) | 2 | .8 | ||||||||
| Other expense | (2 | .0) | (3 | .2) | (2 | .3) | (3 | .0) | (2 | .7) | (1 | .2) | (2 | .4) | (2 | .3) | ||||||||
| Income (loss) before income taxes | 7 | .4 | (13 | .9) | (1 | .1) | (3 | .3) | (25 | .4) | 7 | .0 | (8 | .7) | 0 | .5 | ||||||||
| Income tax provision (benefit) | 3 | .1 | (4 | .1) | (0 | .3) | (0 | .7) | ||||||||||||||||
| Income tax (expense) benefit | 8 | .7 | (3 | .9) | 3 | .0 | (1 | .0) | ||||||||||||||||
| Net income (loss) | 4 | .3% | (9 | .8)% | (0 | .8)% | (2 | .6)% | (16 | .7) | 3 | .1 | (5 | .7) | (0 | .5) | ||||||||
(a) Percentage of service and product revenues, respectively.
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Three Months Ended March 31,June 30, 2006 Compared to Three Months Ended March 31,June 30, 2005
Service and Product Revenues
Revenues for the third fiscal quarter ended June 30, 2006 declined 11% to $10.0 million compared to $11.3 million for the third fiscal quarter last year. Of the $1.3 million decline, Service revenue decreased $1.1 million, comprised of decreases of $1 million each in our Baltimore clinic and our bioanalytical laboratories, offset by a $1 million increase in our toxicology facility and $336,000 of new revenues in our pre-clinical pharmacokinetics/pharmacodynamics (“PKPD”) facility, which began commercial operation this year. The Baltimore clinic was impacted by the acquisition of our largest client for the clinic and subsequent cancellation of its scheduled work, in addition to postponement of a contract pending FDA clearance. Our laboratories experienced a decline in samples processed compared to the prior year when larger contracts resulted in longer production runs, as well as a decline in price per sample due to the nature of the assays. Our toxicology unit continued to experience strong demand for its services, particularly among smaller biotech and discovery clients. Our PKPD unit has experienced good market acceptance of its services, where we employ our proprietary Culex® technology to provide early stage preclinical contract studies for our clients. The decline in product revenue was the result of a decline in Culex® shipments compared to the same quarter last year.
Cost of Revenues
Cost of revenues for the fiscal quarter ended June 30, 2006 was $7.5 million or 75% of revenue compared to $6.3 million, or 56% of revenue for the third fiscal quarter last year. This increase in cost of revenues is a result of several factors. We have experienced increases in our costs in our toxicology and PKPD operations, where we have experienced increased revenues, while maintaining our capabilities in our laboratories and Baltimore clinic in anticipation of restoring activities to prior levels. Additionally, our revenue growth in toxicology resulted in those revenues being a higher proportion of our total revenues, and as a result of a higher percentage cost of revenues in those services than in our laboratory operations, our overall cost of services increased on a percentage basis. Our product costs are up due to increasing sales of consumable products related to our Culex® units, which have lower margins than the units themselves, and to lower utilization of our manufacturing capacity, which results in excess capacity being charged to cost of product revenue. In both our Service and Product Segments, the percentage costs increased relative to sales due to the relatively fixed nature of our costs being carried by a reduced level of sales and increased head count in our production facilities.
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Operating Expenses
Selling expenses for the three months ended June 30, 2006 decreased 13% to $625,000 from $718,000 for the three months ended June 30, 2005. Our sales expenses declined due to the timing of incidental expenses related to our sales force (year-to-date expenditures are up 6%). Research and development expenses of $350,000 for the three months ended June 30, 2006 compared to $261,000 for the three months ended June 30, 2005 and are a result of continuing research on products to support pre-clinical and clinical research.
General and administrative (“G&A”) for the three months ended June 30, 2006 were impacted by the write-down of intangible assets related to our Baltimore clinical research unit of $958,000 as a result of our determination that those values have been impaired, and by recognition of a bad debt related to the same location of $231,000. Other items included in G&A expenses for the three months ended June 30, 2006 decreased $500,000. The principal reasons for this were a reduction of expenses in Baltimore related to our relocated laboratory and cost controls there, coupled with translation expenses charged to G&A in our UK operation last year from a weak pound sterling, compared to translation gains this year.
Other Income/Expense
Interest expense increased 9% to $272,000 in the three months ended June 30, 2006 from $250,000 in the comparable quarter of the prior year. This increase is due to our periodic use of our revolving line of credit, which is a floating interest rate that has been consistently higher in the current quarter compared to a year ago, as well as the financing of additional laboratory equipment utilizing capital leases.
Income Taxes
We computed our tax provision using an effective tax rate for both the three months ended June 30, 2006 and for the three months ended June 30, 2005 of 40% on the US taxable income. On the adjustment of intangible assets related to our Baltimore operation, we provided a benefit of 35% of the adjustment, as we are not assured of a state tax benefit. In the current quarter, we had a profit of $80,000 on foreign operations for which we have loss carryforwards and therefore provided no taxes, and recorded $71,000 of stock option expenses for which we took no tax benefit. In the three months ended June 30, 2005 we provided taxes at the same rate on US taxable income, and did not record a benefit for our foreign loss, resulting in an effective tax rate above the statutory rate
Net Income
As a result of the above factors, we lost $1,675,000 ($.34 per share, both basic and diluted) in the quarter ended June 30, 2006, compared to net income of $356,000 ($.07 per share, both basic and diluted) in the same period last year.
Nine Months Ended June 30, 2006 Compared to Nine Months Ended June 30, 2005
Service and Product Revenues
Revenues for the second fiscal quarternine months ended March 31,June 30, 2006 increased 36%7% to $12.4$32.3 million compared to $9.1$30.1 million for the second quarter last year. Ourfirst nine months of fiscal 2005. Service segment revenue increased by 33% from $7.5 million to $10.1 million over the comparable period last year. Over 50%increases of this increase was7% were the result of the delayan increase in toxicology revenues of a significant laboratory contract$3 million, new revenues from our PKPD facility of $850,000, offset by declines in our first fiscal quarterBaltimore clinic of the current year, with the work being completed in the current fiscal quarter. Our toxicology operations accounted for the remainder of the increase, as we continue to expand our client base into biotechnology$435,000 and early stage companies through our increased sales activities. Salesdeclines in our Products segment increased 48% from $1.6bioanalytical laboratories of $1.4 million, in our first fiscal quarter last yeardue to $2.4 million inthe factors cited above for the current quarter. Although showing anRevenues for our products increased 8% for the nine months, which was a general increase over last year,across our product sales have not returned to the level we experienced two years ago. This continued softness of sales of our products is the result of declining sales of our older product lines, and a dip in sales of our Culex systems after initial adoption by some major companies. Nevertheless, our sales of consumable products for the Culex line continues to increase as our installed base grows.lines.
Cost of Revenues
Cost of revenues for the second quarternine months ended March 31,June 30, 2006 was $7.5$21.7 million or 60%67% of revenue compared to $6.7$18.9 million, or 74%63% of revenue for the second quartersame period last year. We included inBoth the cost of service revenues in the quarter ended March 31, 2006, $145 thousand of additional amortization of intangible costs related to acquisitions completed in fiscal 2003 as a result of revising our estimate of their useful lives. Nevertheless, cost of revenuesService revenue and Product revenue increased as a percentage of revenues decreased as a result of higher utilization of our productive capacity in both our Service and Products segments. Our cost of Service revenue as a percentage of revenue decreased from 80%due to the items cited in the second fiscal quarter last year to 67% in the quarter completed March 31, 2006. Similarly, our costs of Product revenue decreased from 41% to 31% in the corresponding periods. The costs of our productive capacity are charged to cost of Service and Product revenues, with the result that as our utilization of capacity increases, our costs do not increase proportionately. As we have standardized our bioanalytical laboratory procedures in West Lafayette, IN, McMinnville, OR and Kenilworth, England, we have increased our ability to move work between sites, also improving our margins. In February, 2006, we decided to consolidate our bioanaytical laboratory in Baltimore, MD into our West Lafayette facility, which will be completed in our third fiscalcurrent quarter. We expect this consolidation to also favorably impact our operating margins.
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Operating Expenses
Selling expenses for the threenine months ended March 31,June 30, 2006 increased 9%6% to $680 thousand$2.0 million from $626 thousand$1.9 million for the threenine months ended March 31, 2005,June 30, 2005. This increase is the net of several personnel changes we have made as a resultwe endeavor to improve the effectiveness of our revised strategy to develop our sales force into a free-standing sales group, rather than relying on our technical personnel to sell our services. We expect to continue to selectively grow our sales force with the expectation that increased effort will lead to higher revenues.force. Research and development expenses for the threenine months ended March 31,June 30, 2006 increased 16%51% to $201 thousand$989,000 from $173 thousand$653,000 for the threenine months ended March 31, 2005, dueJune 30, 2005. This increase is attributable to additional developmental efforts on new product development and an engineering update of an existing product.products in the current year.
General and administrative expenses for the threenine months ended March 31,June 30, 2006 increased 10%23% to $2.9$9.6 million, up from $2.6$7.8 million for the threenine months ended March 31, 2005. Most of this increase is caused by higher overheads, including the cost of both employee and corporate insurance, the cost of new software systems implemented since last year, the expensing of stock options and higher administrative costs at our toxicology facility as a result of significantly improved revenues.
Other Income (Expense)
Our interest expense declined $9 thousand due to lower average outstanding borrowings between the comparable quarters, in spite of higher short terms rates in the current quarter. A significant amount of our borrowings are at fixed rates that did not change between the comparable quarters.
Income Taxes
Our tax provision for the current quarter was 42% of pre-tax income, which is our effective combined federal and state rate. Foreign operations had a small loss in the current quarter which did not impact our effective tax rate. Our effective tax rate in the comparable quarter last year was adversely impacted by a larger foreign operating loss for which we could take no current benefit.
Net Income (Loss)
As a result of the above factors, we had income of $538 thousand ($.11 per share, both basic and diluted) in the quarter ended March 31, 2006, compared to a loss of $896 thousand ($.18 loss per share, both basic and diluted) in the same period last year.
Six Months Ended March 31, 2006 Compared to Six Months Ended March 31,June 30, 2005,
Service and Product Revenues
Revenues for the six months ended March 31, 2006 increased 18% to $22.3 million compared to $18.8 million for the six month period last year. Increases in demand for toxicology and laboratory services in the Service segment were the principal reasons for the improvement in our six month revenues. Revenues in the first fiscal quarter of the current year were negatively impacted by a large contract that was postponed to the second fiscal quarter, resulting in relatively flat revenues for the Services segment in our first fiscal quarter. Revenues for our products increased 17% for the six months, all primarily as a result of the increaseadjustments made in the second fiscalcurrent quarter mentioned above. Also included in the increase are additional facilities expense in Baltimore of approximately $250,000 in the current year from the sale/leaseback of the facility in January, 2005, increases in our insurance costs, and the addition of a senior officer in the current year.
Cost of Revenues
Cost of revenues for the six months ended March 31, 2006 was $14.2 million or 64% of revenue compared to $12.8 million, or 68% of revenue for the same period last year. The decrease in cost of revenue as a percentage of revenue in both of our segments is primarily the result of the increased capacity utilization mentioned above in the current quarter.
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Operating Expenses
Selling expenses for the six months ended March 31, 2006 increased 18% to $1.4 million from $1.2 million for the six months ended March 31, 2005 as the result of the increased emphasis placed on the development of our sales force, including adding additional sales personnel. Research and development expenses for the six months ended March 31, 2006 increased 63% to $639 thousand from $392 thousand for the six months ended March 31, 2005, as we increased our effort on new product development and undertook an engineering update on an existing product line.
General and administrative expenses for the six months ended March 31, 2006 increased 27% to $5.8 million, up from $4.5 million for the six months ended March 31, 2005. In addition to the reasons for this increase discussed above for the current quarter, our Baltimore location experienced a significant increase in its occupancy costs in the first quarter of this fiscal year over the similar quarter last year as a result of the sale/leaseback of its building in January, 2005.
Other Income (Expense)Income/Expense
Interest expense decreased 4%did not change significantly in the sixnine months ended March 31,June 30, 2006 from the comparable period of the prior year. Lower average borrowing on our revolving line of credit in the current year as a resultwas offset by additional financing costs of reduced average outstanding borrowings.capital leases.
Income Taxes
We computed our tax benefit for the nine months ended June 30, 2006 and our taxes for the nine months ended June 30, 2005 using an effective tax rate for both the six months ended March 31, 2006 and for the six months ended March 31, 2005 of 40% on the US taxable income or loss. We alsoOn the adjustment of intangible assets related to our Baltimore operation, we provided an accrual for an additional $30 thousand for settlementa benefit of 35% of the adjustment, as we are not assured of a disputed state tax liability, which reducedbenefit. In the effective benefit for the six months ended March 31, 2006. The comparable period in the prior fiscallast year, we did not provide a benefit on foreign losses because we had no foreign carrybacks or deferred taxes against which to utilize those benefits, which resulted in a disproportionate tax rate as a result of foreign losses for which we provided no benefit.rate.
Net Loss
Our net loss for the nine months ended June 30, 2006 was $1,853,000 ($0.38 per share, both basic and diluted). As a result of the above,taxes on US income exceeding our consolidated income before tax in the nine months ended June 30, 2005, we experienced a net loss of $178 thousand$137,000 ($.04 loss.03 per share, both basic and diluted) for.
Impairment Charges
PKLB, which now constitutes our Baltimore clinical research unit, has experienced losses since acquisition, including $690,000 and $1,980,000 in the first sixthree and nine months ofended June 30, 2006. Although improvement had been achieved in operating results since acquisition prior to the current year, comparedthe acquisition of a major customer and subsequent cancellation of previously scheduled studies has seriously impacted current operating results. Establishing future profitable operations there will require additional sales effort in attracting new customers. Consequently, in connection with the preparation of our financial statements for the fiscal quarter ended June 30, 2006, we have determined that there is a permanent impairment of value of the intangible assets acquired, and have recorded a charge to net loss ingeneral and administrative expenses of $968,000 to write off the prior yeargoodwill of $493 thousand ($.10 loss per share, both basic$383,000 and diluted) .other intangible assets of $585,000 remaining from the acquisition. We also recorded a deferred tax benefit of $251,000 related to this charge.
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LIQUIDITY AND CAPITAL RESOURCES
Since its inception, BASi’s principal sources of cash have been cash flow generated from operations and funds received from bank borrowings and other financings. At March 31,June 30, 2006 we had cash and cash equivalents of $1 million,$777,000, compared to cash and cash equivalents of $1.3 million$1,254,000 at September 30, 2005. Approximately 60%50% of our cash balances were in the U.K., a portion of which was repatriated to the U.S. after the close of the second fiscal quarter. We monitor our U.K. cash needs to avoid currency conversion costs, which in the current interest rate environment can exceed interest.
Our net cash provided by operating activities was $1.1$2.6 million for the sixnine months ended March 31,June 30, 2006. At September 30, 2005 we had unusually high receivables balances as aThis was the result of new contracts for whichcollections against our receivables, and reduced investment in our inventories, offset by working down the balances in customer deposits.
We utilized this cash from operations to finance $1.3 million of capital asset additions, principally upgrading of facilities in our toxicology and clinical research units. Additionally we bill up to 30%repaid $1.9 million of debt and capital leases during the total fee upon initiation of the contract. This balance has been reduced as we have performed on those contracts.nine month period. We also had a large customer cancel several contracts as a resultfinanced $1.5 million of being acquired, which resultedlaboratory equipment in the reversal of over $1 million of billings and the offsetting reduction in our Customer Advances account. Correspondingly, our accounts payable and accrued expenses at March 31, 2006 were reduced due to the timing of required payments, funded from our cash flow and additional borrowings on our line of credit
Net cash used by investing activities was $1.3 million in the sixnine months ended March 31,June 30, 2006 as a result of routine additions and replacements of production equipment. Of this, $972 thousand was funded through a lease facility closed after the end of the quarter.with capital leases.
Capital Resources
We have outstanding an outstandingirrevocable letter of credit securingissued to secure the lease of our lease on our facility in Baltimore facility. The letter of credit is for $2.0 million. This reducesmillion currently, reducing to $1.0 million in January, 2007 and will be extinguished upon the completion of our leaseexpiring in January, 2008. This letter of credit is counted against our maximum allowable borrowing under our $6.0 million revolving credit agreement with our bank, which is committed until December 31, 2007.
The letter of credit reduces the amount of funds available under theour $6 million revolving credit facility. The amount of funds available under this facility is calculated using a borrowing base formula.formula, principally as percentage of qualifying receivables and inventory. Our recent monthly average qualifying assets for our borrowing base have been approximately $4.0 million. The presence of this outstanding letter of credit could therefore substantially reduce the amount of cash available under our revolving credit facility.$5,000,000.
We do not expect our totalto have any significant additional capital additions in the current fiscal year. We are currently in our planning cycle for our next fiscal year beginning October 1, 2006, and anticipate our additions for next year to be in the range ofapproximately $2.0 million to $2.5 million. After the close(none of the quarter, we arrangedwhich has currently been committed). We have not completed arrangements for financing these additions, but anticipate a lease with a third partycombination of debt, leasing company to finance $972 thousandand utilization of this amount with a capital lease with a five year term.operating cash flow.
Liquidity
We do not foresee the need to borrow extensively under our revolving credit agreement to finance current operations, except for periods when rapid growth of new business may necessitate amounts to finance the buildup of receivables and inventory. Nevertheless, continuation of operating results similar to those experienced in the quarter ended June 30, 2006 would negate our currently positive operating cash flow, and impact our ability to obtain additional financing. Historically, we have experienced significantly varying results from quarter to quarter as a result of the timing of the award and performance of sizable contracts, and we expect that pattern to continue.
At March 31,June 30, 2006, we had $1 million$777,000 in cash, and approximately $400 thousand$3 million of available borrowings under our revolving credit facility.
Our revolving line of credit expires December 31, 2007. The maximum amount available under the terms of the agreement is $6.0 million with outstanding borrowings limited to the borrowing base as defined in the agreement. Interest accrues monthly on the outstanding balance at the bank’s prime rate to prime rate plus 25 basis points, or at the Eurodollar rate plus 250 to 300 basis points, at our election, depending upon the ratio of our interest bearing indebtedness (less subordinated debt) to EBITDA. We pay a fee equal to 25 basis points on the unused portion of the line of credit.
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We are required to make cash payments in the future on debt and lease obligations. The following table summarizes BASi’s contractual term debt, lease obligations and other commitments at March 31, 2006 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (amounts presented for 2006 are those items required in the final two quarters):
| 2006 | 2007 | 2008 | 2009 | 2010 | After 2010 | Total | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Capital expenditures | $ | 500 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 500 | |||||||||
| Mortgage notes payable | 224 | 362 | 384 | 407 | 431 | 6,912 | 8,720 | ||||||||||||||||
| Subordinated debt | — | 360 | 4,477 | — | — | — | 4,837 | ||||||||||||||||
| Capital lease obligations | 187 | 314 | 329 | 346 | 221 | 40 | 1,437 | ||||||||||||||||
| Operating leases | 1,055 | 1,846 | 753 | 10 | — | — | 3,664 | ||||||||||||||||
| $ | 1,966 | $ | 2,882 | $ | 5,943 | $ | 763 | $ | 652 | $ | 6,952 | $ | 19,158 | ||||||||||
For further details on our indebtedness, see Note 7 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended September 30, 2005.
The covenants in the Company’s credit agreement, requiring the maintenance of certain ratios of interest bearing indebtedness (not including subordinated debt) to EBITDA and net cash flow to debt servicing requirements, may restrict the amount the Company can borrow to fund future operations, acquisitions and capital expenditures. Based on our current business activities, we believe cash generated from our operations and amounts available under our existing credit facilities and cash on hand, will be sufficient to fund the Company’s working capital and capital expenditure requirements for the foreseeable future.coming year. As a result of the loss in the three months ended June 30, 2006, we did not meet our fixed charge coverage ratio for the quarter. Our bank has waived this event of non-compliance.
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We are required to make cash payments in the future on debt and lease obligations. The following table summarizes BASi’s contractual term debt, lease obligations and other commitments at June 30, 2006 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (amounts presented for 2006 are those items required in the final quarter), for the fiscal years ending September 30(in thousands):
| 2006 | 2007 | 2008 | 2009 | 2010 | After 2010 | Total | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Capital expenditures | $ | 250 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 250 | |||||||||
| Mortgage notes payable | 86 | 362 | 384 | 407 | 431 | 6,963 | 8,633 | ||||||||||||||||
| Subordinated debt | — | 360 | 4,359 | 118 | — | — | 4,837 | ||||||||||||||||
| Capital lease obligations | 133 | 472 | 510 | 557 | 453 | 128 | 2,253 | ||||||||||||||||
| Operating leases | 527 | 1,846 | 387 | 10 | — | — | 2,770 | ||||||||||||||||
| $ | 996 | $ | 3,040 | $ | 5,640 | $ | 1,092 | $ | 884 | $ | 7,091 | $ | 18,743 | ||||||||||
For further details on our indebtedness, see Note 7 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended September 30, 2005.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
BASi’s primary market risk exposure with regard to financial instruments is changes in interest rates. Borrowings under the credit agreement between BASi and National City Bank dated January 4, 20062005 bear interest at a rate of either the bank’s prime rate to prime plus 25 basis points, or at the Eurodollar rate plus 250 to 300 basis points, depending in each case upon the ratio of BASi’s interest-bearing indebtedness (less subordinated debt) to EBITDA, at BASi’s option. As discussed previously, weWe have taken steps to fix the interest rate on a significant amount of our debt through May, 2007. Historically, BASi has not used derivative financial instruments to manage exposure to interest rate changes. BASi estimates that a hypothetical 10% adverse change in interest rates would not affect the consolidated operating results of BASi by a material amount.
BASi operates internationally and is, therefore, subject to potentially adverse movements in foreign currency exchange rates. The effect of movements in the exchange rates was not material to the consolidated operating results of BASi in fiscal years 20052006 and 2004.2005. BASi estimates that a hypothetical 10% adverse change in foreign currency exchange rates would not affect the consolidated operating results of BASi by a material amount.
ITEM 4. CONTROLS AND PROCEDURES
Based on their most recent evaluation, the Company’s Chief Executive Officer and Chief Financial Officer believe that the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of March 31,June 30, 2006 to ensure that information required to be disclosed by the Company in this Form 10-Q was recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. As disclosed in its annual report on form 10-K for the fiscal year ended September 30, 2005, the Company implemented new systems in its prior fiscal year. Although the Company continues in the development of these new systems, the Chief Executive Officer and Chief Financial Officer believe that implementation of these new accounting systems now allow the Company to record, process, summarize and report accounting information to timely file its Exchange Act reports.
There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II -— OTHER INFORMATION
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS5. OTHER INFORMATION
On February 26, 2005,In connection with the Annual Meetingpreparation of Shareholdersour financial statements for the fiscal quarter ended June 30, 2006, we concluded that there is a permanent impairment of BASi was held atvalue of the principal executive officesintangible assets of BASi. The following matters were votedone of the companies we acquired, and have recorded a charge to general and administrative expenses of $968,000 to write off the goodwill of $383,000 and other intangible assets of $585,000 remaining from the acquisition. We also recorded a deferred tax benefit of $339,000 related to this charge. Pursuant to the instructions to Item 2.06 of Form 8-K, the information required by such Item is included in the Management's Discussion and Analysis of Financial Condition and Results of Operations above. Please see the heading Results of Operations — Impairment Loss on at the meeting:Intangible Assets and Goodwill, which information is incorporated herein by this reference.
| MATTER: | VOTES CAST FOR: | VOTES CAST AGAINST | ||||||
|---|---|---|---|---|---|---|---|---|
| Election of the directors of BASi: | ||||||||
| Peter T. Kissinger | 4,456,029 | 83,766 | ||||||
| Candice B. Kissinger | 4,469,214 | 70,581 | ||||||
| William E. Baitinger | 4,380,218 | 159,577 | ||||||
| David W. Crabb | 4,469,084 | 70,711 | ||||||
| Leslie B. Daniels | 4,396,488 | 143,307 | ||||||
| Gayl W. Doster | 4,378,384 | 161,411 | ||||||
ITEM 6. EXHIBITS
Exhibits
| Number assigned in Regulation S-K Item 601 | Description of Exhibits |
| (3) | 3.1 | Second Amended and Restated Articles of Incorporation of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended December 31, 1997). |
| 3.2 | Second Restated Bylaws of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.2 Form 10-Q for the quarter ended December 31, 1997). |
| (4) | 4.1 | Specimen Certificate for Common Shares (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-36429). |
| (31) | 31.1 | Certification of Peter T. Kissinger + |
| 31.2 | Certification of Michael R. Cox + |
| (32) | 32.1 | Section 1350 Certifications + |
| (99) | 99.1 | Risk factors (incorporated by reference to Exhibit 99.1 to Form 10-K for the year ended September 30, 2005). |
† Filed with this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
BIOANALYTICAL SYSTEMS, INC.
By: /s/ PETER T. KISSINGER
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