UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30,December 31, 2006

OR


OR

o

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

35-1345024

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

2701 KENT AVENUE

WEST LAFAYETTE, IN

47906

(Address of principal executive offices)

35-1345024
(I.R.S. Employer Identification No.)

47906

(Zip code)


(765) 463-4527

(Registrant'sRegistrant’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   

YES

x

NO

o

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  

Large Accelerated Filer

o

Accelerated Filer

o

Non-accelerated Filer

x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

YES            NO   

Yes

o

NO

x

As of July 31,February 10, 2006, 4,892,127 common shares4,909,127 Common Shares of the registrant were outstanding.




1

PAGE
NUMBER


PAGE NUMBER

PART I

FINANCIAL INFORMATION


Item 1

Condensed Consolidated Financial Statements (Unaudited):


Condensed Consolidated Balance Sheets as of June 30,December 31, 2006
and September 30, 20052006

3


Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended June 30,December 31, 2006 and 2005

4


Condensed Consolidated Statements of Cash Flows for the
Nine Three Months Ended June 30,December 31, 2006 and 2005

5


Notes to Condensed Consolidated Financial Statements

6


Item 2

Item 3

Management's

Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

Item 3

Quantitative and Qualitative Disclosures About Market Risk

16

10

15


Item 4

Controls and Procedures

16

15



PART II

OTHER INFORMATION

Item 6

Exhibits

16

SIGNATURES

17

2

Part I.

Financial Statements

Item 1.

Condensed Consolidated Financial Statements


Item 5Other Information17

Item 6Exhibits17

SIGNATURES18


2

PART I—Financial Information
Item 1.     Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

June 30,
2006
 September 30,
2005
Assets      
Current assets:  
   Cash and cash equivalents  $777 $1,254 
    Accounts receivable  
     Trade   7,690  10,352 
     Unbilled revenues and other   1,752  2,677 
   Inventories   1,889  2,041 
   Deferred income taxes   510  381 
   Refundable income taxes   1,017  — 
   Prepaid expenses   602  430 
Total current assets   14,237  17,135 
 
Property and equipment, net   26,656  26,565 
Goodwill   1,854  1,445 
Intangible assets, net   374  2,156 
Debt issue costs   254  280 
Other assets   264  257 
Total assets  $43,639 $47,838 
 
Liabilities and shareholders' equity  
Current liabilities:  
   Accounts payable  $1,356 $1,681 
   Accrued expenses   2,286  2,791 
    Income Taxes Payable   —31
   Customer advances   4,756  5,974 
   Revolving line of credit   —  920 
   Current portion of capital lease obligation   506  278 
   Current portion of long-term debt   715  700 
Total current liabilities   9,619  12,375 
 
Capital lease obligation, less current portion   1,747  807 
Long-term debt, less current portion   8,278  8,579 
Subordinated debt, long-term   4,477  4,829 
Deferred income taxes   1,512  1,651 
 
Shareholders' equity:  
   Preferred shares: Authorized shares - 1,000  
   Issued and outstanding shares - none   —  — 
   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 
Additional paid-in capital   11,567  11,268 
Retained earnings   5,341  7,194 
Accumulated other comprehensive loss   (84) (42)
 
Total shareholders' equity   18,006  19,597 
 
Total liabilities and shareholders' equity  $43,639 $47,838 

 

 

December 31, 2006

 

September 30, 2006

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,863

 

$

1,647

 

Accounts receivable

 

 

 

 

 

 

 

Trade

 

 

5,992

 

 

6,492

 

Unbilled revenues and other

 

 

1,460

 

 

1,545

 

Inventories

 

 

2,211

 

 

1,887

 

Deferred income taxes

 

 

724

 

 

604

 

Refundable income taxes

 

 

762

 

 

888

 

Prepaid expenses

 

 

516

 

 

599

 

Total current assets

 

 

13,528

 

 

13,662

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

25,308

 

 

25,766

 

Goodwill

 

 

1,855

 

 

1,855

 

Intangible assets, net

 

 

464

 

 

517

 

Debt issue costs

 

 

229

 

 

246

 

Other assets

 

 

247

 

 

268

 

Total assets

 

$

41,631

 

$

42,314

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

1,451

 

$

1,610

 

Accrued expenses

 

 

2,684

 

 

3,081

 

Customer advances

 

 

4,025

 

 

4,226

 

Current portion of capital lease obligation

 

 

481

 

 

472

 

Current portion of long-term debt

 

 

844

 

 

721

 

Total current liabilities

 

 

9,485

 

 

10,110

 

 

 

 

 

 

 

 

 

Capital lease obligation, less current portion

 

 

1,524

 

 

1,648

 

Long-term debt, less current portion

 

 

8,093

 

 

8,186

 

Subordinated debt, long-term

 

 

3,999

 

 

4,477

 

Deferred income taxes

 

 

486

 

 

539

 

 

 

 

 

 

 

 

 

Shareholders equity:

 

 

 

 

 

 

 

Preferred Shares:

 

 

 

 

 

 

 

Authorized shares – 1,000

 

 

 

 

 

 

 

Issued and outstanding shares - none

 

 

—

 

 

—

 

Common Shares:

 

 

 

 

 

 

 

Authorized shares – 19,000

 

 

 

 

 

 

 

Issued and outstanding shares – 4,909 at December 31, 2006

 

 

 

 

 

 

 

and 4,892 at September 30, 2006

 

 

1,186

 

 

1,182

 

Additional paid-in capital

 

 

11,792

 

 

11,677

 

Retained earnings

 

 

5,141

 

 

4,584

 

Accumulated other comprehensive loss

 

 

(75

)

 

(89

)

Total shareholders’ equity

 

 

18,044

 

 

17,354

 

Total liabilities and shareholders’ equity

 

$

41,631

 

$

42,314

 

See accompanying notes to condensed consolidated financial statements.


3

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


Three Months Ended
June 30,
 Nine Months Ended
June 30,
2006
 2005
 2006
 2005
 
Service revenue  $7,956 $9,078 $25,548 $23,910 
Product revenue   2,082  2,226  6,751  6,226 
   Total revenue   10,038  11,304  32,299  30,136 
 
Cost of service revenue   6,343  5,434  18,965  16,570 
Cost of product revenue   1,165  844  2,725  2,352 
   Total cost of revenue   7,508  6,278  21,690  18,922 
 
Gross profit   2,530  5,026  10,609  11,214 
 
Operating expenses:  
Selling   625  718  2,038  1,919 
Research and development   350  261  989  653 
General and administrative   3,834  3,115  9,605  7,781 
   Total operating expenses   4,809  4,094  12,632  10,353 
 
Operating (loss) income   (2,279) 932  (2,023) 861 
 
Interest income   2  2  6  7 
Interest expense   (272) (250) (780) (782)
Other income   —  78  —  56 
Gain on sale of property and equipment   —  34  —  21 
 
Income (loss) before income taxes   (2,549) 796  (2,797) 163 
 
Income tax (benefit) expense   (874) 440  (944) 300 
Net income (loss)  $(1,675)$356 $(1,853)$(137)
 
Net income (loss) per share:  
   Basic  $(0.34)$0.07 $(0.38)$(0.03)
   Diluted  $(0.34)$0.07 $(0.38)$(0.03)
 
Weighted common and common equivalent  
shares outstanding:  
   Basic   4,892  4,871  4,879  4,870 
   Diluted   4,892  5,020  4,879  4,870 

 

 

Three Months Ended December 31,

 

 

 

2006

 

 

 

2005

 

 

 

 

 

 

 

 

 

Service revenue

 

$

8,608

 

 

 

$

7,539

 

Product revenue

 

 

2,276

 

 

 

 

2,305

 

Total revenue

 

 

10,884

 

 

 

 

9,844

 

 

 

 

 

 

 

 

 

 

 

Cost of service revenue

 

 

6,622

 

 

 

 

5,864

 

Cost of product revenue

 

 

877

 

 

 

 

834

 

Total cost of revenue

 

 

7,499

 

 

 

 

6,698

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

3,385

 

 

 

 

3,146

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling

 

 

679

 

 

 

 

733

 

Research and development

 

 

355

 

 

 

 

439

 

General and administrative

 

 

1,622

 

 

 

 

2,887

 

Total operating expenses

 

 

2,656

 

 

 

 

4,059

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

729

 

 

 

 

(913

)

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

12

 

 

 

 

2

 

Interest expense

 

 

(241

)

 

 

 

(258

)

Other income

 

 

3

 

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

503

 

 

 

 

(1,169

)

Income tax benefit

 

 

(53

)

 

 

 

(453

)

Net income (loss)

 

$

556

 

 

 

 

(716

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

 

 

$

(0.15

)

Diluted

 

$

0.11

 

 

 

$

(0.15

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

 

4,907

 

 

 

 

4,871

 

Diluted

 

 

4,942

 

 

 

 

4,871

 

See accompanying notes to condensed consolidated financial statements.


4

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


Nine Months Ended June 30,
2006
 2005
 
Operating activities      
Net loss  $(1,853)$(137)
Adjustments to reconcile net loss to net  
cash provided by operating activities:  
   Depreciation and amortization   3,069  2,462 
     Impairment of intangible assets   968 
   Gain on sale of property and equipment   —  (21)
    Employee stock option expense   210  — 
    Deferred income taxes   (268) — 
   Changes in operating assets and liabilities:  
     Accounts receivable   3,587  (5,569)
     Inventories   152  (673)
     Prepaid expenses and other assets   (194) (100)
     Accounts payable   (325) (295)
     Refundable income taxes   (1,048) 211 
     Accrued expenses   (505) (106)
     Customer advances   (1,218) 3,522 
Net cash provided (used) by operating activities   2,575  (706)
 
Investing activities  
Capital expenditures   (1,286) (1,631)
Proceeds from sale of property and equipment   45  5,887 
Net cash provided (used) by investing activities   (1,241) 4,256 
 
Financing activities  
Borrowings on line of credit   11,360  6,968 
Payments on line of credit   (12,280) (9,794)
Exercise of stock options   94  5 
Payments on capital lease obligations   (305) (113)
Payments of long-term debt   (638) (703)
Net cash used by financing activities   (1,769) (3,637)
 
Effects of exchange rate changes   (42) 325 
 
Net increase (decrease) in cash and cash equivalents   (477) 238 
Cash and cash equivalents at beginning of period   1,254  773 
Cash and cash equivalents at end of period  $777 $1,011 
Assets acquired utilizing capital leases  $1,500 $1,112 

 

 

Three Months Ended December 31,

 

 

 

2006

 

2005

 

Operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

556

 

$

(716

)

Adjustments to reconcile net income (loss) to net

 

 

 

 

 

 

 

cash used by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

997

 

 

950

 

Deferred and refundable income taxes

 

 

(47

)

 

(667

)

Employee stock option expense

 

 

43

 

 

44

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

585

 

 

(616

)

Inventories

 

 

(324

)

 

(219

)

Prepaid expenses and other assets

 

 

104

 

 

(27

)

Accounts payable

 

 

(159

)

 

(131

)

Accrued expenses

 

 

(397

)

 

(330

)

Customer advances

 

 

(201

)

 

1,373

 

Net cash generated (used) by operating activities

 

 

1,157

 

 

(339

)

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(268

)

 

(146

)

Net cash used by investing activities

 

 

(268

)

 

(146

)

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Borrowings on line of credit

 

 

0

 

 

4,663

 

Payments on line of credit

 

 

0

 

 

(4,212

)

Proceeds from exercise of stock options

 

 

76

 

 

—

 

Payments on capital lease obligations

 

 

(115

)

 

(78

)

Payments of long-term debt

 

 

(448

)

 

(461

)

Net cash used by financing activities

 

 

(487

)

 

(88

)

 

 

 

 

 

 

 

 

Effects of exchange rate changes

 

 

(186

)

 

(1

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

216

 

 

(574

)

Cash and cash equivalents at beginning of period

 

 

1,647

 

 

1,254

 

Cash and cash equivalents at end of period

 

$

1,863

 

$

680

 

See accompanying notes to condensed consolidated financial statements.statements


5

BIOANALYTICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
(Unaudited)


1.

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 condensedconsolidated 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 accounting principles generally accepted accounting principles,in the United States (“GAAP”), and therefore should be read in conjunction with our audited consolidated financial statements, and the notes thereto, included in our Form 10-K for the year ended September 30, 2005.2006. In the opinion of management, the condensed consolidated financial statements for the three and nine months ended June 30,December 31, 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 June 30,December 31, 2006. The results of operations for the three and nine months ended June 30,December 31, 2006 are not necessarily indicative of the results to be expected for the year ending September 30, 2005.2007.

All amounts in the condensed consolidated financial statements and the notes thereto are presented in thousands, except for share and per share data or where otherwise noted.

2.

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,At December 31, 2006, we had not recognized expenses forstock-based employee stock options.

        We adopted FAS 123R usingand outside director compensation plans, which are described more fully in Note 8 in the modified prospective transition method, which requiresNotes to the application of the accounting standard as of October 1, 2005, the first day of our fiscal year. Our Condensed Consolidated Financial Statements as of June 30, 2006, and for the three and nine 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 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 nine months ended June 30, 2006 was $71,000 and $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. 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 expected to vest during the period, reduced for estimated forfeitures. Stock-based compensation expense recognized in our Condensed Consolidated Statement of Operations for the quarter and nine months ended 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.

        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 formForm 10-K for the year ended September 30, 2006. All options granted under these plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. Effective October 1, 2005, we began expensing the estimated fair value of stock options over the vesting periods of the grants, in accordance with Financial Accounting Standard 123 (Revised). Utilizing Modified Prospective Application, we expensed that portion of the estimated fair value of awards at grant date related to the outstanding options that vested during the period. The assumptions used are detailed in Note 1(f) to our financial statements in our Annual Report on Form 10-K for the year ended September 30, 2006. This resulted in compensation expense of $43 with no tax benefit in the quarter ended December 31, 2006, and compensation expense of $67 and a related deferred tax benefit of $23 in the quarter ended December 31, 2005.

 

There were no options granted in the fiscal year ended September 30, 2006. The key assumptions used 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 June 30, 2005:

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 nine months ended June 30 is as follows:

Three Months Ended
June 30, 2006
 Nine Months Ended
June 30, 2006
 Options
 Weighted
average
exercise
price
 Options
 Weighted
average
exercise
price
Outstanding - beginning of period   434 $4.96 480 $4.95
Exercised   —  —  (21) 4.50
Granted   —  —  —  — 
Terminated   (10) 3.32 (35) 4.69
 
 
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 September 30, 2005 and June 30, 2006, there were 137 and 144 shares vested respectively, all of which were exercisable. The weighted average exercise price for these shares was $4.88 per share; the aggregate intrinsic value of these shares was $319 and the weighted average remaining term was 5.5 years.

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 June 30, 2006. The remaining $474 of the intangible asset related 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 amortization in Cost of Services of $12 in the quarter and $157 in the nine months ended June 30, 2006.


7

PKLB, which now constitutes our Baltimore clinical research unit, has experienced losses since acquisition, including $690 and $1,980for options granted in the three and nine months ended June 30, 2006. Although improvement had been achieved in operating results since acquisition prior to the 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 charge.December 31, 2006 were as  follows:

4.         Income (Loss) per Share

Risk-free interest rate

4.65%

Dividend yield

0.00%

Volatility factor of the expected market

price of the Company’s common stock

0.623

Expected life of the options (years)

6.9 — 7.7

3.

Income (loss) per share

We compute basic income or lossincome/(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 potential common shares outstanding. Potential common shares include the dilutive effect of shares issuable upon exercise of options to purchase common shares. Shares issuable upon conversion of convertible subordinated debt have not been included

6

as they were not dilutive. No shares issuable upon exercise of options or conversion of debt are included in the computation of loss per share in 2005 as they are anti-dilutive.

The following table reconciles our computation of basic earnings income/(loss) per share to diluted earnings income/(loss) per share:

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)

 

 

Three Months Ended December 31,

 

 

 

2006

 

 

 

2005

 

Shares:

 

 

 

 

 

 

 

 

 

Basic shares

 

 

4,907

 

 

 

 

4,871

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

Options

 

 

35

 

 

 

 

—

 

Convertible subordinated debt

 

 

—

 

 

 

 

—

 

Diluted shares

 

 

4,942

 

 

 

 

4,871

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss)

 

$

556

 

 

 

$

(716

)

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share

 

$

0.11

 

 

 

$

(0.15

)

Diluted income (loss) per share

 

$

0.11

 

 

 

$

(0.15

)

4.

5.         Inventories

Inventories consisted of the following:

June 30,
2006
 September 30,
2005
Raw materials  $1,410 $1,425 
Work in progress   271  375 
Finished goods   391  424 
    2,072  2,224 
Less LIFO reserve   (183) (183)
   $1,889 $2,041 



8

 

 

 

 

December 31, 2006

 

 

 

September 30, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Raw materials

 

 

 

$

1,488

 

 

 

$

1,335

 

Work in progress

 

 

 

 

290

 

 

 

 

278

 

Finished goods

 

 

 

 

516

 

 

 

 

357

 

 

 

 

 

 

2,294

 

 

 

 

1,970

 

Less LIFO reserve

 

 

 

 

(83

)

 

 

 

(83

)

 

 

 

 

$

2,211

 

 

 

$

1,887

 

5.

6.         Segment Information

We operate in two principal segments —- research servicesServices and research products.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.policies found in Note 1 to Consolidated Financial Statements in our annual report on Form 10-K for the year ended September 30, 2006.

7

The following table presents operating results by segment:

Three Months Ended
June 30,		 Nine Months Ended
June 30,
 
2006200520062005
 
Operating income (loss):          
Services  $(2,037)$352 $(2,496)$656 
Products   (242) 580  473  205 
 
Total operating income (loss)   (2,279) 932  (2,023) 861 
Corporate expenses   (270) (136) (774) (698)
 
Income (loss) before income taxes  $(2,549)$796 $(2,797)$163 
 

7.         Recent Accounting Pronouncements

 

 

Three Months Ended

December 31,

 

 

 

2006

 

2005

 

Operating income (loss):

 

 

 

 

 

 

 

Services

 

$

458

 

$

(854

)

Products

 

 

271

 

 

(59

)

Total operating income (loss)

 

 

729

 

 

(913

)

Corporate expenses

 

 

(226

)

 

(256

)

Income (loss) before income taxes

 

$

503

 

$

(1,169

)

In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48,Accounting for Uncertainty in6. Income Taxes—an interpretation of FASB Statement No. 109(FIN 48), which clarifies the accounting for uncertainty inTaxes

We have provided income tax positions. This Interpretation requires that we recognize inbenefits on our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit,domestic losses based on our expected annual effective rate of taxes for the technical meritsfiscal year. In the three months ended December 31, 2006 we did not provide income taxes on foreign earnings due to the availability of net operating loss carryforwards to offset our taxable income, which have not previously been recognized for financial statement purposes.

7. Stock Option Plans

The Company established an Employee Stock Option Plan whereby options to purchase the position. Company’s common shares at fair market value at date of grant can be granted to our employees. Options granted become exercisable in four equal annual installments beginning two years after the date of grant. This plan terminates in fiscal 2008.

The provisionsCompany also established an Outside Director Stock Option Plan whereby options to purchase the Company’s common shares at fair market value at date of FIN 48 are effective asgrant can be granted to outside directors. Options granted become exercisable in four equal annual installments beginning two years after the date of grant. This plan terminates in fiscal 2008.

Options in both plans expire the earlier of ten years from grant date or termination of employment.

A summary of our fiscal year beginning October 1, 2007,stock option activity and related information for the three months ended December 31, 2006 is as follows:

 

 

Options

 

 

 

Weighted

average

exercise

price

 

Outstanding - beginning of period 

 

403,878

 

 

 

$

4.98

 

Exercised 

 

(17,000

)

 

 

 

4.58

 

Granted 

 

20,000

 

 

 

 

5.19

 

Terminated 

 

(29,500

)

 

 

 

4.79

 

Outstanding - end of period 

 

377,378

 

 

 

$

5.04

 

Weighted grant date fair values

 

 

 

 

 

$

3.44

 

8

The intrinsic values of options exercised in the three months ended December 31, 2006 were $10. We received $76 from their exercise, for which no tax benefit was recognized. The options on the 377,378 shares outstanding at December 31, 2006 had an aggregate intrinsic value of $226 and a weighted average contract term of 6.4 years.


A summary of non-vested options for the three months ended December 31, 2006 is as follows:

 

 

Number

 

 

Weighted Average
Grant Date
Fair Value

 

 

 

 

 

 

 

 

Non-vested options, beginning of period

 

278,378

 

 

$

3.75

 

Granted

 

20,000

 

 

 

5.19

 

Vested

 

(17,500

)

 

 

3.54

 

Forfeited

 

(22,500

)

 

 

3.54

 

Non-vested options, end of year

 

258,378

 

 

$

3.43

 

 

 

 

 

 

 

 

 

At December 31, 2006, there were 119,000 shares vested, all of which were exercisable. The weighted average exercise price for these shares was $5.29 per share; the aggregate intrinsic value of these shares was $72 and the weighted average remaining term was 6.0 years.

At December 31, 2006, there are 309,875 shares available for grants under the two plans.

The following applies to options outstanding at December 31, 2006:

Range of

exercise prices

 

Number outstanding at

December 31, 2006

Weighted
average
remaining
contractual
life (years)

Weighted
average
exercise
price

Number exercisable
at December 31, 2006

Weighted
average
exercise
price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2.80 - 4.58

 

 

160,000

 

 

6

.39

 

4

.35

 

64,500

 

 4

.34

$

4.96 - 5.74

 

 

200,378

 

 

8

.28

 

5

.33

 

37,500

 

 5

.69

$

7.18 - 8.00

 

 

17,000

 

 

0

.90

 

8

.00

 

17,000

 

 8

.00

At December 31, 2006, we had $437 of compensation expense to be recognized for non-vested options with the cumulative effecta weighted average vesting period 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.3.03 years.




9

ITEM 2. MANAGEMENT'SMANAGEMENT’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, 2005.2006. 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.

All dollar amounts presented in this discussion and analysis are presented in thousands, except per share data.

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, 2005,2006, 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.

10

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,
 
20062005 20062005
 
Service revenue 79.380.379.179.3
Product revenue 20.719.720.920.7
 
   Total revenue 100.0100.0100.0100.0
 
Cost of service revenue (a) 79.759.974.269.3
Cost of product revenue (a) 56.037.940.437.8
 
   Total cost of revenue 74.855.567.262.8
 
Gross profit 25.244.532.837.2
 
Total operating expenses 47.936.339.134.4
 
 
Operating income (loss) (22.7)8.2(6.3)2.8
 
Other expense (2.7)(1.2)(2.4)(2.3)
 
 
Income (loss) before income taxes (25.4)7.0(8.7)0.5
 
Income tax (expense) benefit 8.7(3.9)3.0(1.0)
 
Net income (loss) (16.7)3.1(5.7)(0.5)
 

(a)    Percentage of service and product revenues, respectively.




 

 

Three Months Ended
December 31,

 

 

 

2006

 

2005

 

Service revenue

 

79.1

%

76.6

%

Product revenue

 

20.9

 

23.4

 

Total revenue

 

100.0

 

100.0

 

 

 

 

 

 

 

Cost of service revenue (a)

 

76.9

 

77.8

 

Cost of product revenue (a)

 

38.5

 

36.3

 

Total cost of revenue

 

68.9

 

68.1

 

 

 

 

 

 

 

Gross profit

 

31.1

 

31.9

 

 

 

 

 

 

 

Total operating expenses

 

24.4

 

41.2

 

 

 

 

 

 

 

Operating income (loss)

 

6.7

 

(9.3

)

 

 

 

 

 

 

Other (expense)

 

(2.1

)

(2.6

)

 

 

 

 

 

 

Income (loss) before income taxes

 

4.6

 

(11.9

)

 

 

 

 

 

 

Income tax expense (benefit)

 

(0.5

)

(4.6

)

 

 

 

 

 

 

Net income

 

5.1

%

(7.3

)%

10

(a)

Percentage of service and product revenues, respectively.

Three Months Ended June 30,December 31, 2006 Compared to Three Months Ended June 30,December 31, 2005

Service and Product Revenues

Revenues for the thirdWe increased our revenues in our first fiscal quarter ended June 30, 2006 declinedof the current year by $1,040, or 11% to $10.0 million compared to $11.3 million forover the third fiscalcomparable quarter last year. Of the $1.3In our Service segment, revenue from our bioanalytical services increased $1.0 million decline, Service revenue decreased $1.1(a 25% increase), toxicology revenues increased $0.6 million comprised(a 32% increase), offset by a decrease of decreases of $1$0.5 million each in our Baltimore clinic andclinical research unit (a 33% decrease). The decline in our Baltimore clinical research unit was due to the loss of a significant customer in our second fiscal quarter of 2006. This facility also had a strong quarter in the comparable period in the last fiscal year, which impacts the comparison of comparable periods. The improvements in our bioanalytical laboratories, offset byservices and toxicology operations reflect a $1 million increase in our toxicology facility and $336,000 of newcontinued healthy market for those services, as well as successful sales efforts. Product segment 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 experiencedhad a decline in samples processedof $29, or 1%, from the comparable period last year. Our Culex automated pharmacology systems had improved sales compared to the first quarter of fiscal 2006, offset by declines in our more mature products.

Cost of Revenues

Our cost of Service revenues as a percentage of Service revenues decreased to 76.9% in the current quarter, compared to 77.8% for the same period last year. A substantial portion of our cost of productive capacity (personnel, facilities and laboratory equipment) is relatively fixed, resulting in a declining cost of services as a percentage of sales as we increase revenues. As announced in September 2006, we reduced the number of personnel throughout our organization in order to reduce costs. As a result, Service revenues increased $1,069, our related costs of Service revenues increased $758, improving our margin as a percentage of sales. Included in our cost of service revenue in the quarter ended December 31, 2006 is a cost accrual of $325 for costs to be incurred for repeating a study, without which we would have had further margin improvement. Our cost of Product revenue as a percentage of Product revenue is predominately determined by production volume. Although sales of Product in the current quarter were similar to the first quarter of the prior year, whenmanufacturing activity was reduced, resulting in larger contracts resultedunabsorbed manufacturing costs, which were charged to cost of Product revenue, resulting in longer production runs, as wellan increase in cost as a declinepercentage of Product revenue, 38.5% this quarter compared to 36.3% in price per sample due to the nature of the assays. same quarter last year.

11

Operating Expenses

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 employselling expenses decreased by $54 (7%) in 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® shipmentsfirst fiscal quarter compared to the same quarter last year.

Costin the prior year, which was the result of Revenues

Cost of revenues fordecreased travel and trade show expenses. Research and development expenses decreased by $84 (19%) in the first 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 quartercomparable period 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, andyear as a result of a higher percentage cost of revenuesour reduction in those services thanpersonnel 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,September 2006. General 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.




11

Operating Expenses

Sellingadministrative expenses for the three months ended June 30,December 31, 2006 decreased 13%44% to $625,000$1,622 from $718,000$2,887 for the three months ended June 30,December 31, 2005. Our sales expenses declinedThis decrease was the result of several factors: 1) our September 2006 reduction in personnel, 2) the reduction in amortization expense in the current period due to the timingimpairment charge for our Baltimore clinic recorded in the third quarter of incidental expenses relatedfiscal 2006, 3) a change to heavier reliance on “as needed” personnel in our sales force (year-to-date expenditures are up 6%). Research and development expenses of $350,000 forBaltimore clinic reduced 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.

Generalexcess costs that were absorbed in general and administrative (“G&A”) for the three months ended June 30, 2006 were impacted by the write-down of intangible assets relatedexpenses, and 4) our efforts 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 $272,000contain all other costs in the three months ended June 30, 2006current quarter. This reduction occurred while we increased our salary costs for our new Chief Executive Officer, who began with us at the beginning of the current quarter.

Other Expense

Our interest expense decreased $17 (7%) to $241 in the current fiscal quarter from $250,000$258 in the comparable quarter of the prior year. This increaseThe decrease is dueattributable to our periodic uselower levels of borrowing in the current year. Although our revolving line of credit which isfacility has a floating interest rate thatwhich has been consistently higherincreased since last year, we had no outstanding borrowings in the current quarter compared toquarter. Our long-term debt and capital leases were at the same interest rates in the comparable periods.

Income Taxes

As a year ago, as well asresult of our loss in our Baltimore clinic, we experienced an overall loss on domestic operations in the financing of additional laboratory equipment utilizing capital leases.

Income Taxes

three months ended December 31, 2006. We computed our tax provisionbenefit using an overall effective tax rate for both the three months ended June 30, 2006of 41.5% on domestic losses, which is our estimate of our combined federal and local tax rates for the three months ended June 30, 2005 of 40%current year. We were able to utilize tax loss carryforwards available 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 carryforwardsearnings and therefore provided no taxes, and recorded $71,000 of stock option expenses for which we took norelated income 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 rateexpense.

Net Income (Loss)

As a result of the above factors, we lost $1,675,000had earnings of $556 ($.34.11 per share both basic and diluted) in the quarter ended June 30,December 31, 2006, compared to net incomea loss of $356,000$716 ($.07.15 loss 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 nine months ended June 30, 2006 increased 7% to $32.3 million compared to $30.1 million for the first nine months The computation of fiscal 2005. Service revenue increases of 7% were the result of an increase in toxicology revenues of $3 million, new revenues from our PKPD facility of $850,000, offset by declines in our Baltimore clinic of $435,000 and declines in our bioanalytical laboratories of $1.4 million, due to the factors cited above for the current quarter. Revenues for our products increased 8% for the nine months, which was a general increase across our product lines.

Cost of Revenues

Cost of revenues for the nine months ended June 30, 2006 was $21.7 million or 67% of revenue compared to $18.9 million, or 63% of revenue for the same period last year. Both the cost of Service revenue and Product revenue increased as a percentage of revenues due to the items citedaverage outstanding shares in the current quarter.




12

Operating Expenses

Selling expenses for the nine months ended June 30, 2006 increased 6% to $2.0 million from $1.9 million for the nine months ended June 30, 2005. This increase is the net of several personnel changes we have made as we endeavor to improve the effectiveness of our sales force. Research and development expenses for the nine months ended June 30, 2006 increased 51% to $989,000 from $653,000 for the nine months ended June 30, 2005. This increase is attributable to additional developmental efforts on new products in the current year.

General and administrative expenses for the nine months ended June 30, 2006 increased 23% to $9.6 million, up from $7.8 million for the nine months ended June 30, 2005, primarily as a result of the adjustments made in the current quarter mentioned above. Alsoperiod included dilutive options, whereas options were not included in the increase are additional facilities expense in Baltimorecomputation of approximately $250,000diluted earnings 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.

Other Income/Expense

Interest expense did not change significantly in the nine months ended June 30, 2006 from the comparable period of the prior year. Lower average borrowing on our revolving line of credit in the current year was offset by additional financing costs of capital leases.

Income Taxes

We computed our 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 of 40% on the US taxable income or loss. 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 comparablesimilar period last 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.

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 resultas they were anti-dilutive. The effect of the taxes on US income exceeding our consolidated income before tax in the nine months ended June 30, 2005, we experienced a net loss of $137,000 ($.03 per share, both basic and diluted).

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 three and nine months ended June 30, 2006. Although improvement had been achieved in operating results since acquisition prior to the current year, the 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 preparationconversion 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 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 $251,000 related to this charge.outstanding convertible subordinated debentures was anti-dilutive in both years.




13

LIQUIDITY AND CAPITAL RESOURCES

Comparative Cash Flow Analysis

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 June 30,December 31, 2006, we had cash and cash equivalents of $777,000,$1,863 compared to cash and cash equivalents of $1,254,000$1,647 at September 30, 2005.2006. Approximately 50%14% of our cash balances were in the U.K. 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 providedgenerated by operating activities was $2.6 million$1,157 for the ninethree months ended June 30,December 31, 2006. This was the result of the earnings for the quarter to which is added our non-cash charges for depreciation and amortization, plus good collections againston our receivables during the period. The impact on cash flow of other changes in operating assets and reduced investment inliabilities, net, was not material.

Net cash used by investing activities increased to $268 for the three months ended December 31, 2006 from $146 for the three months ended December 31, 2005 as a result of equipment purchases. We paid $563 of principal on 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 repaid $1.9 million oflong-term debt and capital leases during the nine month period. We also financed $1.5 million of laboratory equipment in the nine months ended June 30, 2006 with capital leases.current quarter.

12

Capital Resources

We have outstandinga $6,000 revolving credit agreement with a commercial bank which extends until December 31, 2007. We may utilize up to that amount based upon our qualifying inventory and accounts receivable.

We have an irrevocableoutstanding letter of credit issued to secure thesecuring our lease ofon our Baltimore facility. Thefacility for $2,000. This letter of credit is for $2.0 million currently, reducingwas reduced under its terms to $1.0 million$1,000 in January 2007, and expiringexpires in January 2008.

The This letter of credit reduces the amount of fundsour amounts available under our $6 million revolving credit facility. The amount of funds available under this facility is calculated using a borrowing base formula, principally as percentage of qualifying receivables and inventory. Our recent monthly average qualifying assets for our borrowing base have been approximately $5,000,000.by the balance outstanding.

We do not expect to have any significant additionalour total 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 year2007 to be approximately $2.0 million (nonein the range of $1,000 to $1,200, which has currently been committed). We have not completed arrangements for financing these additions, but anticipate a combination of debt, leasing and utilization ofwe expect to fund from 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 whenunless we experience rapid growth of new business, which may necessitate amountsborrowings 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 June 30,December 31, 2006, we had $777,000$1,863 in cash, and approximately $3 million$1,760 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$6,000 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 2550 basis points, or at the EurodollarLIBOR rate plus 250 to 300325 basis points, at our election, depending upon the ratio of our interest bearing indebtedness (less subordinated debt) to EBITDA.election. We pay a fee equal to 2537.5 basis points on the unused portion of the line of credit. We have certain financial ratio covenants in our loan agreement, all of which were met in the quarter ended December 31, 2006.

13

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 December 31, 2006 and the effect such obligations are expected to have on our liquidity and cash flows in the periods ending September 30:

 

 

2007

 

 

2008

 

 

2009

 

 

2010

 

 

2011

 

 

After 2011

 

 

Total

 

Capital expenditures

 

$

250

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

250

 

Mortgage notes payable

 

 

275

 

 

 

384

 

 

 

406

 

 

 

431

 

 

 

456

 

 

 

6,507

 

 

 

8,459

 

Subordinated debt

 

 

—

 

 

 

4,477

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,477

 

Capital lease obligations

 

 

358

 

 

 

510

 

 

 

553

 

 

 

453

 

 

 

132

 

 

 

—

 

 

 

2,006

 

Operating leases

 

 

1,605

 

 

 

491

 

 

 

69

 

 

 

8

 

 

 

—

 

 

 

—

 

 

 

2,173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,488

 

 

$

5,862

 

 

$

1,028

 

 

$

892

 

 

$

588

 

 

$

6,507

 

 

$

17,365

 

For further details on our indebtedness, see Note 6 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended September 30, 2006.

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 coming year. Asforeseeable future. In January, 2008 our subordinated notes of $3,999 from 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.




14

2003 acquisition become due. We are requiredexploring various alternatives 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):fund that obligation.

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.




1514

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 agreementRevolving Credit Agreement between BASi and National City Bank dated January 4, 2005 bear interest at a rate of either the bank’s prime rate to prime plus 2550 basis points, or at the EurodollarLIBOR 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,325, at BASi’s option. We have taken steps to fix thefixed our interest rate on a significant amount of our mortgage 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 2006 and 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.

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 June 30,December 31, 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 waswere no changesignificant changes in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quartercontrols or other factors that has materially affected, or is reasonably likely to materiallycould significantly affect the Company’s internal control over financial reporting.




16

PART II — OTHER INFORMATION

ITEM 5.    OTHER INFORMATION

In connection with the preparation of our financial statements for the fiscal quarter ended June 30, 2006, we concluded that there is a permanent impairment of value of the intangible assets of one 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. Pursuantthose controls subsequent to the instructions to Item 2.06date of Form 8-K, the information required by such Item is included in the Management's Discussion and Analysistheir evaluation, which was completed as of Financial Condition and Results of Operations above. Please see the heading Results of Operations — Impairment Loss on Intangible Assets and Goodwill, which information is incorporated herein by this reference.September 30, 2006.

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ITEM 6.

ITEM 6.    EXHIBITS

Exhibits

Number assigned
in Regulation S-K
Item 601
Description of Exhibits

(3)3.1Second 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).

3.2Second Restated Bylaws of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.2 Form 10-Q for the quarter ended December 31, 1997).

(4)4.1Specimen Certificate for Common Shares (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-36429).

(31)31.1Certification of Peter T. Kissinger +

31.2Certification of Michael R. Cox +

(32)32.1Section 1350 Certifications +

(99)99.1Risk factors (incorporated by reference to Exhibit 99.1 to Form 10-K for the year ended September 30, 2005).


† 

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 Amended and Restated Bylaws of Bioanalytical Systems, Inc., as subsequently amended.*

 

(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 Richard M. Shepperd*

 

 

31.2

 

Certification of Michael R. Cox*

 

(32)

32.1

 

Section 1350 Certifications*

*Filed with this Quarterly Report on Form 10-Q.




17

16

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

Peter T. Kissinger
President and Chief Executive
Officer (Principal Executive Officer)

Date:  August 14, 2006



By:  /s/ MICHAEL R. COX
Michael R. Cox
Vice President-Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)

Date:  August 14, 2006




18

BIOANALYTICAL SYSTEMS, INC.

Date: February 12, 2007

By: /s/  RICHARD M. SHEPPERD

Richard M. Shepperd

Chief Executive Officer

(Principal Executive Officer)

Date: February 12, 2007

By: /s/ MICHAEL R. COX

Michael R. Cox

Vice President-Finance

and Chief Financial Officer

(Principal Financial and Accounting Officer)

17