UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31,June 30, 2007

OR

For the transition period from ___________ to _____________

Commission File Number 0-23357

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 x NOo

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.

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

(In thousands)

 

See accompanying notes to condensed consolidated financial statements.

 

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

(In thousands)

(Unaudited)

 

See accompanying notes to condensed consolidated financial statements.

BIOANALYTICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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.

At March 31,June 30, 2007, we had stock-based employee and outside director compensation plans, which are described more fully in Note 8 in the Notes to the Consolidated Financial Statements in our Annual Report on Form 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. Stock based compensation expense for the three months and sixnine months ended March 31,June 30, 2007 was $50$71 and $93,$164, respectively, and compensation expense for the three months and sixnine months ended March 31,June 30, 2006 was $71 and $139,$210, respectively. We did not record anyrecorded tax benefitbenefits of $19 related to these options.options in the three and nine months ended June 30, 2007.

There were no options granted in the fiscal year ended September 30, 2006. The assumptions used in computing our stock based compensation expense for options granted in the sixnine months ended March 31,June 30, 2007 were as follows:

We compute basic income/(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 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 for the six months ended March 31,in 2006 as they are anti-dilutive.

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

 

Inventories consisted of the following:

We operate in two principal segments - research Services and research Products. Our Services segment provides research and development support on a contract basis directly to pharmaceutical companies. Our Products segment provides liquid chromatography, electrochemical and physiological monitoring products to pharmaceutical companies, universities, government research centers and medical research institutions. Our accounting policies in these segments are the same as those described in the summary of significant accounting policies found in Note 1 to Consolidated Financial Statements in our annual reportAnnual Report on Form 10-K for the year ended September 30, 2006.

We computed income taxes using an overall effective tax rate of 41.5% on our consolidated domestic income, which is our estimate of our combined federal and local tax rates for the current fiscal year. In the sixnine months ended March 31,June 30, 2007 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.

The Company established an Employee Stock Option Plan whereby options to purchase the 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.

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

A summary of our stock option activity and related information for the sixnine months ended March 31,June 30, 2007 is as follows:

The intrinsic values of options exercised in the sixnine months ended March 31,June 30, 2007 were $10. We received $76 from their exercise, for which no tax benefit was recognized. The options on the 367641 shares outstanding at March 31,June 30, 2007 had an aggregate intrinsic value of $636$770 and a weighted average contract term of 6.37.7 years.

A summary of non-vested options for the sixnine months ended March 31,June 30, 2007 is as follows:

At March 31,June 30, 2007, there were 320 shares available for grants under the two plans.

The following applies to options outstanding at March 31,June 30, 2007:

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 Part I of BASi’s annual reportAnnual Report on Form 10-K for the year ended September 30, 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.

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 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 Report on Form 10-K for the year ended September 30, 2006, we commented on the impacts and anticipated impacts developments in the pharmaceutical industry have on our businesses, as well as the material potential risks posed to our business by these industries. Those comments are still applicable, and are found under “General” and “Changing Nature of the Pharmaceutical Industry” in Part I, Item 21 of that report.

The following table summarizes the consolidated statement of operations as a percentage of total revenues:

 

Revenues for the secondthird fiscal quarter ended March 31,June 30, 2007 decreased 9%increased 26% to $11.3$12.6 million compared to $12.4$10.0 million for the secondthird fiscal quarter last year. Our Service segment revenue decreased by 13% from $10.1accounted for the $2.6 million to $8.7increase, comprised of increases of $1.0 million compared to the comparable period last year. This was primarily the result of a decline in revenues in our bioanalytical laboratories, where revenues in the year earlier quarter were particularly strong due to a large study in that quarter that had been rescheduled from an earlier quarter. Our toxicology revenues increased $0.4facility, $1.0 million (a 10% increase), reflecting the continued health of our toxicology operations. Revenue in our Baltimore clinic increased 4% over the comparable quarter last year, reflecting our continuing effort to cultivate new clients for these services. Sales in our Products segment increased 9.3% from $2.4and $0.6 million in our second fiscal quarter last year to $2.6 millionbioanalytical laboratories. The improvements in our toxicology operations reflect a continued broad-based demand across existing biotechnology clients and effective sales efforts in acquiring new clients. The comparative improvements in our Baltimore clinic reflect a more favorable trial mix, volume and duration, along with the facility being impacted by a significant client cancellation in the current quarter. Sales ofcomparable period in the last fiscal year. Strong domestic revenues accounted for our Culex automated pharmacology systems showed continued strength posting a $0.5 million increase overin bioanalytical laboratories revenue which overcame softness in the UK bioanalytical laboratory due to study delays. Product revenue was static when compared to the same period last year. The Culex systems improvement in sales was offset bya year ago as we continued to experience steady demand for our Culex® technology, offsetting declines in our more mature products.product lines.

Cost of revenues for the secondfiscal quarter ended March 31,June 30, 2007 was $8.1$8.5 million or 72%67% of revenue compared to $7.5 million, or 60%75% of revenue for the secondthird fiscal quarter last year. Our cost of Service revenue as a percentage of Service revenue increaseddecreased from 67%80% in the secondthird fiscal quarter last year to 80%71% in the quarter ended March 31,June 30, 2007. A substantial portionWe were able to achieve a $2.6 million increase in Service revenue while incurring only an additional $1.3 million in our related costs of Service revenue in the comparable periods, improving our cost of productive capacity (personnel, facilities and laboratory equipment) is relatively fixed, resulting in a higher cost of servicesmargin as a percentage of sales when compared tosales. This improvement was partly as a result of the same period a year ago due to the revenue decrease. The revenue decrease did not create a corresponding decreasereduction in the costs of productive capacity. In addition, we transferredpersonnel throughout our pre-clinical services payroll related costs from our research group to cost of services. Similarly, ourorganization, as announced in September 2006. Our costs of Product revenue as a percentagedecreased from 56% of Productproduct revenue increased from 31%in the third fiscal quarter last year to 45%. A substantial portion44% of products shippedproduct revenue in the quarter ended March 31, 2007 were manufactured in the prior quarter, with manufacturing activity lower in the current fiscal quarter. This resulted in under-absorptionJune 30, 2007. Although sales of manufacturing costsProduct in the current quarter which is included in costwere similar to the comparable period last year, a reduction of products and raises theproduction personnel along with a favorable product mix yielded higher margins as a percentage of costs compared to sales.

Selling expenses for the three months ended March 31,June 30, 2007 decreased 1%increased 10% to $673 thousand$687 from $680 thousand$625 for the three months ended March 31,June 30, 2006. There were no significant changesOur sales expense increase is consistent with our increase in our sales efforts between the comparable quarters.revenues. Research and development expenses decreased 39% to $212 from $350 for the three months ended March 31,June 30, 2007 decreased 50% to $101 thousand from $201 thousand for the three months ended March 31, 2006 as a result of $118 thousand of payroll costs related to the commercialization of our pharmacokinetics and pharmacodynamics (“PKPD”) services payroll costs being transferred from our research groupchanged to cost of services in the current quarter.year, whereas they were included in research and development expenses in the comparable quarter last year.

General and administrative expenses for the three months ended March 31,June 30, 2007 decreased 35%47% to $1.9$2.1 million, down from $2.9$4.0 million for the three months ended March 31,June 30, 2006. The major contributors to our cost reduction in the current period were the strategic reductionreductions in personnel in September 2006 which reduced costs at all locations. In the impairment charge taken on thecomparable quarter last year, a write-down of assets related to our Baltimore clinic in fiscal 2006 reducing our expenses in the current year,clinical research unit of $1.1 million and a shift to utilizationbad debt write-off of temporary personnel$231 resulted in the Baltimore clinic which enables us to reduce personnel costs when the clinic is not occupied. We also recorded a loss of $98 thousand on the sale of an excess building adjacent to our main facilityone-time increase in West Lafayette, IN.these expenses.

Our interestInterest expense declined $18 thousanddecreased 10% to $230 thousand$245 in the three months ended June 30, 2007 from $272 in the comparable quarter of the prior year. This decline is due to our lower average outstanding borrowings between the comparable quarters, in spite of higher short term rates in the current quarter. A significant amountThis expense was offset by interest income of our borrowings are at fixed rates that did not change between$27 in the current quarter as compared to $2 in the comparable quarters.quarter of the prior year. This increase is primarily attributable to higher interest rates available on short-term cash investments and higher average cash balances to invest during the three months ended June 30, 2007 compared to the same period in the last fiscal year.

We computed our tax provision for the current quarter using an overall effective tax rate of 41.5% on domestic earnings, which is our combined federal and local rate. We were able to utilize tax loss carryforwards available on our foreign earnings and therefore provided no related income tax expense.

As a result of the above factors, we had net income of $124 thousand$449 ($0.030.09 per share, both basic and diluted) in the quarter ended March 31,June 30, 2007, compared to incomea net loss of $538 thousand$1,756 ($0.110.36 per share, both basic and diluted) in the same period last year.

Revenues for the sixnine months ended March 31,June 30, 2007 were relatively unchanged: $22.2increased 8% to $34.8 million asin the first nine months of fiscal 2007, compared to $22.3$32.3 million for the six month period last year.first nine months of fiscal 2006. Service revenue decreasesincreases of 2%10% were the result of a declineincreases in our Baltimore clinical research unittoxicology revenues of $1.4$1.5 million and bioanalytical laboratories of $1.3 million due to the lossfactors cited above. These increases were offset by declines in our Baltimore clinic of $0.3 million, due to the postponement of a significant customer in our second fiscal quarter of 2006. This decrease was partially offset by increases of $0.3 million and $0.2 million in our U.K. and Oregon bioanalytical laboratories respectively, along with an increase of $0.4 million in toxicology revenues.clinical trial. Revenues for our Products increased 4%were unchanged for the sixnine months, due to the itemsfactors cited inabove for the current quarter.

Cost of revenues for the sixnine months ended March 31,June 30, 2007 was $15.6$24.1 million or 70%69% of revenue compared to $14.2$21.7 million, or 64%67% of revenue for the same period last year. Both the costThe commercialization of Service revenue and the cost of Product revenue increased as a percentage of Service revenues and Product revenues, respectively, due to the items citedour PKPD operations in the current quarter.year account for a significant piece of this percentage change.

Selling expenses for both the sixnine months ended March 31,June 30, 2007 andof $2.0 million were unchanged from the sixnine months ended March 31, 2006 were unchanged at $1.4 million each.June 30, 2006. Increased efficiencies and targeted marketing efforts continue to yield a greater return on our sales efforts. Research and development expenses for the sixnine months ended March 31,June 30, 2007 decreased 29%32% to $456 thousand$668 from $639 thousand$989 for the sixnine months ended March 31, 2006,June 30, 2006. This decrease is primarily due to personnel previously charged to research and development now being charged to cost of services as we commercialize our pharmacokinetics and pharmacodynamics services, which had previously been in development.factors cited above.

General and administrative expenses for the sixnine months ended March 31,June 30, 2007 decreased 39%43% to $3.5$5.6 million, down from $5.8$9.7 million for the sixnine months ended March 31, 2006 due to items citedJune 30, 2006. The decline was the result of the one-time increases in the current quarter.prior year and the personnel reductions previously mentioned.

Interest expense decreased 7%8% from $508 thousand$780 to $471 thousand$717 in the sixnine months ended March 31,June 30, 2007 from the comparable period of the prior year as a result of reduced average outstanding borrowings.factors cited above. Interest income increased to $52 from $6 in the nine months ended June 30, 2007 from the comparable period of the prior year as a result of factors cited above.

We computed our income tax using an effective tax rate of 41.5% on domestic earnings for the sixnine months ended March 31,June 30, 2007. 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. The income tax benefit for the sixnine months ended March 31,June 30, 2006 was computed using an effective taxthe federal rate of 42.5% on the US taxable losses, the effective benefit was reduced by an accrual for an additional $30 thousand for settlement of a disputed35% with no state tax liability.benefit.

As a result of the above, we had net income of $680 thousand$1.1 million ($0.140.23 per share, both basic and diluted) for the first sixnine months of the current year, compared to a net loss in the prior year of $178 thousand$1.9 million ($0.04 loss0.40 per share, both basic and diluted).

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, 2007 we had cash and cash equivalents of $1.4$3.0 million compared to cash and cash equivalents of $1.6 million at September 30, 2006. Approximately 26%12% of our cash balances were in the U.K at March 31, 2007 as compared to 60% at March 31, 2006.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 provided by operating activities was $0.4$2.6 million for the sixnine months ended March 31, 2007 compared to $1.1 million for the six months ended March 31, 2006.June 30, 2007. This was the result of the earnings to which is added our non-cash charges fornet income from operations of $1.1 million plus depreciation and amortization of $2.7 million, offset by receivables balances increasing as a result of new contracts, a building held for resale, and working down the balancesdecrease in customer deposits and accrued expenses. The impact on cash flowadvances of other changes in operating assets and liabilities was not material.$1.2 million.

Net cash providedused by investing activities was $0.3$0.04 million in the sixnine months ended March 31,June 30, 2007 as a result of our routine equipment purchases being offset by the nettingproceeds of disposalsasset sales (including a building in West Lafayette) against routine equipment purchases.. Additionally, we repaid $0.8$1.0 million of principal on our long-term debt and capital leases in the sixnine months ended March 31,June 30, 2007.

We have a $6.0 million 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 are in discussions with our bank to extend this facility beyond its expiration date.

We have an outstanding letter of credit securing our lease on our Baltimore facility for $1.0 million, which expires in January 2008. The letter of credit reduces our amounts available under our revolving credit facility.

We have $4.0 million of convertible subordinated debt, which becomes due on January 1, 2008. Accordingly, the entire amount is presented in current portion of long-term debt in the balance sheet at March 31,June 30, 2007. The debt is convertible at $16 per share into common stock, a conversion price that makes it unlikely to be converted before its maturity. This debt is subordinated to our bank debt, and cannot be repaid without the consent of our senior lenders. We are currently exploring optionsintend to refinanceretire this debt including acquiringfrom operating cash and cash flow, possibly augmenting with some additional mortgage debt, extending the termsfinancing or utilizing our line of the debt, and obtaining funds by a private placement of debt or equity securities.credit.

We expect our total capital additions in fiscal 2007 to be in the range of $1.0$0.9 million to $1.2$1.3 million. We have funded and expect to fund these capital expenditures from operating cash flow.

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 borrowing to finance the buildup of receivables and inventory.

At March 31,June 30, 2007, we had $1.4$3.0 million in cash, and approximately $4.0 million available 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 50 basis points, or at the LIBOR rate plus 325 basis points, at our election. We pay a facility fee equal to 37.5 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 March 31,June 30, 2007.

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,June 30, 2007 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (amounts presented for 2007 are those items required in the final two quarters)quarter):

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, 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 foreseeable future. As discussed above, in January, 2008 our subordinated notes of $4.0 million from a 2003 acquisition become due. We are exploring various alternatives to fund that obligation.

BASi’s primary market risk exposure with regard to financial instruments is changes in interest rates. Borrowings under the Revolving Credit Agreement between BASi and National City Bank dated January 4, 2005 bear interest at a rate of either the bank’s prime rate plus 50 basis points, or at the LIBOR rate plus 325, at BASi’s option. We have fixed ourBorrowings under the Company’s mortgages with Regions Bank bear interest at their prime rate, or an indexed rate based on our mortgage debt through May, 2007.Treasury Bill rates at the Company’s option.

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.approximately $70 in pretax expenses.

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 in fiscal year 2007.

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, 2007 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, 2006, the Company implemented new systems in its prior fiscal year. Although the Company continues in the development of these new accounting 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 werewas no significant changeschange in the Company’s internal controlscontrol over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or other factors that could significantlyis reasonably likely to materially affect, those controls subsequent to the date of their evaluation, which was completed as of September 30, 2006.Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

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.