On October 1, 2007, we recorded a $183 liability for uncertain income tax positions, which was accounted for as a reduction to retained earnings, for the cumulative effect change of adopting FIN 48. Upon further analysis of our opening liability accounts, we determined that our recorded liability on October 1, 2007 was $102 greater than our exposure for uncertain tax positions. Accordingly, we revised our original adjustment and recorded a reduction in tax liability and increase in retained earnings to properly record our adoption of FIN 48 in fiscal 2008. During the three and nine months ended June 30,December 31, 2008, we recorded tax expense of $71 and $179there were no changes to our FIN 48 reserve. Thus, our reserve for additional exposure on these uncertain income tax positions thus increasing our liability at June 30,December 31, 2008 to $362.remains at $473. This liability is classified as a current liability in the condensed consolidated balance sheet based on the timing of when we expect each of the items to be settled.
On December 18, 2007, we entered into a loan agreement with Regions Bank (“Regions”) under which Regions loaned us $1,400 under a term loan maturing December 18, 2010. Interest on the loan is equal to LIBOR plus 215 basis points and requires monthly payments of approximately $12 plus interest. The loan is collateralized by real estate at the Company’s West Lafayette and Evansville, Indiana locations. Regions also holds an additional $8,000approximately $7,700 of our mortgage debt on these facilities. We used a portion of the proceeds of the loan and existing cash on hand to repay our subordinated debt of approximately $4,500 during the first quarter of the prior fiscal quarter.year. We entered into interest rate swap agreements with respect to this loan to fix the interest rate at 6.1%. We entered into the derivative transactions to hedge interest rate risk of this debt obligation and not to speculate on interest rates. As a result of recent declines in short term interest rates, the swaps had a fair value to the bank of $137 at December 31, 2008, which was recorded in our condensed consolidated financial statements as interest expense and long term liability. The fair value of these swaps was not material to the condensed consolidated financial statements in the comparable period of the prior fiscal year.
Our Agreement limits outstanding borrowings to the “borrowing base,” as defined in the Agreement, up to a maximum available amount of $5,000. As of June 30,December 31, 2008, we had a balance on the line$3,094 of credittotal borrowing capacity, of $1,244.which $1,647 was outstanding. Borrowings bear interest at a variable rate based on either (a) the London Interbank Offer Rate (LIBOR) or (b) a base rate determined by the bank’s prime rate, in either case, plus an applicable margin, as defined in the Agreement. The applicable margin for borrowings under the line of credit ranges from 0.00% to 0.50% for base rate borrowings and 1.50% to 3.00% for LIBOR borrowings, subject to adjustment based on the average availability under the line of credit. The interest rate at December 31, 2008 was 3.87%. We also pay commitment fees on the unused portions of the line of credit ranging from 0.20% - 0.30%. All interest and fees are paid monthly. Under the borrowing base computation, we had $3,418 of available borrowing capacity at June 30, 2008.
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 and Exchange Act of 1934, as amended. Those statements may include, but are not limited to, discussions regarding our intent, belief or current expectations with respect to (i) our strategic plans; (ii) our future profitability; (iii) our capital requirements; (iv) industry trends affecting our financial condition or results of operations; (v) our sales or marketing plans; or (vi) our growth strategy. Investors in our common shares are cautioned that reliance on any forward-looking statement involves risks and uncertainties, including the risk factors contained in our annual report on Form 10-K for the fiscal year ended September 30, 2007.2008. Although we believe 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 us that our plans and objectives will be achieved. We do not undertake any obligation to update any forward-looking statement.
Due to the sale of our clinical research unit in June 2008, the following analysis will focus only on only continuing operations. (Amounts are in thousands, unless otherwise indicated.)
"Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Liquidity and Capital Resources" discusses the unaudited condensed consolidated financial statements of the Company, which have been prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires management to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Certain significant accounting policies applied in the preparation of the financial statements require management to make difficult, subjective or complex judgments, and are considered critical accounting policies. We have identified the following areas as critical accounting policies.
Product revenue from sales of equipment not requiring installation, testing or training is recognized upon shipment to customers. One product includes internally developed software and requires installation, testing and training, which occur concurrently. Revenue from these sales is recognized upon completion of the installation, testing and training when the services are bundled with the equipment sale.
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Goodwill and other indefinite lived intangible assets, collectively referred to as "indefinite lived assets,” are tested annually for impairment, and more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. We may have a future impairment of goodwill for the UK reporting unit if future losses exceed expectations. We will evaluate this possibility quarterly in the current fiscal year. The value of goodwill at our UK reporting unit at December 31, 2008 was $472. At June 30,December 31, 2008, recorded goodwill was $1,855, and the net balance of other intangible assets was $152.$136.
We use the binomial option valuation model to determine the grant date fair value. The determination of fair value is affected by our stock price as well as assumptions regarding subjective and complex variables such as expected employee exercise behavior and our expected stock price volatility over the term of the award. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. We estimated the following key assumptions for the binomial valuation calculation:
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| • | Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option. |
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| • | Expected volatility. We use theour historical stock price volatility ofon our common shares to computestock for our expected volatility.volatility assumption. |
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| • | Expected term. The expected term represents the weighted-average period the stock options are expected to remain outstanding. The expected term is determined based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior. |
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| • | Expected dividends. We currently assumeassumed that we will pay no dividends. |
Employee stock-based compensation expense recognized in the first three and nine months of fiscal 20082009 and 20072008 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment will be recognized at that time.
Changes to our underlying stock price, our assumptions used in the binomial option valuation calculation and our forfeiture rate as well as future grants of equity could significantly impact compensation expense to be recognized in fiscal 20082009 and future periods.
As described in Note 7 to these condensed consolidated financial statements, we use the asset and liability method of accounting for income taxes.
Additionally, in accordance with Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (“FIN 48”), which we adopted effective October 1, 2007, when warranted, we maintain a reserve for uncertain tax positions. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrual for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that we believe is more likely than not to be realized upon ultimate settlement of the position.
On October 1, 2007, we recorded a $183 additional liability for uncertain income tax positions for a total liability of $240, which was accounted for as a reduction to retained earnings, for the cumulative effect change of adopting FIN 48. Upon further analysis of our opening liability accounts, we determined that our recorded liability on October 1, 2007 was $102 greater than our FIN 48 liability for uncertain tax positions. Accordingly, we revised our original adjustment and recorded a reduction in tax liability and increase in retained earnings to properly record our estimate of FIN 48 exposure in fiscal 2008.
During the three and nine months ended June 30,December 31, 2008, we recorded tax expense of $71 and $179there were no changes in our income tax provision for additional exposure on uncertain tax positions, thus increasingFIN 48 reserve. Thus, our reserve for uncertain income tax positions at June 30,December 31, 2008 to $362.remains at $473. This reserve is classified as a current liability in the condensed consolidated balance sheet based on when we expect each of the items to be settled. We record interest and penalties accrued in relation to uncertain income tax positions as a component of income tax expense.
Any changes in the liability for uncertain tax positions would impact our effective tax rate. Over the next twelve months, it is reasonably possible that the uncertainty surrounding our reserve for uncertain income tax positions, which relate to certain state income tax issues, will be resolved upon the conclusion of state tax audits. Accordingly, if such resolutions are favorable, we would reduce the carrying value of our reserve.
We have an accumulated net deficit in our UK subsidiaries, consequently, United States deferred tax liabilities on such earnings have not been recorded.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) cost method of accounting.
Results of Operations
The following table summarizes the condensed consolidated statement of operations as a percentage of total revenues offrom continuing operations:
| | Three Months Ended June 30, | | Nine Months Ended June 30, | | | Three Months Ended December 31, | |
| | 2008 | | 2007 | | 2008 | | 2007 | | | 2008 | | | 2007 | |
Service revenue | | | 79.2 | % | | 82.3 | % | | 79.4 | % | | 77.5 | % | | | 74.1 | % | | | 76.1 | % |
Product revenue | | | 20.8 | | | 17.7 | | | 20.6 | | | 22.5 | | | | 25.9 | | | | 23.9 | |
Total revenue | | | 100.0 | | | 100.0 | | | 100.0 | | | 100.0 | | | 100.0 | | | | 100.0 | |
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Cost of service revenue (a) | | | 68.8 | | | 66.4 | | | 67.6 | | | 71.2 | | | | 88.3 | | | | 67.8 | |
Cost of product revenue (a) | | | 37.5 | | | 44.2 | | | 39.1 | | | 42.6 | | | | 35.5 | | | | 40.9 | |
Total cost of revenue | | | 62.3 | | | 62.4 | | | 61.7 | | | 64.8 | | | | 74.7 | | | | 61.3 | |
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Gross profit | | | 37.7 | | | 37.6 | | | 38.3 | | | 35.2 | | | | 25.3 | | | | 38.7 | |
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Total operating expenses | | | 27.4 | | | 25.9 | | | 27.4 | | | 26.2 | | | | 44.8 | | | | 26.5 | |
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Operating income | | | 10.3 | | | 11.7 | | | 10.9 | | | 9.0 | | |
Operating income (loss) | | | | (19.5 | ) | | | 12.2 | |
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Other expense | | | 2.2 | | | 2.0 | | | 2.1 | | | 2.2 | | | | (4.8 | ) | | | (2.1 | ) |
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Income from continuing operations before income taxes | | | 8.1 | | | 9.7 | | | 8.8 | | | 6.8 | | |
Income (loss) from continuing operations before income taxes | | | (24.3 | ) | | | 10.1 | |
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Income taxes | | | 4.5 | | | 4.5 | | | 4.4 | | | 2.3 | | |
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Net income from continuing operations | | | 3.6 | % | | 5.2 | % | | 4.4 | % | | 4.5 | % | |
Income tax provision (benefit) | | | | (4.7 | ) | | | 4.5 | |
Net income (loss) from continuing operations | | | | (19.6 | )% | | | 5.6 | % |
| (a) | Percentage of service and product revenues, respectively |
Three Months Ended June 30,December 31, 2008 Compared to Three Months Ended June 30,December 31, 2007
Service and Product Revenues
Revenues for the fiscal quarter ended June 30,December 31, 2008 increased 5.4%decreased 23.6% to $11,447$8,076 compared to $10,865$10,565 for the same period last year.
Our Service segment revenue increased by 1.5% from $8,937decreased 25.5% to $9,068 as$5,987 in the current quarter compared to $8,035 for the sameprior year period last year primarily as a result of strong increasesdecreases in bioanalytical analysis and toxicology revenues. Our bioanalytical analysis revenues experienced increasesdecreased $816, a 19.4% decrease from the same quarter in West Lafayettefiscal 2008, due to study delays by clients and the UK with a slight declinedecreases in Oregon, totaling a 26.4% increase, from $4,253 to $5,377. Our West Lafayette facility’snew bookings. Toxicology revenues increased because of a larger amount of sample volume, and higher immunochemistry revenues of nearly $200decreased $978 or 34.3% over the prior year. The increasesyear period. Study delays and cancellations contributed to the decline for the toxicology group as well. Partially offsetting these decreases was an increase in the UK are also due to increased volume over the same quarter of prior year. Our increased bioanalyticalpharmaceutical analysis revenues were offset by a decline in our toxicology revenue of 22.5% to $2,993 from $3,864 in the comparable period of$89 or 17.4% over the prior year due to study delays.period.
Sales in our Products segment increased 23.4%decreased 17.4% from $1,928$2,530 to $2,379$2,089 when compared to the same period in the prior year. The majority of that increasethe decrease stems from sales of our Culex automated in vivo sampling systems, which improved 64.5% to $1,265 from $769declined $815, or 47.1%. Slightly offsetting the decline was an increase in the same period last year. The increase was mainly due to the completion of previously delayed equipment installations. Salessales of our more mature analytical products also improved to $939, an increase of 5.8%$225 or 32.0% over the same period last year. Slightly offsetting these gains was a decline in our Vetronics business of $96 primarily because a contract with a long-time client was not renewed.
Cost of Revenues
Cost of revenues for the current quarter was $7,131$6,029 or 62.3%74.7% of revenue, compared to $6,782,$6,479, or 62.4%61.3% of revenue for the prior year period.
Cost of Service revenue as a percentage of Service revenue increased to 68.8%88.3% in the current quarter from 66.4%67.8% in the comparable period last year. The principal cause of this increase was an accrualthe decline in sales which led to lower absorption of $160 to cover the netfixed costs in our Service segment. A significant portion of our costs of performingproductive capacity in the Service segment are fixed. Thus, decreases in revenues lead to increases in costs as a study for a client to recreate data that was not properly archived.percentage of revenue.
Costs of Products revenue as a percentage of Product revenue in the current quarter decreased to 37.5%35.5% from 44.2%40.9% in the prior year quarter. This decrease is due to decreasedthe decline in sales and higherrelated increased absorption of manufacturing costs that are included in the cost of products.into inventory.
Operating Expenses
Selling expenses for the three months ended June 30,December 31, 2008 increased 41.9%26.9% to $975$1,005 from $687$792 for the comparable period last year. This increase was primarily driven by expanded sales efforts and new hires in both our West Lafayette and UK facilities along with increased marketing and advertising efforts.
Research and development expenses for the thirdfirst quarter of fiscal 2008 of $212 were equal2009 increased 9.0% over the comparable period last year to last year’s$205 from $188. The increase was partially due to spending for the third quarter. Work hastemporary labor utilized in our continued effort on the development of a new product funded by an NIH grant.
General and administrative expenses for the current quarter increased 9.7%31.4% to $1,953$2,390 from $1,781$1,819 for the prior year period. The increase is mainly due to the following: 1) expenses for attracting and hiring new management personnel in our West Lafayette and UK facility;facilities; 2) an increase in building rent expense fromseverance expenses for former employees of the newly constructed facility in the UK;Company; and 3) an increase in stock compensation expense for options awardedforeign currency losses related to executive officers in the first quarterdecline of fiscal 2008.the pound sterling relative to the U.S. dollar.
Other Income (Expense)
Other expense for the current quarter increased to $250$390 from $217$218 for the same quarter of the prior year mainly due to interest on higher outstanding loan balances, capital leases and a reduction of interest income.
Income Taxes
Our effective tax rate for the quarter ended June 30, 2008 was 56.1% compared to 46.1% for the prior year period.year. The principalprimary reason for the increased effective rateincrease was a loss$137 non-cash charge on our interest rate swaps due to the decline in the current quarter at our UK facility, which can not be used to reduce domestic taxes.
Nine Months Ended June 30, 2008 Compared to Nine Months Ended June 30, 2007
Service and Product Revenuesshort term interest rates.
Revenues for the nine months ended June 30, 2008 increased 7.2% to $32,313 compared to $30,142 for the same period last year.
Our Service revenue increased 9.9% to $25,653 compared to $23,353 for the same period last year primarily as a result of strong increases in bioanalytical and pharmaceutical analysis revenues. Our bioanalytical analysis revenues increased $1,999 (a 16.2% increase over the same period in fiscal 2007), with improvements at the West Lafayette and the UK facilities. The revenue increases in the UK facility are mainly due to increased volume when compared to the same period in the prior year. The West Lafayette facility experienced a higher sample assay volume and an increase in immunochemistry revenues of nearly $600 over the same period in the prior year.
Our Products revenue decreased 1.9% from $6,689 in the first nine months of the prior year to $6,660. The decline mostly stems from a $293 decrease in our Vetronics business because a contract with a long-time client was not renewed.
Cost of Revenues
Cost of revenues for the nine months ended June 30, 2008 was $19,952 or 61.7% of revenue compared to $19,529, or 64.8% of revenue for the comparable prior period.
Cost of Service revenue as a percentage of Service revenue decreased to 67.6% in the first nine months from 71.2% in the comparable period last year. This decrease occurred because a significant portion of our costs of productive capacity in the Service segment are fixed. Thus, increases in revenue do not generate proportionate increases in costs. This decrease occurred even though an additional charge of $160 was incurred in the third quarter of the current fiscal year.
Costs of Product revenue as a percentage of Product revenue in the first nine months decreased from 42.6% to 39.1%, mainly due to the higher absorption of manufacturing costs.
Operating Expenses
Selling expenses for the nine months ended June 30, 2008 increased 29.7% to $2,641 from $2,037 for the comparable period last year. This increase was driven by expanded sales efforts and new hires in both our West Lafayette and UK facilities and an increase in trade shows, exhibits and advertising expenses. Research and development expenses for the first nine months of fiscal 2008 decreased 12.7% to $583 from $668 for the same period in the prior year mainly as a result of costs related to the commercialization of our pharmacokinetics and pharmacodynamics services being considered as cost of services; whereas in the first quarter of the prior fiscal year, they were considered research and development expenses.
General and administrative expenses for the nine months ended June 30, 2008 increased 11.2% to $5,624 from $5,060 for the prior year period. The increase is mainly due to the following: 1) expenses for attracting and hiring new management personnel in our UK facility; 2) an increase in stock compensation expense with the new option grants to executive officers in the first quarter of fiscal 2008; 3) higher legal and other professional consulting costs; 4) an increase in building rent expense for our new UK facility; and 5) increased travel related expenses.
Income Taxes
Our effective tax rate for the nine monthsquarter ended June 30,December 31, 2008 was 49.8%a benefit of 19.3% compared to 33.6%expense of 44.8% for the prior year period. The main difference stemsprincipal reason for the decreased effective rate was the loss from taxes on domestic income from which we could not deductcontinuing operations in the current quarter, including a loss from our UK facility.foreign operations on which no income tax benefit was recognized.
Discontinued Operations
On June 30, 2008, we sold the operating assets of our Baltimore Clinical Pharmacology Research Unit (“CPRU”) to Algorithme Pharma USA Inc. ("AP USA") and Algorithme Pharma Holdings Inc. ("Algorithme") for a cash payment of $850 and the assumption of certain liabilities related to the CPRU. As a result, we have exited the market for Phase I first-in-human clinical studies. We remain contingently liable for $800 annually through 2015 for future financial obligations under the CPRU facility lease. For further detail, see Note 5 to the condensed consolidated financial statements included in this report and exhibitsExhibits 2.1 and 10.1 to the current report on Form 8-K filed on July 7, 2008.
Accordingly, in the condensed consolidated statements of operations and cash flows, we have segregated the results of the CPRU as discontinued operations for the current and prior fiscal periods.year. The loss from discontinued operations in the prior fiscal year reflects the results of operations of the CPRU through the sale date.first three months of fiscal 2008. The remaining estimated cash expenditures related to this unit are recorded as current liabilities of discontinued operations, since they are expected to be paid within the current fiscal year.year 2009. These expenditures relate mostly to normal operating expenses.expenses accrued at the time of sale, but yet to be paid. The current assets of discontinued operations relate mostly to outstanding customer receivables for completed clinical trials.
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, 2008, we had cash and cash equivalents of $1,045,$451, compared to cash and cash equivalents of $2,837$335 at September 30, 2007.2008.
Net cash provided by continuing operating activities was $4,082$265 for the ninethree months ended June 30,December 31, 2008 compared to $3,411$2,713 for the ninethree months ended June 30,December 31, 2007. In addition to increasedThe decrease in cash provided by continuing operating activities in the current fiscal quarter partially results from a decrease in earnings from continuing operations deferred income taxes also addedas well as decreases in accounts payable of $997 and customer advances of $652. These were partially offset by a $773 resulting fromdecrease in accounts receivable of $2,920. Also included in operating activities for the tax provision onfirst quarter of fiscal 2009 is the non-cash loss of $137 recorded to reflect the fair value of our domestic income from continuing operations.interest rate swaps. The impact on operating cash flow of other changes in working capital was not material.
The decline in cash generated from operations, which is our primary source of cash, relates to our current operating loss. We experienced an operating loss in the first quarter of fiscal 2009 as compared to operating income in the prior year period as a result of a 24% year-to-date reduction in sales and a 30% increase in selling, general and administrative costs, which both significantly reduced our cash flow from operations. The decline in sales was due to both a decrease in new bookings and delays by sponsors on projects previously booked. We anticipate that this impact on our cash flow from operations will continue through our second quarter of fiscal 2009. The increase in selling, general and administrative costs in the first quarter of fiscal 2009 included one-time costs, such as severance for employees, recruiting fees for replacing former officers and marketing and advertising costs associated with our new marketing plan and branding. We do not expect these costs to continue into our second fiscal quarter of 2009. Whether we have additional currency translation costs depends on the strength of the pound sterling relative to the U.S dollar. Changes in the rates for the pound sterling require us to revalue dollar denominated debt of our UK subsidiary.
In January 2009, we completed a reduction in force through both attrition and terminations, which we expect to reduce our annual compensation expense by approximately 12%. This reduction impacted all areas of operations.
Failure to improve our cash flow from operations could severely restrict our ability to fund our operations with bank borrowings. If additional sources of funding are utilized, it is likely to be increasingly expensive and/or dilutive to current shareholders, if available at all.
Investing activities used $1,281$304 in the first nine monthsquarter of fiscal 20082009 mainly due to capital expenditures. Our principal investments were for laboratory equipment replacements and upgrades in all of our West Lafayette, Oregon and UK facilities new building improvements in the UK related to relocating to new space, construction costs in our Evansville facility to convert an area for higher revenue studies andas well as general building and information technology infrastructure expenditures at all sites.
Financing activities used $2,565$670 in the first three months of fiscal 2009 as compared to $892$3,286 used for the first three months of fiscal 2007.2008. The main use of cash in the first quarter of fiscal 2009 was for long term debt and capital lease payments of $294 as well as net payments on our line of credit of $376. In the first quarter of fiscal 2008, was to repaywe repaid the balance of our subordinated debt, approximately $4,500, as well as other long term debt and capital lease payments of $744,which was partially offset by $1,400 of long-term debt and $1,244 net borrowings from our line of credit.additional borrowings.
Since the acquisition of the Baltimore clinic in fiscal 2003, we havehad consistently experienced negative cash flows from that operation. With the sale of that operation on June 30, 2008, we have eliminated a significant drain on operating cash flows, which should result in improved future liquidity. During the ninethree months ended June 30,December 31, 2008, cash used inprovided by operating activities for discontinued operations of $2,709 is mainly from the loss on operations and the loss on disposal. The $668 provided by investing activities for discontinued operations during the nine months of fiscal 2008$558 is mainly due to the $850collection of cash proceeds from the disposal slightly offset by capital expenditures.outstanding receivables.
Capital Resources
We amended our revolving credit facility with National City Bank (“National City”) in October 2007, reducing our line of credit to $5,000 from $6,000 as we did not have qualifying assets sufficient to borrow the higher amount and were paying fees on amounts we could not use. We also have mortgage notes payable to another bank aggregating approximately $9,400.$9,100. Borrowings under these credit agreements are collateralized by substantially all assets related to our operations and all common stock of our U.S. subsidiaries and 65% of the common stock of our non-United States subsidiaries. Under the terms of our credit agreements, we have agreed to restrict advances to subsidiaries, limit additional indebtedness and capital expenditures as well as to comply with certain financial covenants outlined in the borrowing agreements. These credit agreements contain cross-default provisions. Further details of each debt issue are discussed in our Annual Report on Form 10-K for the year ended September 30, 2007.2008.
On December 18, 2007, we entered into a loan agreement with Regions Bank (“Regions”) under which Regions loaned us $1,400 under a term loan maturing December 18, 2010. Interest on the loan is equal to LIBOR plus 215 basis points. Monthly payments are $12 plus interest. The loan is collateralized by real estate at the Company’s West Lafayette and Evansville, Indiana locations. Regions also holds an additional $8,000approximately $7,700 of mortgages on these facilities. A portion of the $1,400 loan was used to repay our subordinated debt of approximately $4,500 during the first quarter of the currentprior fiscal year while existing cash on hand made up the balance of the payment. We entered into interest rate swap agreements with respect to this loan to fix the interest rate at 6.1%. We entered into the derivative transactions to hedge interest rate risk of this debt obligation and not to speculate on interest rates. As a result of recent declines in short term interest rates, the swaps had a fair value to the bank of $137 at December 31, 2008, which was recorded in our condensed consolidated financial statements as interest expense and long term liability. The fair value of these swaps was not material to the condensed consolidated financial statements in the comparable period of the prior fiscal year.
The terms of the interest rate swaps match the scheduled principal outstanding under the loans. We do not intend to prepay the loans, and expect the swaps to expire under their terms in two years without payment by us. Upon expiration of the swaps, the net fair value recorded in the condensed consolidated financial statements is expected to be zero.
Based on our current business activities and cash on hand, we expect to continue to borrow on our revolving credit facility to finance working capital and only necessary capital expenditures since we instituted a freeze on capital expenditures. As of December 31, 2008, we had $3,094 of total borrowing capacity, of which $1,647 was outstanding, and $451 of cash on hand. The decrease in our total borrowing capacity from the fiscal year 2008 ended September 30, 2008 was due to several factors. Declining sales in the first quarter of fiscal 2009 led to a lower accounts receivable balance, which reduces the total borrowing capacity. As discussed above, we expect the sales decline due to lower new bookings and sponsor delays to continue through the second quarter of fiscal 2009. Accounts receivable is also expected to decline during the same period, which could lower our total borrowing capacity.
The covenants in our revolving credit facility with National City require the maintenance of a minimum level of tangible net worth and certain ratios of interest-bearing indebtedness to EBITDA and net cash flow to debt servicing requirements, which may restrict the amount we can borrow to fund future operations, acquisitions and capital expenditures. The covenants in our loan agreements with Regions require us to maintain certain ratios including a fixed charge coverage ratio and total liabilities to tangible net worth ratio. Both agreements contain cross-default provisions. Weprovisions that are triggered by acceleration of amounts due. As of September 30, 2008, we were not in compliance with the minimum tangible net worth covenant in the National City agreement. On December 19, 2008, National City agreed to waive our non-compliance with that covenant and to amend it for future periods. At December 31, 2008, we were not in compliance with our fixed charge coverage ratio and debt service coverage ratio requirements under both the National City and Regions facilities. As of February 17, 2009, Regions bank agreed to waive the requirement to comply with the fixed charge coverage covenant through our second fiscal quarter ending March 31, 2009, as evidenced in Exhibit 10.7 filed with this quarterly report on Form 10-Q. As of the filing date of this Form 10-Q, we are in discussions with National City regarding a waiver of the covenant breach, but National City has not been able to complete its review. While our discussions regarding a waiver have been constructive, it is possible that National City may not grant a waiver or may condition its waiver on changes to the credit agreement which may further limit our borrowing availability or significantly increase our interest expense and limit our ability to fund operations or pay outstanding indebtedness. Under the terms of the credit agreement, the covenant breach does not result in a default unless National City provides us written notice that it is declaring a default. If a default is declared, National City could require the Company to immediately repay all amounts outstanding under the credit agreement. In addition, if we are unable to repay National City upon an acceleration of payments, we would be in default under the Regions loan covenantsagreement, entitling Regions to accelerate that debt as well. This would have a material adverse effect on our financial condition, liquidity and operations. Acceleration of repayment of our outstanding debt would require us to seek other sources of financing which may not be available to us in a timely manner, on acceptable terms or at June 30, 2008.all. Failure to obtain alternative sources of financing in these circumstances would severely impair our ability to continue operations
BasedWith the decrease in cash flow from operations discussed above, we may face additional situations during fiscal 2009 in which we are not in compliance with at least one covenant requirement, requiring us to obtain a waiver from the bank at that time. If that situation arises, we will face having to deal with our lending banks again to obtain loan modifications or waivers as described above. We cannot predict whether our lenders will provide those waivers, if required, what the terms of any such waivers might be or what impact any such waivers will have on our current business activitiesliquidity, financial condition or results of operations.
U.S. and cash on hand afterglobal market and economic conditions continue to be disrupted and volatile, and the subordinated debt paydown of $4,500disruption has been particularly acute in the first quarterfinancial sector. The cost and availability of funds may be adversely affected by, among other things, illiquid credit markets. Our line of credit expires in December 2009. Continued disruption in U.S. and global markets, which has adversely affected our cash flow from operations, could adversely affect our ability to renew this line of credit and any renewed line of credit may be under terms that are not as favorable as the current line of credit. This situation, coupled with the recent decline in our cash flow from operations, the current credit markets’ situation and our inability to obtain financing on favorable terms, may have a material adverse effect on our results of operations and business in the current fiscal year.
ITEM 4 - CONTROLS AND PROCEDURES
During the preparation of the consolidated financial statements for the year we expect to continue to borrow on our revolving credit facility to finance working capital and capital expenditure requirements. At Juneended September 30, 2008, we identified differences in the amounts of deferred and refundable income taxes in our books and records as compared to the amounts included in our income tax returns. To verify the amount and the nature of the difference, we elected to delay the filing of our annual report on Form 10-K. We concluded that the difference was related to an overstatement of our unrecognized tax liability and the related error in recording our liability for uncertain tax positions upon our adoption of FIN 48 on October 1, 2007, the beginning of our previous fiscal year. The failure to identify this difference and resulting error in adopting FIN 48 through our normal financial statement preparation process caused us to conclude that we had a balance onmaterial weakness in our line of credit of $1,244 with approximately $3,400 available to borrowaccounting for income taxes and $1,045 of cash on hand.
ITEM 4T - CONTROLS AND PROCEDURES
Based on their most recent evaluation, our Chief Executive Officer and Chief Financial Officer believe that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of June 30, 2008 to ensure that information required to be disclosed 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.
There was no significant change in our internal controls over financial reporting were not effective as of September 30, 2008. To prevent a recurrence of similar errors in future years, we plan to implement commercially available software that occurredwill accurately maintain and track the differences between financial reporting and tax return reporting. As of December 31, 2008, we had not yet implemented this software.
There were no other changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the first quarter of fiscal quarter ended June 30, 20082009 that hashave materially affected or isare reasonably likely to materially affect our internal control over financial reporting.
Under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2008 due to the difference described above and because we have not implemented, as of December 31, 2008, a commercially available software that will accurately maintain and track the differences between financial reporting and tax return reporting. There are inherent limitations to the effectiveness of systems of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective systems of disclosure controls and procedures can provide only reasonable assurances of achieving their control objectives.
PART II
ITEM 1A - RISK FACTORS
Noncompliance with debt covenants contained in our credit agreements that could adversely affect our ability to borrow under our credit agreements and could, ultimately render a substantial portion of our outstanding indebtedness immediately due and payable.
Certain of the Company’s credit agreements contain certain affirmative and negative financial covenants and which the Company expects will be difficult to comply with based on the Company’s current and expected financial condition and results of operations. A breach of any of these covenants or our inability to comply with any required financial ratios could result in a default under one or more credit agreements, unless we are able to remedy any default within any allotted cure period or obtain the necessary waivers or amendments to the credit agreements. Upon the occurrence of an event of default that is not waived, and subject to any appropriate cure periods, the lenders under the affected credit agreements could elect to exercise any of their available remedies, which may include the right to not lend any additional amounts to us or, in certain instances, to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable. If we are unable to repay the borrowings with respect to such credit facility when due the lenders could be permitted to proceed against their collateral. The election to exercise any such remedy could have a material adverse effect on our business and financial condition.
The Company’s inability to repay or refinance its revolving line of credit which expires in December, 2009.
Our revolving line of credit expires in December, 2009. If we cannot generate sufficient cash to repay that debt, or are unable to refinance all or a portion of such debt at times, and or terms, which are acceptable to us, we may have to take such actions as reducing or delaying capital investments, selling assets, restructuring or refinancing our debt or seeking additional capital through alternative sources. Any of these actions may not be able to be affected on commercially reasonable terms, or at all. In addition, our various credit agreements, which contain certain affirmative and negative financial and operating covenants, may restrict us from adopting any one or more of these alternatives. Our inability to repay or refinance our debt maturing during the next twelve months, or the violation of any covenants which may impair, restrict or limit our ability to do so, could have a material adverse effect on our financial condition and results of operations.
You should also carefully consider the risks described in our Annual Report on Form 10-K for the year ended September 30, 2008, including those controls.under the heading “Risk Factors” appearing in Item 1A of Part I of the Form 10-K and other information contained in this Quarterly Report before investing in our securities. Realization of any of these risks could have a material adverse effect on our business, financial condition, cash flows and results of operations.
PART II
ITEM 6 - EXHIBITS
(a) Exhibits:
Number | | | Description of Exhibits | | | Description of Exhibits |
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(2)(3) | 2.1 | | Asset Purchase Agreement, dated June 30, 2008, by and among Bioanalytical Systems, Inc., BASi Maryland, Inc., Algorithme Pharma USA Inc. and Algorithme Pharma Holdings Inc (incorporated by reference to Exhibit 2.1 of Form 8-K filed July 7, 2008). | 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). |
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(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). | |
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| 3.2 | | Second Amended and Restated Bylaws of Bioanalytical Systems, Inc., as subsequently amended (incorporated by reference to Exhibit 3.2 to Form 10-Q for the quarter ended March 31, 2007). | 3.2 | | Second Amended and Restated Bylaws of Bioanalytical Systems, Inc., as subsequently amended (filed herewith). |
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(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). | 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). |
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(10) | 10.1 | | Assignment and Assumption of Office Lease, dated June 30, 2008, between Bioanalytical Systems, Inc. and AP USA Algorithme Pharma USA Inc (incorporated by reference to Exhibit 10.1 of Form 8-K filed July 7, 2008). | |
| | 10.1 | | Severance Agreement and Release of All Claims between Edward M. Chait and Bioanalytical Systems, Inc., dated November 7, 2008 (incorporated by reference to Exhibit 10.29 to Form 10-K for the fiscal year ended September 30, 2008). |
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| | 10.2 | | Employment Agreement between Jon Brewer and Bioanalytical Systems, Inc., effective as of October 1, 2008 (incorporated by reference to Exhibit 10.1 to Form 8-K filed September 26, 2008). |
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| | 10.3 | | Employee Incentive Stock Option Agreement between Jon Brewer and Bioanalytical Systems, Inc., dated October 1, 2008 (incorporated by reference to Exhibit 10.35 to Form 10-K for the fiscal year ended September 30, 2008). |
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| | 10.4 | | Employment Agreement between Anthony S. Chilton and Bioanalytical Systems, Inc., dated December 1, 2008 (incorporated by reference to Exhibit 10.1 to Form 8-K filed November 14, 2008). |
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| | 10.5 | | Employee Incentive Stock Option Agreement between Anthony S. Chilton and Bioanalytical Systems, Inc., dated December 1, 2008 (incorporated by reference to Exhibit 10.36 to Form 10-K for the fiscal year ended September 30, 2008). |
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| | 10.6 | | Waiver letter, dated December 19, 2008, from National City Bank regarding the Second Amendment to Amended and Restated Credit Agreement by and between Bioanalytical Systems, Inc. and National City Bank (incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended September 30, 2008). |
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| | 10.7 | | Waiver letter, dated February 17, 2009, from Regions Bank (filed herewith). |
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(31) | 31.1 | | Certification of Richard M. Shepperd (filed herewith). | 31.1 | | Certification of Richard M. Shepperd (filed herewith). |
| | | | 31.2 | | Certification of Michael R. Cox (filed herewith). |
| 31.2 | | Certification of Michael R. Cox (filed herewith). | |
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(32) | 32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). | 32.1 | | Written Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith). |
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| 32.2 | | Certification of Executive Vice President, Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
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. |
| (Registrant) |
| |
Date: August 14, 2008February 23, 2009 | By: | /s/ /s/ Richard M. Shepperd |
| Richard M. Shepperd |
| President and Chief Executive Officer |
| |
Date: August 14, 2008February 23, 2009 | By: | /s/ /s/ Michael R. Cox |
| Michael R. Cox |
| Vice President, Finance and Administration, Chief Financial Officer and Treasurer |