Revenues for the third fiscal quarter ended June 30, 2006 declined 11% to $10.0 million compared to $11.3 million for the third fiscal quarter last year. Of the $1.3 million decline, Service revenue decreased $1.1 million, comprised of decreases of $1 million each in our Baltimore clinic and our bioanalytical laboratories, offset by a $1 million increase in our toxicology facility and $336,000 of new revenues in our pre-clinical pharmacokinetics/pharmacodynamics (“PKPD”) facility, which began commercial operation this year. The Baltimore clinic was impacted by the acquisition of our largest client for the clinic and subsequent cancellation of its scheduled work, in addition to postponement of a contract pending FDA clearance. Our laboratories experienced a decline in samples processed compared to the prior year when larger contracts resulted in longer production runs, as well as a decline in price per sample due to the nature of the assays. Our toxicology unit continued to experience strong demand for its services, particularly among smaller biotech and discovery clients. Our PKPD unit has experienced good market acceptance of its services, where we employ our proprietary Culex® technology to provide early stage preclinical contract studies for our clients. The decline in product revenue was the result of a decline in Culex® shipments compared to the same quarter last year.
Cost of revenues for the fiscal quarter ended June 30, 2006 was $7.5 million or 75% of revenue compared to $6.3 million, or 56% of revenue for the third fiscal quarter last year. This increase in cost of revenues is a result of several factors. We have experienced increases in our costs in our toxicology and PKPD operations, where we have experienced increased revenues, while maintaining our capabilities in our laboratories and Baltimore clinic in anticipation of restoring activities to prior levels. Additionally, our revenue growth in toxicology resulted in those revenues being a higher proportion of our total revenues, and as a result of a higher percentage cost of revenues in those services than in our laboratory operations, our overall cost of services increased on a percentage basis. Our product costs are up due to increasing sales of consumable products related to our Culex® units, which have lower margins than the units themselves, and to lower utilization of our manufacturing capacity, which results in excess capacity being charged to cost of product revenue. In both our Service and Product Segments, the percentage costs increased relative to sales due to the relatively fixed nature of our costs being carried by a reduced level of sales and increased head count in our production facilities.
Operating Expenses
Selling expenses for the three months ended June 30, 2006 decreased 13% to $625,000 from $718,000 for the three months ended June 30, 2005. Our sales expenses declined due to the timing of incidental expenses related to our sales force (year-to-date expenditures are up 6%). Research and development expenses of $350,000 for the three months ended June 30, 2006 compared to $261,000 for the three months ended June 30, 2005 and are a result of continuing research on products to support pre-clinical and clinical research.
General and administrative (“G&A”) for the three months ended June 30, 2006 were impacted by the write-down of intangible assets related to our Baltimore clinical research unit of $958,000 as a result of our determination that those values have been impaired, and by recognition of a bad debt related to the same location of $231,000. Other items included in G&A expenses for the three months ended June 30, 2006 decreased $500,000. The principal reasons for this were a reduction of expenses in Baltimore related to our relocated laboratory and cost controls there, coupled with translation expenses charged to G&A in our UK operation last year from a weak pound sterling, compared to translation gains this year.
Other Income/Expense
Interest expense increased 9% to $272,000 in the three months ended June 30, 2006 from $250,000 in the comparable quarter of the prior year. This increase is due to our periodic use of our revolving line of credit, which is a floating interest rate that has been consistently higher in the current quarter compared to a year ago, as well as the financing of additional laboratory equipment utilizing capital leases.
Income Taxes
We computed our tax provision using an effective tax rate for both the three months ended June 30, 2006 and for the three months ended June 30, 2005 of 40% on the US taxable income. On the adjustment of intangible assets related to our Baltimore operation, we provided a benefit of 35% of the adjustment, as we are not assured of a state tax benefit. In the current quarter, we had a profit of $80,000 on foreign operations for which we have loss carryforwards and therefore provided no taxes, and recorded $71,000 of stock option expenses for which we took no tax benefit. In the three months ended June 30, 2005 we provided taxes at the same rate on US taxable income, and did not record a benefit for our foreign loss, resulting in an effective tax rate above the statutory rate
Net Income
As a result of the above factors, we lost $1,675,000 ($.34 per share, both basic and diluted) in the quarter ended June 30, 2006, compared to net income of $356,000 ($.07 per share, both basic and diluted) in the same period last year.
Nine Months Ended June 30, 2006 Compared to Nine Months Ended June 30, 2005
Service and Product Revenues
Revenues for the nine months ended June 30, 2006 increased 7% to $32.3 million compared to $30.1 million for the first nine months 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 cited in the current quarter.
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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. Also included in the increase are additional facilities expense in Baltimore of approximately $250,000 in the current year from the sale/leaseback of the facility in January, 2005, increases in our insurance costs, and the addition of a senior officer in the current year.
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 comparable 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 result 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 preparation of our financial statements for the fiscal quarter ended June 30, 2006, we have determined that there is a permanent impairment of value of the intangible assets acquired, and have recorded a charge to 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.
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LIQUIDITY AND CAPITAL RESOURCES
Since its inception, BASi’s principal sources of cash have been cash flow generated from operations and funds received from bank borrowings and other financings. At June 30, 2006 we had cash of $777,000, compared to cash of $1,254,000 at September 30, 2005. Approximately 50% 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 provided by operating activities was $2.6 million for the nine months ended June 30, 2006. This was the result of collections against our receivables, and reduced investment in our inventories, offset by working down the balances in customer deposits.
We utilized this cash from operations to finance $1.3 million of capital asset additions, principally upgrading of facilities in our toxicology and clinical research units. Additionally we repaid $1.9 million of 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.
Capital Resources
We have outstanding an irrevocable letter of credit issued to secure the lease of our Baltimore facility. The letter of credit is for $2.0 million currently, reducing to $1.0 million in January, 2007 and expiring in January, 2008.
The letter of credit reduces the amount of funds 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.
We do not expect to have any significant additional capital additions in the current fiscal year. We are currently in our planning cycle for our next fiscal year beginning October 1, 2006, and anticipate our additions for next year to be approximately $2.0 million (none of which has currently been committed). We have not completed arrangements for financing these additions, but anticipate a combination of debt, leasing and utilization of operating cash flow.
Liquidity
We do not foresee the need to borrow extensively under our revolving credit agreement to finance current operations, except for periods when rapid growth of new business may necessitate amounts to finance the buildup of receivables and inventory. Nevertheless, continuation of operating results similar to those experienced in the quarter ended June 30, 2006 would negate our currently positive operating cash flow, and impact our ability to obtain additional financing. Historically, we have experienced significantly varying results from quarter to quarter as a result of the timing of the award and performance of sizable contracts, and we expect that pattern to continue.
At June 30, 2006, we had $777,000 in cash, and approximately $3 million of available borrowings under our revolving credit facility.
Our revolving line of credit expires December 31, 2007. The maximum amount available under the terms of the agreement is $6.0 million with outstanding borrowings limited to the borrowing base as defined in the agreement. Interest accrues monthly on the outstanding balance at the bank’s prime rate to prime rate plus 25 basis points, or at the Eurodollar rate plus 250 to 300 basis points, at our election, depending upon the ratio of our interest bearing indebtedness (less subordinated debt) to EBITDA. We pay a fee equal to 25 basis points on the unused portion of the line of credit.
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. As a result of the loss in the three months ended June 30, 2006, we did not meet our fixed charge coverage ratio for the quarter. Our bank has waived this event of non-compliance.
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We are required to make cash payments in the future on debt and lease obligations. The following table summarizes BASi’s contractual term debt, lease obligations and other commitments at June 30, 2006 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (amounts presented for 2006 are those items required in the final quarter), for the fiscal years ending September 30(in thousands):
| 2006
| | 2007
| | 2008
| | 2009
| | 2010
| | After 2010
| | Total
|
|---|
| Capital expenditures | | | $ | 250 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 250 | |
| Mortgage notes payable | | | | 86 | | | 362 | | | 384 | | | 407 | | | 431 | | | 6,963 | | | 8,633 | |
| Subordinated debt | | | | — | | | 360 | | | 4,359 | | | 118 | | | — | | | — | | | 4,837 | |
| Capital lease obligations | | | | 133 | | | 472 | | | 510 | | | 557 | | | 453 | | | 128 | | | 2,253 | |
| Operating leases | | | | 527 | | | 1,846 | | | 387 | | | 10 | | | — | | | — | | | 2,770 | |
|
| |
| |
| |
| |
| |
| |
| |
| | | | $ | 996 | | $ | 3,040 | | $ | 5,640 | | $ | 1,092 | | $ | 884 | | $ | 7,091 | | $ | 18,743 | |
|
| |
| |
| |
| |
| |
| |
| |
For further details on our indebtedness, see Note 7 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended September 30, 2005.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
BASi’s primary market risk exposure with regard to financial instruments is changes in interest rates. Borrowings under the credit agreement between BASi and National City Bank dated January 4, 2005 bear interest at a rate of either the bank’s prime rate to prime plus 25 basis points, or at the Eurodollar rate plus 250 to 300 basis points, depending in each case upon the ratio of BASi’s interest-bearing indebtedness (less subordinated debt) to EBITDA, at BASi’s option. We have taken steps to fix the interest rate on a significant amount of our debt through May, 2007. Historically, BASi has not used derivative financial instruments to manage exposure to interest rate changes. BASi estimates that a hypothetical 10% adverse change in interest rates would not affect the consolidated operating results of BASi by a material amount.
BASi operates internationally and is, therefore, subject to potentially adverse movements in foreign currency exchange rates. The effect of movements in the exchange rates was not material to the consolidated operating results of BASi in fiscal years 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. 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, 2006 to ensure that information required to be disclosed by the Company in this Form 10-Q was recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. As disclosed in its annual report on form 10-K for the fiscal year ended September 30, 2005, the Company implemented new systems in its prior fiscal year. Although the Company continues in the development of these new systems, the Chief Executive Officer and Chief Financial Officer believe that implementation of these new accounting systems now allow the Company to record, process, summarize and report accounting information to timely file its Exchange Act reports.
There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 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. Pursuant to the instructions to Item 2.06 of Form 8-K, the information required by such Item is included in the Management's Discussion and Analysis of Financial Condition and Results of Operations above. Please see the heading Results of Operations — Impairment Loss on Intangible Assets and Goodwill, which information is incorporated herein by this reference.
ITEM 6. EXHIBITS
Exhibits
Number assigned
in Regulation S-K
Item 601 | Description of Exhibits |
| (3) | 3.1 | Second Amended and Restated Articles of Incorporation of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended December 31, 1997). |
| 3.2 | Second Restated Bylaws of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.2 Form 10-Q for the quarter ended December 31, 1997). |
| (4) | 4.1 | Specimen Certificate for Common Shares (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-36429). |
| (31) | 31.1 | Certification of Peter T. Kissinger + |
| 31.2 | Certification of Michael R. Cox + |
| (32) | 32.1 | Section 1350 Certifications + |
| (99) | 99.1 | Risk factors (incorporated by reference to Exhibit 99.1 to Form 10-K for the year ended September 30, 2005). |
† Filed with this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
BIOANALYTICAL SYSTEMS, INC.
By: /s/ PETER T. KISSINGER
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
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