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BASI > SEC Filings for BASI > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for BIOANALYTICAL SYSTEMS INC

Form 10-Q for BIOANALYTICAL SYSTEMS INC


14-Aug-2014

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Report and may include, but are not limited to, statements regarding our intent, belief or current expectations with respect to (i) our strategic plans; (ii) trends in the demand for our products and services; (iii) trends in the industries that consume our products and services; (iv) our ability to develop new products and services;
(v) our ability to make capital expenditures and finance operations; (vi) global economic conditions, especially as they impact our markets; (vii) our cash position; (viii) our ability to integrate a new sales and marketing team; (ix) our ability to service our outstanding indebtedness and (x) our expectations regarding the volume of new bookings, pricing, gross profit margins and liquidity. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward looking statements as a result of various factors, many of which are beyond our control.

In addition, we have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the assumptions on which the forward-looking statements contained herein are based are reasonable, actual events may differ from those assumptions, and as a result, the forward-looking statements based upon those assumptions may not accurately project future events. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included or incorporated by reference elsewhere in this Report. In addition to the historical information contained herein, the discussions in this Report may contain forward-looking statements that may be affected by risks and uncertainties, including those discussed in Item 1A, Risk Factors contained in our annual report on Form 10-K for the fiscal year ended September 30, 2013. Our actual results could differ materially from those discussed in the forward-looking statements.

The following amounts are in thousands, unless otherwise indicated.

General

We are an international contract research organization providing drug discovery and development services. Our clients and partners include pharmaceutical, biotechnology, academic and governmental organizations. We apply innovative technologies and products and a commitment to quality to help clients and partners accelerate the development of safe and effective therapeutics and maximize the returns on their research and development investments. We offer an efficient, variable-cost alternative to our clients' internal product development programs. Outsourcing development work to reduce overhead and speed drug approvals through the Food and Drug Administration ("FDA") is an established alternative to in-house development among pharmaceutical companies. We derive our revenues from sales of our research services and drug development tools, both of which are focused on determining drug safety and efficacy. The Company has been involved in the research of drugs to treat numerous therapeutic areas for over 40 years.

We support the preclinical and clinical development needs of researchers and clinicians for small molecule and large biomolecule drug candidates. Our scientists have the skills in analytical instrumentation development, chemistry, computer software development, physiology, medicine, analytical chemistry and toxicology to make the services and products we provide increasingly valuable to our current and potential clients. Our principal clients are scientists engaged in analytical chemistry, drug safety evaluation, clinical trials, drug metabolism studies, pharmacokinetics and basic research at many of the small start-up biotechnology companies and the largest global pharmaceutical companies.

Our business is largely dependent on the level of pharmaceutical and biotechnology companies' efforts in new drug discovery and approval. Our services segment is a direct beneficiary of these efforts, through outsourcing by these companies of research work. Our products segment is an indirect beneficiary of these efforts, 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.

Developments within the industries we serve have a direct, and sometimes material, impact on our operations. Currently, many large pharmaceutical companies have major "block-buster" drugs that are nearing the end of their patent protections. This puts significant pressure on these companies both to develop new drugs with large market appeal, and to re-evaluate their cost structures and the time-to-market of their products. Contract research organizations ("CRO's") have benefited from these developments, as the pharmaceutical industry has turned to out-sourcing to both reduce fixed costs and to increase the speed of research and data development necessary for new drug applications. The number of significant drugs that have reached or are nearing the end of their patent protection has also benefited the generic drug industry. Generic drug companies provide a significant source of new business for CROs as they develop, test and manufacture their generic compounds.

A significant portion of innovation in the pharmaceutical industry is now being driven by biotech and small, venture capital funded, drug development companies. Many of these companies are "single-molecule" entities, whose success depends on one innovative compound. While several of the biotech companies have reached the status of major pharmaceuticals, the industry is still characterized by smaller entities. These developmental companies generally do not have the resources to perform much of the research within their organizations, and are therefore dependent on the CRO industry for both their research and for guidance in preparing their FDA submissions. These companies have provided significant new opportunities for the CRO industry, including us. They do, however, provide challenges in selling, as they frequently have only one product in development, which causes CROs to be unable to develop a flow of projects from a single company. These companies may expend all their available funds and cease operations prior to fully developing a product. Additionally, the funding of these companies is subject to investment market fluctuations, which changes as the risk profiles and appetite of investors change.

Research services are capital intensive. The investment in equipment and facilities to serve our markets is substantial and continuing. While our physical facilities are adequate to meet market needs for the near term, rapid changes in automation, precision, speed and technologies necessitate a constant investment in equipment and software to meet market demands. We are also impacted by the heightened regulatory environment and the need to improve our business infrastructure to support our increasingly diverse operations, which will necessitate additional capital investment. Our ability to generate capital to reinvest in our capabilities, both through operations and financial transactions, is critical to our success. While we are currently committed to fully utilizing capacity, sustained growth will require additional investment in future periods. Our financial position could limit our ability to make such investments.

Executive Overview

Our revenues are dependent on a relatively small number of industries and clients. As a result, we closely monitor the market for our services. In the first nine months of fiscal 2014, we experienced an increase in the demand for our services as compared to the first nine months of fiscal 2013 resulting in higher levels of new orders. We believe in the fundamentals of the market. For the remainder of fiscal 2014, we plan to focus on sales execution, operational excellence and building strategic partnerships with pharmaceutical and biotechnology companies, to differentiate our company and create value for our clients and shareholders.

We review various metrics to evaluate our financial performance, including revenue, margins and earnings. In the first nine months of fiscal 2014, we had a 9.6% increase in revenues over the same period in fiscal 2013. Gross profit and operating income also increased in the first nine months of the current fiscal year compared to the prior fiscal year period by 19.3% and 12.4%, respectively. The improved margins and earnings were due to the revenue increase as well as dedication to cost monitoring. For a detailed discussion of our revenue, margins, earnings and other financial results for the nine months ended June 30, 2014, see "Results of Operations" below.

As of June 30, 2014, we had $736 of cash and cash equivalents as compared to $1,304 of cash and cash equivalents at the end of fiscal 2013. In the first nine months of fiscal 2014, we generated $1,215 in cash from operations partially due to the higher operating income we reported in the first nine months of fiscal 2014 versus the first nine months of fiscal 2013. Total capital expenditures were $343 in fiscal 2014, as compared to $5 of cash provided by investing activities for fiscal 2013 due to proceeds from the sale of equipment. We successfully paid off our line of credit in January 2014 and, on May 14, 2014, we entered into a new Credit Agreement with The Huntington National Bank ("Huntington") for both a replacement term loan and a new revolving line of credit. We are poised for increased capacity utilization and potential strategic growth and are focused on continuing to improve our cash flow from operations in the remainder of fiscal 2014.

We believe that the development of innovative new drugs is going through an evolution, evidenced by the significant reduction of expenditures on research and development at several major international pharmaceutical companies, accompanied by increases in outsourcing and investments in smaller start-up companies that are performing the early development work on new compounds. Many of these smaller companies are funded by either venture capital or pharmaceutical investment, or both, and generally do not build internal staffs that possess the extensive scientific and regulatory capabilities to perform the various activities necessary to progress a drug candidate to the filing of an Investigative New Drug ("IND") application with the FDA.

While continuing to maintain and develop our relationships with large pharmaceutical companies, we intend to aggressively promote our services to developing businesses, which will require us to expand our existing capabilities to provide services early in the drug development process, and to consult with clients on regulatory strategy and compliance leading to their FDA filings. We have recently launched our Enhanced Drug Discovery services as part of this strategy, utilizing our proprietary Culex® technology to provide early experiments in our laboratories that previously would have been conducted in the sponsor's facilities. As we move forward, we must balance the demands of the large pharmaceutical companies with the personal touch needed by smaller biotechnology companies to develop a competitive advantage. We intend to accomplish this through the use of and expanding upon our existing project management skills, strategic partnerships and relationship management.

Our long-term strategic objective is to maximize the Company's intrinsic value per share. While we remain focused on reducing our costs through productivity and better processes and a continued emphasis on generating free cash flow, we are dedicated to the strategies that drive our top-line growth. We are intensifying our efforts to improve our processes, embrace change, and wisely employ our stronger liquidity position. We will continue to take actions to make BASi a stronger company.

For the remainder of fiscal 2014, we will focus on growing our revenues and continue initiatives to control costs and improve productivity to further reduce our break-even point and achieve our financial objectives. We expect to see improvement in the volume of new bookings in fiscal 2014 along with maintaining improved gross profit margins.

Results of Operations



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



                                      Three Months Ended          Nine Months Ended
                                           June 30,                    June 30,
                                       2014          2013         2014          2013

Service revenue                           78.8 %       74.2 %        78.2 %       75.4 %
Product revenue                           21.2         25.8          21.8         24.6
Total revenue                            100.0        100.0         100.0        100.0

Cost of service revenue (a)               70.8         69.7          70.6         76.1
Cost of product revenue (a)               53.2         46.4          50.4         46.8
Total cost of revenue                     67.1         63.7          66.2         68.9

Gross profit                              32.9         36.3          33.8         31.1

Total operating expenses                  28.7         28.5          29.3         26.7

Operating income                           4.2          7.8           4.5          4.4

Other income (expense)                    (0.9 )        2.8          (8.2 )       (1.1 )

Income (loss) before income taxes          3.3         10.6          (3.7 )        3.3

Income tax (benefit) expense              (0.3 )        0.3           0.0          0.1

Net income (loss)                          3.6 %       10.3 %        (3.7 )%       3.2 %

(a) Percentage of service and product revenues, respectively

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Service and Product Revenues

Revenues for the fiscal quarter ended June 30, 2014 increased 7.7% to $6,032 compared to $5,600 for the same period last year.

Our Service revenue increased 14.4% to $4,754 in the current quarter compared to $4,156 for the prior year period primarily as a result of higher toxicology and other laboratory services revenues partially offset by lower bioanalytical analysis revenues. Toxicology revenues increased due to an increase in the volume of new orders while bioanalytical analysis revenues in our third fiscal quarter of 2014 were negatively impacted by studies delayed by clients and fewer samples received

                                       Three Months Ended
                                            June 30,
                                        2014          2013       Change         %
         Bioanalytical analysis      $    1,573      $ 2,264     $  (691 )     -30.5 %
         Toxicology                       2,521        1,314       1,207        91.9 %
         Other laboratory services          660          578          82        14.2 %

Sales in our Products segment decreased 11.5% in the current fiscal quarter from $1,444 to $1,278 when compared to the same period in the prior fiscal year. The majority of the decrease stems from lower sales of our Culex automated in vivo sampling systems compared to the same period in the prior fiscal year.

                                           Three Months Ended
                                                June 30,
                                          2014            2013        Change         %
     Culex®, in-vivo sampling systems   $     555       $     659     $  (104 )     -15.8 %
     Analytical instruments                   556             542          14         2.6 %
     Other instruments                        167             243         (76 )     -31.3 %

Cost of Revenues

Cost of revenues for the current quarter was $4,048 or 67.1% of revenue, compared to $3,568, or 63.7% of revenue for the prior year period.

Cost of Service revenue as a percentage of Service revenue increased slightly to 70.8% in the current quarter from 69.7% in the comparable period last year. This increase was due to slightly higher costs in our Toxicology site for increased use of outside scientific professional services and higher overtime pay as the site is conducting a higher volume of studies in the current quarter.

Cost of Products revenue as a percentage of Product revenue in the current quarter increased to 53.2% versus 46.4% from the comparable prior year period. The increase is mainly due to the mix of products sold and the rise in raw material costs.

Operating Expenses

Selling expenses for the three months ended June 30, 2014 increased 25.9% to $399 from $317 for the comparable period last year. This increase stems from higher personnel related expenses in the current quarter as compared to the same period in fiscal 2013. We hired new sales employees in our third quarter of fiscal 2013.

Research and development expenses for the third quarter of fiscal 2014 increased 34.7% over the comparable period last year to $167 from $124. The increase was primarily due to new employees and increased utilization of outsourced professional engineering services in the current quarter.

General and administrative expenses for the current quarter increased only 0.8% to $1,162 from $1,153 for the comparable prior year period. Building repairs, corporate insurance and employee search fees were higher in the current quarter.

Other Expense

Other expense (income) for the current fiscal quarter increased to $56 from ($156) for the same quarter of the prior fiscal year.The primary reason for the change is the change in the fair value of the warrant liability, including warrant exercises, partially offset by lower interest expense in fiscal 2014 due to the payoff of the Entrepreneur Growth Capital LLC line of credit and the more favorable interest rates under the credit facility with Huntington described under New Credit Facility below.

Income Taxes

Our effective tax rate for the quarters ended June 30, 2014 and 2013 was (7.5%) and 3.0%, respectively. No net benefits have been provided on taxable losses in the current fiscal year. We continue to maintain a full valuation allowance on our U.S. and UK subsidiary deferred income tax balances.

Nine Months Ended June 30, 2014 Compared to Nine Months Ended June 30, 2013

Service and Product Revenues

Revenues for the nine months ended June 30, 2014 increased 9.7% to $18,164 compared to $16,560 for the same period last year.

Our Service revenue increased 13.6% to $14,196 in the first nine months of fiscal 2014 compared to $12,493 for the prior year period primarily as a result of higher toxicology and other laboratory services revenues partially offset by lower bioanalytical analysis revenues. Toxicology and other laboratory services revenues increased due to an increase in the volume of new orders. Bioanalytical analysis revenues were negatively impacted by study cancellations by clients, a lower number of samples assayed as well as more time spent on method development and validations, which have lower revenues.

                                        Nine Months Ended
                                             June 30,
                                         2014         2013       Change         %
          Bioanalytical analysis      $    5,262     $ 6,197     $  (935 )     -15.1 %
          Toxicology                       6,939       4,667       2,272        48.7 %
          Other laboratory services        1,995       1,629         366        22.5 %

Sales in our Products segment decreased 2.4% in the first nine months of fiscal 2014 from $4,067 to $3,968 when compared to the same period in the prior fiscal year. The majority of the decrease stems from lower sales of analytical products and a decrease in hardware maintenance and service.

                                     Nine Months Ended
                                          June 30,
                                      2014         2013       Change         %
Culex®, in-vivo sampling systems   $    1,812     $ 1,658     $   154         9.3 %
Analytical instruments                  1,568       1,730        (162 )      -9.4 %
Other instruments                         588         679         (91 )     -13.4 %

Cost of Revenues

Cost of revenues for the first nine months of fiscal 2014 was $12,023 or 66.2% of revenue, compared to $11,414, or 68.9% of revenue for the prior year period.

Cost of Service revenue as a percentage of Service revenue decreased to 70.6% in the first nine months of fiscal 2014 from 76.1% in the comparable period of the prior year. The principal cause of this decrease was the increase in service revenues which led to higher absorption of the fixed costs in our Service segment. A significant portion of our costs of productive capacity in the Service segment are fixed. Thus, increases in revenues lead to decreases in costs as a percentage of revenue.

Cost of Products revenue as a percentage of Product revenue in the first nine months of fiscal 2014 increased to 50.4% from 46.8% in the comparable prior year period. This increase is mainly due to a change in the mix of products sold and increases in raw material costs in the first nine months of fiscal 2014 .

Operating Expenses

Selling expenses for the nine months ended June 30, 2014 increased 34.3% to $1,315 from $979 for the comparable period last year. This increase stems mainly from hiring new sales employees in the second half of fiscal 2013.

Research and development expenses for the first half of fiscal 2014 increased 44.6% over the comparable period of prior year to $480 from $332. The increase was primarily due to personnel costs of new employees and increased utilization of outsourced professional engineering services in the current year.

General and administrative expenses for the first half of fiscal 2014 increased 13.5% to $3,523 from $3,103 for the comparable prior year period. The increase stems mainly from outside services and consulting expenses to repair and maintain multiple building services during the unusually harsh winter as well as higher utilities costs and employee search fees in the current year.

Other Expense

Other expense for the first nine months of fiscal 2014 increased to $1,497 from $193 for the same period of the prior fiscal year.The primary reason for the increase is the change in the fair value of the warrant liability, including warrant exercises, offset slightly by lower interest expense in fiscal 2014 due to the payoff of the Entrepreneur Growth Capital LLC line of credit and the more favorable interest rates under the credit facility with Huntington described under New Credit Facility below.

Income Taxes

Our effective tax rate for the nine months ended June 30, 2014 and 2013 was 1.2% and 3.5%, respectively. No net benefits have been provided on taxable losses in the current fiscal year. We continue to maintain a full valuation allowance on our U.S. and UK subsidiary deferred income tax balances.

Restructuring Activities

In March 2012, we announced a plan to restructure our bioanalytical laboratory operations. We consolidated our laboratory in McMinnville, Oregon into our 120,000 square foot headquarters facility in West Lafayette, Indiana. This plan was implemented to reduce operating costs and strengthen our ability to meet clients' needs by improving laboratory utilization. In the fourth fiscal quarter of 2012, we decided to initiate closure of our facility and bioanalytical laboratory in Warwickshire, United Kingdom after careful evaluation of its financial performance and analysis of our strategic alternatives. We continue to sell our products globally while further consolidating delivery of our CRO services into our Indiana locations. As part of the overall evaluation of our business, personnel reductions in the Selling, R&D and General and Administrative functions were also implemented at both of our Indiana locations during the second half of fiscal 2012. In total, 74 employees were terminated as part of the restructuring activities in fiscal 2012.

We reserved for lease payments at the cease use date for our UK facility and have considered free rent, sublease rentals and the number of days it would take to restore the space to its original condition prior to our improvements. In the first quarter of fiscal 2013, we began amortizing into general and administrative expense, equally through the cease use date, the estimated rent income of $200 when the reserve was originally established. We have been unsuccessful at subleasing the facility. Based on these factors, we have $941 reserved for UK lease related costs.

The following table sets forth the rollforward of the restructuring activity for the nine months ended June 30, 2014.

                                 Balance,                                                              Balance,
                               September 30,          Total             Cash                           June 30,
                                   2013              Charges          Payments           Other           2014
One-time termination
benefits                      $             -     $           -     $           -     $         -     $         -
Lease related costs                       877                 -                 -              64             941
Equipment moving costs and
method transfers                            -                 -                 -               -               -
Travel and relocation costs                 -                 -                 -               -               -
Loss on sale of equipment                 (16 )               -                 -              16               -
Other costs                               117                 -                 -               -             117
                      Total   $           978     $           -     $           -     $        80     $     1,058

Other costs include legal and professional fees and other costs incurred in connection with transitioning services from sites being closed as well as costs incurred to remove improvements previously made to the UK facility. Other activity in the reserve rollforward primarily reflects a receivable for settlement of the capital lease in the UK.

Liquidity and Capital Resources

Comparative Cash Flow Analysis

At June 30, 2014, we had cash and cash equivalents of $736, compared to $1,304 at September 30, 2013.

Net cash provided by operating activities was $1,215 for the nine months ended June 30, 2014, compared to $1,418 for the nine months ended June 30, 2013. The decrease in cash provided by operating activities in the current year partially results from increases in inventory and prepaid expenses in the current year versus the prior year. Other factors contributing to our cash from operations for the first nine months of fiscal 2014 were noncash charges of $1,195 for depreciation and amortization and an increase in the fair value of warrant liability of $1,095 as well as a decrease in accounts receivable of $361, offset by a decrease in accounts payable of $166, along with a decrease in accrued expenses of $357. Included in operating activities for the first nine months of fiscal 2013 are non-cash charges of $1,313 for depreciation and amortization, a net decrease in accounts receivable of $942, offset slightly by cash paid during the year for restructuring activities of $546 and a net decrease in customer advances of $635.

Investing activities used $343 in the first nine months of fiscal 2014 due to capital expenditures as compared to $5 provided by investing activities in the first nine months of fiscal 2013. Our principal investments were for laboratory . . .

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