This report contains statements that constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Those 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 successfully integrate the operations and
personnel of Seventh Wave, Smithers Avanza, and Pre-Clinical Research Services;
(ix) our ability to effectively manage current expansion efforts in Evansville
and any future expansion or acquisition initiatives undertaken by the Company;
(x) our ability to develop and build infrastructure and teams to manage growth
and projects; (xi) our ability to continue to retain and hire key talent; (xii)
our ability to market our services and products under relevant brand names;
(xiii) our ability to service our outstanding indebtedness, (xiv) our
expectations regarding the volume of new bookings, pricing, gross profit margins
and liquidity and (xv) the impact of COVID-19 on the economy, demand for our
services and products and our operations, including the measures taken by
governmental authorities to address the pandemic, which may precipitate or
exacerbate other risks and/or uncertainties. Readers are cautioned that
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 herein and in our annual report on Form 10-K for the fiscal
year ended September 30, 2019. Our actual results could differ materially from
those discussed in the forward-looking statements.
Amounts in this Item 2 are in thousands, unless otherwise indicated.
Recent Developments and Executive Summary
During recent periods, we have undertaken significant internal and external
growth initiatives. We acquired the business of Seventh Wave Laboratories, LLC,
in July 2018 (the "Seventh Wave Acquisition"), undertook the expansion of our
facilities in Evansville, Indiana, which we began using for operations in March
of 2020, acquired the toxicology business of Smithers Avanza on May 1, 2019 (the
"Smithers Avanza Acquisition"), acquired the preclinical testing business of
Pre-Clinical Research Services, as well as related real property, on December 1,
2019 (the "PCRS Acquisition"), and obtained funding to support these initiatives
and other improvements to our laboratories, facilities and equipment in order to
support future growth and enhance our scientific capabilities, client service
offerings and client experiences. In addition we have made significant
investments in upgrading facilities and equipment, added additional services to
provide our clients and filled critical leadership and scientific positions.
Over the last nine months, we have also improved our infrastructure and platform
to support future growth and additional potential acquisitions. These
improvements included establishing the new trade name and brand Inotiv for our
combined service businesses, installing new accounting software systems,
investments in our information technology platforms, building program management
functions to enhance management and communication with clients and multi-site
programs, further enhancements to client services and improving the client
experience. We believe these internal infrastructure initiatives, investments,
acquisitions and recruiting efforts, combined with our existing team and the
continuing development of our sales and marketing team, have led and will
continue to lead to growth in revenue and the ability to improve the service
offerings to our clients. We recognize the recent investments in growth,
continuing development of a strong leadership team, improving our platform,
recruiting new employees, enhancing and building our scientific strength and
adding services are critical to meeting the future expectations of our clients,
employees and shareholders. We believe the actions taken and investments made in
recent periods form a solid foundation upon which we can build.
Our financial results for the first nine months of fiscal 2020 were positively
impacted by increases in sales and gross margins from the acquisitions and
internal growth the Company has experienced in the Service business. However,
the Company did experience program delays and postponements that impacted
revenue due to the COVID-19 pandemic, which also impacted earnings. We saw an
increase in corporate expenses as a result of continuing to use outside services
to support building our infrastructure and systems, the introduction of our new
trade name and brand Inotiv, recruiting, acquisitions, refinancings and changes
in accounting policies. In addition, the financial results were negatively
impacted by reduced sales for the Products segment of the business. The Products
business serves universities as well as other customers. We saw a reduction of
orders from universities as they closed and reduced purchasing due to the
COVID-19 pandemic.
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Notwithstanding the COVID-19 pandemic, we have maintained our operations. As
part of the "essential critical infrastructure" industry, we believe we have a
special responsibility to maintain business continuity and a normal work
schedule to the greatest extent practicable. We are doing the important work of
supporting our clients in their efforts towards drug discovery and development,
including working with multiple clients, at our multiple sites, on a variety of
therapy or vaccine candidates for COVID-19 and many other lifesaving medicines.
Our team has implemented measures to promote a safe working environment and
mitigate risk related to COVID-19, including allowing for work from home
arrangements where possible, while continuing to support each other and our
clients. Among other initiatives related to COVID-19, the Company applied for
and accepted funds from the SBA Payroll Protection Program ("PPP") as part of
the CARES Act. The PPP loan was received in April, 2020 in the amount of $5,051.
The funds were used over the 8 weeks following the receipt of the funds for
payroll, utility and rent expenses, in step with our business continuity
measures and as allowed under the PPP. The Company will seek the forgiveness of
the debt when allowed to do so. This debt is recorded as a liability on the
balance sheet.
On a more general level, we continue to work on the integration of our combined
businesses and added services. We plan to further develop our infrastructure,
project management, sales, marketing, client services and branding. We will
continue to evaluate additional internal and external growth opportunities and
new services to provide to existing clients. We will also continue our efforts
to recruit and retain talented people and make investments to develop existing
services into "Centers of Excellence" to distinguish our services in the
industry.
Business Overview
The Company provides contract research services to pharmaceutical, agrochemical
and medical device companies, biomedical research organizations and
government-sponsored research centers. The Company integrates innovative
laboratory services into its consultative practice to support clients' drug
discovery and development objectives for improved decision-making in toxicology,
metabolism and disposition and regulated bioanalysis. Our manufacture of
scientific instruments and related software for life sciences research also
creates innovative solutions for clients. Our clients are located throughout the
world. We derive our revenues from sales of our research services and drug
development instruments, both of which are primarily focused on evaluating drug
safety and efficacy.
We support both the non-clinical and clinical development needs of researchers
and clinicians primarily for small molecule drug candidates, but also including
chemical products and biomedical devices. We believe our scientists have the
skills in analytical instrumentation development, chemistry, computer software
development, histology, pathology, physiology, medicine, analytical chemistry,
drug disposition 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
from small start-up biotechnology companies to many of the largest global
pharmaceutical companies. We are committed to bringing scientific expertise,
quality and speed to every drug discovery and development program to help our
clients develop safe and effective life-changing medicines and medical devices.
Our business is largely dependent on the level of pharmaceutical and
biotechnology companies' efforts in new drug discovery and approval. Our
contract research services segment is a direct beneficiary of these efforts,
through outsourcing of research work by these companies. 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 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 "blockbuster" drugs that have or are nearing the end of
their patent protections. This puts significant pressure on these companies both
to develop new drugs with large market opportunity, and to re-evaluate their
cost structures and the time-to-market of their products. Contract research
organizations have benefited from these developments, as the industries we serve
have turned to out-sourcing to both reduce fixed costs and to increase the speed
of research and data development necessary for new drug and device applications.
The number of significant drugs or devices 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.
We also believe that the development of innovative new drugs is evolving,
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 discovery and 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 skills required to perform
the various activities necessary to progress a drug candidate to the filing of
an Investigational New Drug application with the FDA.
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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 biotech companies have reached the status
of major pharmaceutical companies, 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 regulatory submissions. These companies have provided
significant new opportunities for the CRO industry, including the Company. We
believe that the Company is ideally positioned to serve these clients as they
look for alternatives to the large CROs that cater primarily to the large
pharmaceutical company segment of the marketplace.
While continuing to maintain and develop our relationships with large
pharmaceutical companies, we aggressively promote our services to developing
businesses, which will require us to expand our existing capabilities to provide
services early in the drug discovery and development phases, and to consult with
clients on regulatory strategy and compliance leading to their FDA filings. Our
Enhanced Drug Discovery services, part of this strategy, utilizes 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 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.
Research services are capital intensive. The investment in equipment, facilities
and human capital to serve our markets is substantial and continuing. 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 operations, which will necessitate
additional capital investment. Our ability to generate capital to reinvest in
our capabilities and to obtain additional capital if and as needed through
financial transactions is critical to our success. Sustained growth will require
additional investment in future periods. Positive cash flow and access to
capital will be important to our ability to make such investments.
Over the last two years, we were able to see our new vision start to come to
fruition as we addressed deferred maintenance issues, made strategic investments
in new equipment, recruited critical leadership positions and scientists and
obtained additional financing which allowed us to complete multiple acquisitions
and expansions of existing facilities. Our goals included increasing revenue on
a consistent basis while investing and adding talent, capacity and complementary
services.
With the acquisitions and expansion efforts, we have significantly grown our
active client base, enhanced client service offerings and have added significant
capacity. In addition, the combined operations provide an opportunity to develop
and integrate support services, leverage purchasing opportunities, leverage our
sales and marketing efforts, and leverage relevant software.
During the last two years we have incurred significant non recurring expenses
related to (i) building infrastructure and systems; (ii) recruiting; (iii) due
diligence related to acquisitions; (iv) professional fees related to
acquisitions, financings and expansions; (v) expenses related to the integration
of the acquisitions; (vi) marketing expenses related to our name change and a
new brand, image and web site and (vi) professional fees related to adopting two
new accounting standards. These have been expensed as incurred.
Our long-term strategic objectives are to be a Company people want to be a part
of that is respected by clients for its excellence in service, products and
performance, and to maximize the Company's intrinsic value per share. Our goals
include increasing revenue on a consistent basis, while investing and adding
additional talent and complementary services in order to deliver excellent data
and results for our clients. We intend to continue enhancing our business
development and client services programs and marketing efforts, increasing our
visibility in the marketplace and building our brand. We also intend to complete
ongoing Company-wide activities intended to enhance the employee experience,
client experience and streamline our communication, systems and operations. We
plan to continue to emphasize establishing a positive culture, which we believe
has significantly reduced our employee turnover and will facilitate our
continued recruitment and retention of talent. We have seen our sales and orders
grow as we continue to promote our vision.
During fiscal 2020, we have continued to invest in Products research and
development in order to upgrade current products and to identify potential new
products. We have also further developed and expanded our relationships with
distributors and resellers to boost sales in our Products business. We continue
to evaluate adding additional partnerships with companies similar to our current
partners to expand our Product offerings. Further, we have added key talent to
help drive sales and development of our Products and to solidify relationships
with our clients and prospective partners. We did see a decrease in sales over
the last nine months and are aware our sales could be further impacted by the
COVID-19 pandemic. We will continue to closely monitor our customers and
competitors' businesses and potentially amend our strategy as we evaluate the
risk and longer-term impact of business changes due to the pandemic.
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We review various metrics to evaluate our financial performance, including
revenue, margins and earnings. In the nine months ended June 30, 2020, total
revenues increased to $44,695 from $28,830, a 55.0% increase from the nine
months ended June 30, 2019. We had clients who delayed some large programs and
we had start dates for other programs that were postponed. We estimate that the
impact on revenue in the nine months ended June 30, 2020 was approximately
$2,000 from the delays and postponements. Gross profit increased to $13,614 from
$8,110, a 67.9% increase. Operating expenses were higher by 74.6% in the nine
months ended June 30, 2020 compared to the nine months ended June 30, 2019. The
most notable growth in operating expenses is related to our investment and focus
in sales and marketing efforts to promote our brand as well as costs related to
adding to the leadership team, costs related to the Smithers Avanza Acquisition
and the PCRS Acquisition as well as non-recurring costs related to the
acquisitions, launching our new brand, recruiting costs for leadership and
scientific staff additions, the adoption of two new accounting standards and
upgrades to our IT infrastructure. These non-recurring, third party costs in the
nine months ended June 30, 2020 totaled approximately $1,100. The latest
acquisitions were closed May 1, 2019 and December 1, 2019. Further, in the first
nine months of fiscal 2019, we benefited from the initial reduction in our
United Kingdom lease liability for a portion of the reserve for lease related
liabilities that were no longer owed due to the statute of limitations. This
benefit of approximately $623 compares to a benefit of only $208 in the first
nine months of fiscal 2020.
As of June 30, 2020, we had $2,948 of cash and cash equivalents as compared to
$606 of cash and cash equivalents at the end of fiscal 2019. In the first nine
months of fiscal 2020, we generated $1,386 in cash from operations as compared
to $1,567 in the same period in fiscal 2019. Total capital expenditures
increased in the first nine months of fiscal 2020 to $5,094 from $4,530 in the
prior year period as we completed the expansion at our Evansville facility and
invested in laboratory and IT equipment at all sites.
As of June 30, 2020, we did not have an outstanding balance on our $5,000
general line of credit, we had a $2,129 balance on our $3,000 capex line of
credit and a $5,685 balance on our construction related lines of credit. As
described herein, we incurred indebtedness in connection with financing the
Seventh Wave Acquisition, the Smithers Avanza Acquisition and the PCRS
Acquisition and planned expansion of facilities and services. Please refer to
the Liquidity and Capital Resources section herein for a description of our
Amended and Restated Credit Agreement.
For a detailed discussion of our revenue, margins, earnings and other financial
results for the three and nine months ended June 30, 2020, see "Results of
Operations" below.
Results of Operations
The following table summarizes our condensed consolidated statement of
operations as a percentage of total revenues for the periods shown:
Three Months Ended Nine Months Ended
June 30, June 30,
2020 2019 2020 2019
Service revenue 94.2 % 89.2 % 94.4 % 88.6 %
Product revenue 5.8 10.8 5.6 11.4
Total revenue 100.0 100.0 100.0 100.0
Cost of Service revenue (a) 68.9 72.3 69.6 72.6
Cost of Product revenue (a) 64.4 62.1 68.9 66.2
Total cost of revenue 68.6 71.2 69.5 71.9
Gross profit 31.4 28.8 30.5 28.1
Total operating expenses 34.4 31.1 34.2 30.4
Operating income (loss) (3.0 ) (2.3 ) (3.8 ) (2.3 )
Other expense (2.4 ) (1.6 ) (2.4 ) (1.5 )
Loss before income taxes (5.4 ) (3.9 ) (6.2 ) (3.7 )
Income taxes 0.1 0.0 0.3 0.0
Net loss (5.6 )% (3.9 )% (6.5 )% (3.7 )%
(a) Percentage of service and product revenues, respectively
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Service and Product Revenues
Revenues for the quarter ended June 30, 2020 increased 45.2% to $15,765 compared
to $10,861 for the same period last fiscal year.
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Our Service revenue increased 53.3% to $14,852 in the three months ended June
30, 2020 compared to $9,689 for the three months ended June 30, 2019. Internal
growth from existing operations consisted of 21.7% or $2,104 of the increase in
revenue. $3,059 or 31.6% of the growth was attributable to additional revenues
from the Smithers Avanza Acquisition and the PCRS Acquisition of $1,784 and
$1,275, respectively. Nonclinical services revenues increased $4,257 in the
three months ended June 30, 2020 from the prior year period due to an overall
increase in the number of studies. Bioanalytical analysis revenues increased by
$620 in the three months ended June 30, 2020 compared to the three months ended
June 30, 2019, mainly due to increasing the services we offer, gaining new
client relationships and increasing sales with current clients. We did see an
estimated $2,000 decrease in Service revenue during the three months ended June
30, 2020 due to program delays or postponements by clients as a result of the
COVID-19 pandemic.
Three Months Ended
June 30,
2020 2019 Change %
Bioanalytical analysis $ 1,985 $ 1,365 $ 620 45.4 %
Nonclinical services 12,125 7,868 4,257 54.1 %
Other laboratory services 742 456 286 62.7 %
$ 14,852 $ 9,689 $ 5,163Sales in our Products segment decreased 22.2% in the three months ended June 30,
2020 to $913 from $1,172 in the three months ended June 30, 2019. The decrease
stems from lower sales of Culex in-vivo sampling systems and analytical
instruments, which was slightly offset by the increase in maintenance and
services revenues included in other instruments, in the third quarter of fiscal
2020. The decrease is primarily due to a reduction of orders from universities
as they closed and reduced purchasing due to the COVID-19 pandemic and our
inability to go on site to install and service client instruments.
Three Months Ended
June 30,
2020 2019 Change %
Culex, in-vivo sampling systems $ 404 $ 599 $ (195 ) (32.6 )%
Analytical instruments 381 462 (81 ) (17.5 )%
Other instruments 128 111 17 15.3 %
$ 913 $ 1,172 $ (259 )
Cost of Revenues
Cost of revenues for the three months ended June 30, 2020 was $10,821 or 68.6%
of revenue, compared to $7,732, or 71.2% of revenue for the three months ended
June 30, 2019.
Cost of Service revenue as a percentage of Service revenue decreased to 68.9%
during the three months ended June 30, 2020 from 72.3% in the three months ended
June 30, 2019 due to increasing revenues which generate higher margins after
fixed costs are covered.
Cost of Products revenue as a percentage of Products revenue in the three months
ended June 30, 2020 increased to 64.4% from 62.1% in the three months ended June
30, 2019 due to reduced revenue to cover fixed costs.
Operating Expenses
Selling expenses for the three months ended June 30, 2020 decreased 5.2% to $692
from $730 compared to the three months ended June 30, 2019. The increase in the
number of sales associates and increased wages were offset by the decrease in
trade shows, conferences and travel expenses due to the COVID-19 pandemic as our
sales team has been meeting with clients virtually.
Research and development expenses for the three months ended June 30, 2020
decreased 26.1% compared to the three months ended June 30, 2019 to $105 from
$142. The decrease was primarily due to lower contract labor utilized for
certain services that could not be performed by in-house employees and slightly
lower operating supplies used in new product development.
General and administrative expenses for the three months ended June 30, 2020
increased 83.4% to $4,624 from $2,521 compared to the three months ended June
30, 2019. The increase was primarily due to additional expenses of $711 from
Smithers Avanza and PCRS that were not present during the three months ended
June 30, 2019, which includes depreciation and amortization of $189, increased
salaries, wages, benefits and non cash stock compensation by adding employees to
build infrastructure, increased depreciation expense, and other non-recurring
expense of approximately $100 relating to recruiting, implementing a new
accounting system and other IT enhancements.
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Other Income (Expense)
Interest expense for the three months ended June 30, 2020 increased 114.6% to
$382 from $178 compared to the three months ended June 30, 2019. The increase
was driven by our credit arrangements with First Internet Bank, as we increased
borrowings for the Evansville facility expansion and additional equipment and
entered into new financing arrangements, including as part of the Smithers
Avanza Acquisition and the PCRS Acquisition, which added related debt and
increased interest expense.
Income Taxes
Our effective tax rates for the three months ended June 30, 2020 and 2019 were
(2.4)% and (0.2)%, respectively, and primarily relate to state income taxes.
Net Income/Loss
As a result of the above described factors, we had a net loss of $879 for the
three months ended June 30, 2020 as compared to a net loss of $426 during the
three months ended June 30, 2019.
Nine Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019
Service and Product Revenues
Revenues for the nine months ended June 30, 2020 increased 55.0% to $44,695 as
compared to $28,830 for the nine months ended June 30, 2019. Internal growth
from existing operations consisted of 20.2% or $5,825 of the increase in sales.
$10,040 or 34.8% of the growth was attributable to additional revenues from the
Smithers Avanza Acquisition and the PCRS Acquisition of $6,835 and $3,205,
respectively, during the nine months ended June 30, 2020.
Our Service revenue increased 65.1% to $42,185 in the nine months ended June 30,
2020 compared to $25,555 for the nine months ended June 30, 2019. Nonclinical
services revenues increased due to an overall increase in the number of studies
from the prior year. We did see an estimated $2,000 decrease in Service revenue
during the nine months ended June 30, 2020 due to program delays or
postponements by clients as a result of the COVID-19 pandemic.
Nine Months Ended
June 30,
2020 2019 Change %
Bioanalytical analysis $ 5,899 $ 4,940 $ 959 19.4 %
Nonclinical services 34,301 19,184 15,117 78.8 %
Other laboratory services 1,985 1,431 554 38.7 %
$ 42,185 $ 25,555 $ 16,630Sales in our Product segment decreased 23.4% in the first nine months ended June
30, 2020 to $2,510 from $3,275 when compared to the nine months ended June 30,
2019. The decrease stems primarily from decreased sales of our Culex automated
in vivo sampling instruments and Other instruments, slightly offset by increased
sales of our Analytical instruments in the first nine months of fiscal 2020. The
decrease is primarily due to a reduction of orders from universities as they
closed and reduced purchasing due to the COVID-19 pandemic and our inability to
go on site to install and service client instruments.
Nine Months Ended
June 30,
2020 2019 Change %
Culex, in-vivo sampling systems $ 808 $ 1,568 $ (760 ) (48.5 )%
Analytical instruments 1,304 1,290 14 1.1 %
Other instruments 398 417 (19 ) (4.6 )%
$ 2,510 $ 3,275 $ (765 )
Cost of Revenues
Cost of revenues for the nine months ended June 30, 2020 was $31,081 or 69.5% of
revenue, compared to $20,720, or 71.9% of revenue compared to the nine months
ended June 30, 2019.
Cost of Service revenue as a percentage of Service revenue decreased to 69.9%
during the nine months ended June 30, 2020 from 72.6% in the nine months ended
June 30, 2019 due to improved margins from increasing sales after covering fixed
cost.
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Cost of Product revenue as a percentage of Product revenue in the nine months
ended June 30, 2020 increased to 68.9% from 66.2% in the nine months ended June
30, 2019. This increase in the first nine months of fiscal 2020 is mainly due to
the increase in material cost and adjustment of selling price for in vivo
products to stay competitive with the market and some change in product mix.
Operating Expenses
Selling expenses for the nine months ended June 30, 2020 increased 31.1% to
$2,672 from $2,038 compared to the nine months ended June 30, 2019. This
increase in the first nine months of fiscal 2020 as compared to the same period
in the prior year is mainly due to higher salaries and benefits for the
additional sales employees from the Smithers Avanza acquisition, increased
commissions due to increased sales and increased marketing expenses related to
our new trade name Inotiv, new web site and branding, partially offset by lower
travel and trade show expenses due to the COVID-19 pandemic, as our sales and
marketing teams have recently been conducting meetings virtually.
Research and development expenses for the nine months ended June 30, 2020
increased 8.1% compared to the nine months ended June 30, 2019 to $429 from
$397. The increase was primarily due to increased consulting expenses due to
sourcing certain consulting services that we could not do in-house.
General and administrative expenses for the nine months ended June 30, 2020
increased 92.8% to $12,205 from $6,332 compared to the nine months ended June
30, 2019. The increase was mainly driven by the additional expense associated
with the Smithers Avanza and PCRS operations, which added $2,460 of expenses,
including $679 of depreciation and amortization expense, plus increased
salaries, wages, benefits and non cash stock compensation by adding employees to
build infrastructure, severance expense related to changes in management,
increased depreciation expense, increased corporate expenses associated with
professional fees related to PCRS acquisition, and other non-recurring expenses
of approximately $1,100 related to recruiting, implementing a new accounting
system, adopting two new accounting standards, and other one-time expenses. We
do not expect the non-recurring costs to impact the remainder of fiscal 2020.
Further, in the nine months ended June 30, 2019, we benefited from the initial
reduction in our United Kingdom lease liability for a portion of the reserve for
lease related liabilities that were no longer owed due to the statute of
limitations. This benefit of approximately $623 compares to a benefit of only
$208 in the nine months ended June 30, 2020.
Other Income (Expense)
Interest expense for the nine months ended June 30, 2020 increased 154.7% to
$1,085 from $426 compared to the nine months ended June 30, 2019. The increase
was driven by our credit arrangements with First Internet Bank, as we entered
into new financing arrangements, including as part of the Evansville expansion,
new equipment financings, Smithers Avanza Acquisition and the PCRS Acquisition,
which added related debt and increased interest expense.
Income Taxes
Our effective income tax rates for the nine months ended June 30, 2020 and 2019
were (4.6)% and (0.2)%, respectively, and primarily relate to state income
taxes.
Net Income (Loss)
As a result of the factors described above, net loss for the nine months ended
June 30, 2020 amounted to $2,893, compared to net loss of $1,080 for the nine
months ended June 30, 2019.
Liquidity and Capital Resources
Comparative Cash Flow Analysis
At June 30, 2020, we had cash and cash equivalents of $2,948, compared to $606
at September 30, 2019.
Net cash provided by operating activities was $1,386 for the nine months ended
June 30, 2020 compared to cash provided by operating activities of $1,567 for
the nine months ended June 30, 2019. Contributing factors to our cash provided
by operations in the first nine months of fiscal 2020 were noncash charges of
$2,747 for depreciation and amortization, $380 for stock compensation expense,
$115 of amortization of finance lease, $166 change on operating lease, $327
increase in accrued expenses and a net increase in customer advances of $4,036,
as a result of increasing orders. These items were partially offset by an
increase of $701 in accounts receivable, an increase of $395 in inventories, an
increase of $409 in prepaid expenses and other assets, and a decrease of $2,040
in accounts payable.
Days' sales in accounts receivable decreased to 51 days at June 30, 2020 from 58
days at September 30, 2019. It is not unusual to see a fluctuation in the
Company's pattern of days' sales in accounts receivable. Customers may expedite
or delay payments from period-to-period for a variety of reasons including, but
not limited to, the timing of capital raised to fund on-going research and
development projects.
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Included in operating activities for the nine months ended June 30, 2019 are
non-cash charges of $2,037 for depreciation and amortization, employee stock
compensation expense of $196, a net increase in customer advances of $912, a net
increase in accounts payable of $664 and an increase in accrued expenses of
$719. These items were partially offset by, among other items, a net decrease in
accounts receivable of $1,477, an increase in prepaid expenses and other assets
of $181 and an unrealized foreign currency gain of $147.
Investing activities used $9,094 in the nine months ended June 30, 2020 due
mainly to capital expenditures of $5,094 as compared to $4,530 in the first nine
months of fiscal 2019 and $4,000 cash paid for the PCRS Acquisition. The capital
additions during the nine months ended June 30, 2020 consisted of investments in
the Evansville expansion, investments in Gaithersburg capacity, upgrades in
software as well as laboratory and IT equipment.
Financing activities provided $10,050 in the nine months ended June 30, 2020,
compared to $3,967 provided during the nine months ended June 30, 2019. The main
sources of cash in the first nine months of fiscal 2020 were from borrowings on
the long-term loan of $3,726, funds received from the PPP loan of $5,051 and
borrowings on the Construction loan and Capex lines of credit of $1,287 and
$2,423, respectively. Total long-term loan payments were $1,157 and net
repayments on the Revolving Credit facility were $1,063. Finance lease payments
of $130 and payment of debt issuance cost of $111 also contributed to the use of
cash. The primary sources of cash in the nine months ended June 30, 2019 were
borrowings on Long-Term debt of $2,180, borrowings on the Construction loan and
Capex lines of credit of $2,012 and $460, respectively, and net cash borrowed
against the Revolving Credit facility of $572. Total long-term loan payments
were $1,089 and payments on capital lease obligations were $82.
Capital Resources
Credit Facility
On December 1, 2019, in connection with the PCRS Acquisition, we entered into an
Amended and Restated Credit Agreement (the "Credit Agreement") with First
Internet Bank of Indiana ("FIB"). The Credit Agreement was amended on March 27,
2020 to modify the definition of Adjusted EBITDA for purposes of covenant
calculations and to modify the terms of the Initial Capex Line. The Credit
Agreement includes five term loans (the "Initial Term Loan," "Second Term Loan,"
"Third Term Loan," "Fourth Term Loan," and "Fifth Term Loan," respectively), a
revolving line of credit (the "Revolving Facility"), a construction draw loan
(the "Construction Draw Loan"), an equipment draw loan (the "Equipment Draw
Loan"), and two capital expenditure instruments (the "Initial Capex Line" and
the "Second Capex Line," respectively).
The Initial Term Loan for $4,500 bears interest at a fixed rate of 3.99%, with
monthly principal and interest payments of approximately $33. The Initial Term
Loan matures June 23, 2022. The balance on the Initial Term Loan at June 30,
2020 was $3,809. We used the proceeds from the Initial Term Loan to satisfy our
indebtedness with Huntington Bank and terminated the related interest rate swap.
The Second Term Loan for $5,500 was used to fund a portion of the cash
consideration for the Seventh Wave acquisition. Amounts outstanding under the
Second Term Loan bear interest at a fixed per annum rate of 5.06%, with monthly
principal and interest payments equal to $78. The Second Term Loan matures July
2, 2023 and the balance on the Second Term Loan at June 30, 2020 was $4,185.
The Third Term Loan for $1,271 was used to fund the cash consideration for the
Smithers Avanza Acquisition. Amounts outstanding under the Third Term Loan bear
interest at a fixed per annum rate of 4.63%. The Third Term Loan required
monthly interest only payments until December 1, 2019, from which time payments
of principal and interest in monthly installments of $20 are required, with all
accrued but unpaid interest, cost and expenses due and payable at the maturity
date. The Third Term Loan matures November 1, 2025 and the balance on the Third
Term Loan at June 30, 2020 was $1,162.
The Fourth Term Loan in the principal amount of $1,500 has a maturity of June 1,
2025. Interest accrues on the Fourth Term Loan at a fixed per annum rate equal
to 4%, with interest payments only commencing January 1, 2020 through June 1,
2020, with monthly payments of principal and interest thereafter through
maturity. The balance on the Fourth Term Loan at June 30, 2020 was $1,493.
The Fifth Term loan in the principal amount of $1,939 has a maturity of December
1, 2024. Interest accrues on the Fifth Term Loan at a fixed per annum rate equal
to 4%, with payments of principal and interest due monthly through maturity. The
balance on the Fifth Term Loan at June 30, 2020 was $1,907. We entered into the
Fourth Term Loan and the Fifth Term Loan in connection with the PCRS
Acquisition.
The Revolving Facility provides a line of credit for up to $5,000, which the
Company may borrow from time to time, subject to the terms of the Credit
Agreement, including as may be limited by the amount of the Company's
outstanding eligible receivables. The Revolving Facility has a maturity of
January 31, 2021 and requires monthly accrued and unpaid interest payments only
until maturity at a floating per annum rate equal to the greater of (a) 4%, or
(b) the sum of the Prime Rate plus Zero Basis Points (0.0%), which rate shall
change concurrently with the Prime Rate. The Company did not have an outstanding
balance on the Revolving Facility as of June 30, 2020.
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The Construction Draw Loan provides for borrowings up to a principal amount not
to exceed $4,445 and the Equipment Draw Loan provides for borrowings up to a
principal amount not to exceed $1,429. The Construction Draw Loan and Equipment
Draw Loan each mature on March 28, 2025. As of June 30, 2020, there was a $4,337
balance on the Construction Draw Loan and a $1,348 balance on the Equipment Draw
Loan.
Subject to certain conditions precedent, the Construction Draw Loan and an
Equipment Draw Loan each permitted the Company to obtain advances aggregating up
to the maximum principal amount available for such loan through March 28, 2020.
Amounts outstanding under these loans bear interest at a fixed per annum rate of
5.20%. The Construction Draw Loan and the Equipment Draw Loan each require
monthly payments of accrued interest on amounts outstanding through March 28,
2020, and thereafter monthly payments of principal and interest on amounts then
outstanding through maturity. We have utilized funds from the Construction Draw
Loan and the Equipment Draw Loan in connection with the Evansville facility
expansion.
The Initial Capex Line previously provided for borrowings up to the principal
amount of $1,100, which the Company could borrow from time to time, subject to
the terms of the Credit Agreement. On March 27, 2020, the parties amended the
Initial Capex Line to eliminate the revolving nature of the line in favor of a
term loan in the principal amount of $948, equivalent to the amount of
borrowings then outstanding on the Initial Capex Line. As amended, the Initial
Capex Line matures on June 30, 2025, and as of June 30, 2020, had a balance of
$948. Interest accrues on the principal balance of the Initial Capex Line at a
fixed per annum rate equal to 4%. The Company is required to pay accrued but
unpaid interest on the Initial Capex Line on a monthly basis until June 30,
2020. Commencing August 1, 2020, and on the first day of each monthly period
thereafter until and including on the maturity date, the Initial Capex Line
requires payments of principal and interest in monthly installments equal to
$17.
The Second Capex Line provides for borrowings up to the principal amount of
$3,000, subject to the terms of the Credit Agreement, with a maturity of
December 31, 2020 and interest payments only until maturity at a floating per
annum rate equal to the greater of (a) 4%, or (b) the sum of the Prime Rate plus
Fifty Basis Points (0.5%), which rate shall change concurrently with the Prime
Rate. At June 30, 2020, the balance on the Second Capex Line was $2,129.
The Company's obligations under the Credit Agreement are guaranteed by BAS
Evansville, Inc. ("BASEV"), Seventh Wave Laboratories, LLC, BASi Gaithersburg
LLC, as well as Bronco Research Services LLC ("Bronco"), each a wholly owned
subsidiary of the Company (collectively, the "Guarantors"). The Company's
obligations under the Credit Agreement and the Guarantor's obligations under
their respective guaranties are secured by first priority security interests in
substantially all of the assets of the Company and the Guarantors, respectively,
mortgages on the Company's, BASEV's and Bronco's facilities in West Lafayette,
Indiana, Evansville, Indiana, and Fort Collins, Colorado, respectively, and
pledges of the Company's ownership interests in its subsidiaries.
Except as provided below, the Credit Agreement includes financial covenants
consisting of (i) a Fixed Charge Coverage Ratio (as defined in the Credit
Agreement) of not less than 1.25 to 1.0, tested quarterly and measured on a
trailing twelve (12) month basis and (ii) beginning March 31, 2020 a Cash Flow
Leverage Ratio (as defined in the Credit Agreement), tested quarterly, as
follows: not to exceed (a) as of March 31, 2020, 5.00 to 1.00, (b) as of June
30, 2020, 4.50 to 1.00, (c) as of September 30, 2020, 4.25 to 1.00 and (d) as of
December 31, 2020 and each quarter thereafter, 4.00 to 1.00. The amendment to
the Credit Agreement on March 27, 2020 modified the definition of Adjusted
EBITDA, including for purposes of covenant calculations. As amended, the
calculation of Adjusted EBITDA includes (i) the addition of a decreasing amount
of proforma EBITDA from Pre-Clinical Research Services, Inc. (which the Company
acquired in the first quarter of fiscal 2020) for each quarter of fiscal 2020
and (ii) the addition or subtraction of certain non-cash expenses or income
recognized. Upon an event of default, which includes certain customary events
such as, among other things, a failure to make required payments when due, a
failure to comply with covenants, certain bankruptcy and insolvency events, and
defaults under other material indebtedness, FIB may cease advancing funds,
increase the interest rate on outstanding balances, accelerate amounts
outstanding, terminate the agreement and foreclose on all collateral. The
Company has also agreed to obtain a life insurance policy in an amount not less
than $5,000 for its President and Chief Executive Officer and to provide FIB an
assignment of such life insurance policy as collateral.
The Company entered into a Credit Agreement modification on August 13, 2020 with
FIB. Based on the impact of COVID-19 on the Company's operations and financial
performance, FIB suspended testing of the Fixed Charge Coverage Ratio and the
Cash Flow Leverage Ratio for the June 30, 2020 compliance period. The
modification also updated the definition of Total Funded Debt under the Credit
Agreement to exclude the funding of the Company's $5,051 loan pursuant to the
Paycheck Protection Program (PPP) under Division A, Title 1 of the CARES Act
until the SBA has made a determination regarding forgiveness of the loan. Any
PPP loan balance not forgiven will thereafter immediately be deemed funded debt
for purposes of the Total Funded Debt definition.
In addition to the indebtedness under our Credit Agreement, as part of the
Smithers Avanza Acquisition, we have an unsecured promissory note payable to the
Smithers Avanza Seller in the initial principal amount of $810 made by BASi
Gaithersburg and guaranteed by the Company. The promissory note bears interest
at 6.5% with monthly payments and maturity date of May 1, 2022. As part of the
PCRS Acquisition, we also have an unsecured promissory note payable to the
Preclinical Research Services Seller in the initial principal amount of $800.
The promissory note bears interest at 4.5% with monthly payments and a maturity
date of December 1, 2024.
On April 23, 2020, we were granted a loan (the "Loan") from Huntington National
Bank in the aggregate amount of $5,051, pursuant to the Paycheck Protection
Program under Division A, Title I of the CARES Act, which was enacted March 27,
2020. The principal and accrued interest under the loan is to be repaid in
eighteen installments of $283 beginning on November 16, 2020 and continuing
monthly until the final payment is due on April 16, 2022. We plan to seek
forgiveness of the loan.
29
On January 28, 2015, the Company entered into a lease agreement with Cook
Biotech, Inc. The lease agreement has and will provide the Company with
additional cash in the range of approximately $50 per month during the first
year of the initial term to approximately $57 per month during the final year of
the initial term.
The Company's sources of liquidity for fiscal 2020 are expected to consist
primarily of cash generated from operations, cash on-hand, the Loan and
additional borrowings available under our Credit Agreement. Management believes
that the resources described above will be sufficient to fund operations,
planned capital expenditures and working capital requirements over the next
twelve months.
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