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 in our annual report on Form 10-K for the fiscal year ended
September 30, 2020. Our actual results could differ materially from those
discussed in the forward-looking statements.
19
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 year, 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 three months ended December 31, 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. During the current quarter, we saw a decrease in operating expenses as
a percentage of revenue compared to the same quarter in the prior year. In
addition, the financial results were positively impacted by the Products segment
of the business as expense reductions were implemented in last half of fiscal
year 2020 and there were improved margins on existing sales.
Notwithstanding the COVID-19 pandemic, we have maintained our operations. As
part of the "essential critical infrastructure" industry, we believe we continue
to 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 eight 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 applied for forgiveness of
the PPP loan in the amount of $4,851, which represents qualified expenses. The
PPP debt is recorded as a liability on the balance sheet.
In order to further establish our brand, including in the context of exploring
external growth opportunities, we have proposed adopting Inotiv, Inc. as our
formal corporate name at the 2021 annual meeting of shareholders scheduled for
March 18, 2021.
20
Business Overview
The Company provides drug discovery and development services to the
pharmaceutical, chemical, and medical device industries, and sells analytical
instruments to the pharmaceutical development and contract research industries.
Our mission is to provide drug and product developers with superior scientific
research and innovative analytical instrumentation in order to bring
revolutionary new drugs and products to market quickly and safely. Our strategy
is to provide services that will generate high-quality and timely data in
support of new drug and product approval or expand their use. Our clients and
partners include pharmaceutical, biotechnology, biomedical device, academic and
government organizations. We provide innovative technologies and products and a
commitment to quality to help clients and partners accelerate the development of
safe and effective drugs and products and maximize the returns on their research
and development investments. We believe that we offer an efficient,
variable-cost alternative to our clients' internal drug and product development
programs. Outsourcing development work to reduce overhead and speed product
approvals through the Food and Drug Administration ("FDA") and other regulatory
authorities is an established alternative to in-house product development
efforts. We derive our revenues from sales of our research services and
instruments, both of which are focused on evaluating drug and product safety and
efficacy. The Company has been involved in the research of drug and products to
treat diseases in numerous therapeutic areas for over 45 years since its
formation as a corporation organized in Indiana in 1974.
We support both the non-clinical and clinical development needs of researchers
and clinicians for primarily small molecule drug candidates, but also including
biotherapeutics and devices. We believe that our scientists have the skills in
analytical instrumentation development, chemistry, computer software
development, histology, pathology, physiology, medicine, surgery, analytical
chemistry, drug metabolism, pharmacokinetics, 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 some 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
therapies.
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 are nearing the end of their
patent protections. This puts significant pressure on these companies both to
acquire or 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
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
product 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 driven
by smaller, venture capital funded drug discovery 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 their 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.
21
We review various metrics to evaluate our financial performance, including
revenue, margins and earnings. In the three months ended December 31, 2020,
total revenues increased to $17,885 from $12,918, a 38.5% increase as compared
to the three months ended December 31, 2019, including incremental PCRS related
revenues, given the December 1, 2019 closing for the PCRS acquisition. Gross
profit increased to $5,877 from $3,477, a 69.1% increase. Operating expenses
were higher by 30.4% in the three months ended December 31, 2020 compared to the
three months ended December 31, 2019. The most notable growth in operating
expenses is employee-related costs, including benefits and incentive programs,
and additional expenses related to operations acquired in the PCRS Acquisition.
As of December 31, 2020, we had $1,155 of cash and cash equivalents as compared
to $1,406 of cash and cash equivalents at the end of fiscal 2020. In the first
three months of fiscal 2021, we generated $1,652 in cash from operations as
compared to $1,452 in the fiscal 2020 period. Capital expenditures for
investments in laboratory equipment to increase capacity and improvements to our
Fort Collins facility during the first three months of fiscal 2021 totaled
$1,474, which is a decrease from $2,165 in the first three months of fiscal
2020.
As of December 31, 2020, we did not have an outstanding balance on our $5,000
general line of credit, we had a $3,000 balance on our $3,000 capex line 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 the 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.
22
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
December 31,
2020 2019
Service revenue 95.2 % 94.0 %
Product revenue 4.8 6.0
Total revenue 100.0 100.0
Cost of Service revenue (a) 68.1 73.4
Cost of Product revenue (a) 48.2 68.2
Total cost of revenue 67.1 73.1
Gross profit 32.9 26.9
Total operating expenses 32.8 34.8
Operating income (loss) 0.1 (7.9 )
Other expense (2.0 ) (2.4 )
Loss before income taxes (1.9 ) (10.3 )
Income taxes 0.1 0.8
Net loss (2.0 )% (11.0 )%
(a) Percentage of service and product revenues, respectively
Three Months Ended December 31, 2020 Compared to Three Months Ended December 31,
2019
Service and Product Revenues
Revenues for the quarter ended December 31, 2020 increased 38.5% to $17,885
compared to $12,918 for the same period last fiscal year.
Our Service revenue increased 40.3% to $17,032 in the three months ended
December 31, 2020 compared to $12,142 for the three months ended December 31,
2019. Nonclinical services revenue increased $3,559 in the three months ended
December 31, 2020 due to an expansion at our Evansville location, as well as
incremental revenues attributable to the PCRS Acquisition of $479. Bioanalytical
analysis revenues increased by $323 in the first quarter of fiscal 2020, mainly
due to a higher number of samples received and analyzed. Other laboratory
services revenues were positively impacted by a full quarter of revenue from the
PCRS Acquisition resulting in incremental revenue of $977 in the three months
ended December 31, 2020 as compared to the three months ended December 31, 2019.
23
Three Months Ended
December 31,
2020 2019 Change %
Bioanalytical analysis $ 1,650 $ 1,327 $ 323 24.3 %
Nonclinical services 13,687 10,128 3,559 35.1 %
Other laboratory services 1,695 687 1,008 146.7 %
$ 17,032 $ 12,142 $ 4,890Sales in our Products segment increased 9.9% in the three months ended December
31, 2020 to $853 from $776 for the three months ended December 31, 2019. The
majority of the increase in the first fiscal quarter of 2021 stems from higher
sales of Culex in-vivo sampling systems and analytical instruments, partially
offset by a decrease in other instruments.
Three Months Ended
December 31,
2020 2019 Change %
Culex, in-vivo sampling systems $ 261 $ 176 $ 85 48.3 %
Analytical instruments 504 389 115 29.6 %
Other instruments 88 211 (123 ) (58.3 )%
$ 853 $ 776 $ 77
Cost of Revenues
Cost of revenues for the three months ended December 31, 2020 was $12,007 or
67.1% of revenue, compared to $9,441, or 73.1% of revenue for the three months
ended December 31, 2019.
Cost of Service revenue as a percentage of Service revenue decreased to 68.1%
during the three months ended December 31, 2020 from 73.4% in the three months
ended December 31, 2019, reflecting operating leverage and the greater
utilization of recently expanded capacity.
Cost of Products revenue as a percentage of Products revenue in the three months
ended December 31, 2020 decreased to 48.2% from 68.2% in the comparable prior
year period due to expense reductions implemented in the last half of fiscal
2020 and improved margins on existing sales.
Operating Expenses
Selling expenses for the three months ended December 31, 2020 decreased 29.1% to
$625 from $882 for the three months ended December 31, 2019. This decrease is
mainly due to the reduction of non-recurring costs of nearly $140 that was
related to the launch of our new trade name Inotiv, as well as a decrease in
trade show and travel expenses due to the COVID-19 pandemic, as our sales and
marketing teams have been conducting meetings virtually.
Research and development expenses for the three months ended December 31, 2020
increased 21.0% over the three months ended December 31, 2019 to $196 from $162.
The increase was primarily due to internal development investments of $118 for
new services, partially offset by lower development costs in the Product
segment.
General and administrative expenses for the three months ended December 31, 2020
increased 46.0% to $5,042 from $3,453 for the three months ended December 31,
2019. The increase was mainly driven by increased employee-related costs,
including benefits and non-cash stock compensation, as we continue to grow and
expand our business, as well as additional expenses from the PCRS acquisition,
such as depreciation and amortization expenses.
Other Income (Expense)
Other expense for the first quarter of fiscal 2020 was $347, as compared to
other expense of $309 for the first quarter of fiscal 2020. The primary reason
for the change in expense was the increase in interest expense under the PPP
loan received in April 2020 and our credit arrangements with First Internet Bank
("FIB"). We entered into new financing arrangements with FIB, including as part
of the PCRS Acquisition.
24
Net Income/Loss
As a result of the above described factors, we had a net loss of $366 for the
three months ended December 31, 2020 as compared to a net loss of $1,426 during
the three months ended December 31, 2019.
Income Taxes
Our effective income tax rate for the three months ended December 31, 2020 and
2019 was (9.89)% and (7.32)%, respectively. The expense recorded for each period
was $33 and $97, respectively, and relates primarily to certain credits that
arise when deferred tax liabilities that are created by indefinite-lived assets
cannot be used as a source of taxable income to support the realization of
deferred tax assets for valuation allowance purposes. The tax expense associated
with such certain credits is required to be recorded.
Accrued Expenses
As part of a fiscal 2012 restructuring, we accrued for lease payments at the
cease use date for our United Kingdom 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. Based on these matters, we had
a $1,117 reserve for lease related costs and for legal and professional fees and
other costs to remove improvements previously made to the facility. At December
31, 2020 and September 30, 2020, respectively, we had $178 and $168 reserved for
the remaining liability. The reserve is classified as a current liability on the
condensed consolidated balance sheets.
Liquidity and Capital Resources
Comparative Cash Flow Analysis
At December 31, 2020, we had cash and cash equivalents of $1,155, compared to
$1,406 at September 30, 2020.
Net cash provided by operating activities was $1,652 for the three months ended
December 31, 2020 compared to net cash provided by operating activities of
$1,452 for the three months ended December 31, 2019. Contributing factors to our
net cash provided by operations in the first three months of fiscal 2021 were
noncash charges of $1,065 for depreciation and amortization, $36 of amortization
of finance lease, a net increase in customer advances of $2,242, as a result of
increasing orders, and an increase in accounts payable of $435. These items were
partially offset by an increase of $634 in accounts receivable, a net increase
in prepaid expenses of $229, and a decrease in accrued expenses of $1,087.
Days' sales in accounts receivable decreased to 49 days at December 31, 2020
from 56 days at September 30, 2020. It is not unusual to see a fluctuation in
the Company's pattern of days' sales in accounts receivable as invoicing is
based on billing milestones and may not be consistent with the timing of revenue
recognition. Clients 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.
Included in operating activities for the first three months of fiscal 2020 are
noncash charges of $732 for depreciation and amortization, $32 of amortization
of finance lease, a net increase in customer advances of $2,501, as a result of
increasing orders, an increase in accrued expenses of $597, and an increase in
accounts payable of $479. These items were partially offset by an increase of
$1,013 in accounts receivable and a net increase in prepaid expenses of $774.
Investing activities used $1,474 in the first three months of fiscal 2021 for
capital expenditures as compared to $6,096 in the first three months of fiscal
2020, which included $2,165 of capital expenditures and $3,931 cash paid for the
PCRS Acquisition. The capital additions during the first quarter of fiscal 2021
consisted of investments in laboratory equipment to increase capacity and
improvements in our Fort Collins facility.
25
Financing activities used $429 in the first three months of fiscal 2021, as
compared to cash provided of $4,549 during the first three months of fiscal
2020. The use of cash in the first quarter of fiscal 2021 consisted of payments
on long-term debt of $712, financing lease payments of $108 and debt issuance
costs of $40, which were partially offset from net cash borrowed against the
capex line of credit of $387 and proceeds from the exercise of stock options of
$44. The main sources of cash in the first three months of fiscal 2020 were from
borrowings on the long-term loan of $3,439, and borrowings on the Construction
loans and Capex lines of credit of $1,183 and $728, respectively. These items
were partially offset by a net payment against the Revolving Facility of $337,
long-term loan payments of $250, finance lease payment of $104 and payment of
debt issuance cost of $110.
Capital Resources
Credit Facility
On December 1, 2019, we entered into an Amended and Restated Credit Agreement
(as has been amended from time to time, the "Credit Agreement") with First
Internet Bank of Indiana ("FIB"). 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 December 31,
2020 was $3,686. 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 December 31, 2020 was
$3,820.
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 December 31, 2020 was $1,067.
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 having commenced 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 December 31, 2020 was $1,356.
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 December 31, 2020 was $1,875. 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 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
December 31, 2020. On December 18, 2020, the parties amended the Revolving
Facility to extend its maturity through May 31, 2021.
The Construction Draw Loan provided for borrowings up to a principal amount not
to exceed $4,445 and the Equipment Draw Loan provided 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 December 31, 2020, there was a
$4,123 balance on the Construction Draw Loan and a $1,185 balance on the
Equipment Draw Loan.
Subject to certain conditions precedent, the Construction Draw Loan and the
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 required
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.
26
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 December 31, 2020, had a balance
of $869. Interest accrues on the principal balance of the Initial Capex Line at
a fixed per annum rate equal to 4%. The Company was 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 previously provided for borrowings up to the principal
amount of $3,000, which the Company could borrow from time to time, subject to
the terms of the Credit Agreement. On December 18, 2020, the parties amended the
Second Capex Line to eliminate the revolving nature of the line in favor of a
term loan in the principal amount of $3,000, equivalent to the amount of
borrowings then outstanding on the Second Capex Line. As amended, the Second
Capex Line matures on December 31, 2025. Interest accrues on the principal
balance of the Second Capex Line at a fixed per annum rate equal to 4.25%.
Commencing January 31, 2021, and on the last day of each monthly period
thereafter until and including on the maturity date, the Second Capex Line
requires payments of principal and interest in monthly installments equal to
$55.
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.
The Company entered into a Credit Agreement modification on December 18, 2020
with FIB. Based in part on the impact of COVID-19 on the Company's operations
and financial performance, FIB, among other things, agreed to suspended testing
of the Fixed Charge Coverage Ratio under the Credit Agreement for the December
31, 2020 compliance period. The December 18, 2020 modification, also revised the
Company's covenant calculations on a go-forward basis, as described below.
Absent these suspensions and modifications, the Company would not have been in
compliance with the covenants for the December 31, 2020 measurement period.
As amended, (i) beginning March 31, 2021, the Company is required to maintain a
Fixed Charge Coverage Ratio (as defined in the Credit Agreement), tested
quarterly, of not less than (a) as of March 31, 2021 1.05 to 1.0, (b) as of June
30, 2021 1.10 to 1.00 and (c) as of September 30, 2021 and for each quarter
thereafter 1.20 to 1.00 and (ii) the Company is required to maintain a Cash Flow
Leverage Ratio (as defined in the Credit Agreement), tested quarterly, not to
exceed (a) as of December 31, 2020, 6.00 to 1.00, (b) as of March 31, 2021, 5.75
to 1.00, (c) as of June 30, 2021, 5.00 to 1.00 and (d) as of September 30, 2021
and for each quarter thereafter, 4.25 to 1.00. The Fixed Charge Coverage Ratio
and Cash Flow Leverage Ratio are measured on a trailing twelve (12) month basis,
provided, however, that in the case of Fixed Charge Coverage Ratio calculations
for the remainder of fiscal 2021 (i) the measurement period for the quarter
ending March 31, 2021 includes only the quarter ending March 31, 2021, (ii) the
measurement period for the quarter ending June 30, 2021 includes only the
quarters ending March 31, 2021 and June 30, 2021 and (iii) the measurement
period for the quarter ending September 30, 2021 includes only the quarters
ending March 31, 2021, June 30, 2021 and September 30, 2021.
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.
27
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. At December 31,
2020, the balance on the note payable to the Smithers Avanza Seller was $570. As
part of the PCRS Acquisition, we also have an unsecured promissory note payable
to the PCRS 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. At December 31, 2020, the balance on the note payable to the PCRS Seller
was $735.
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. The bank is not
requiring payments of principal or interest pending the loan forgiveness
decision. We have applied for forgiveness of the loan in the amount of $4,851.
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 2021 are expected to consist
primarily of cash generated from operations, cash on-hand, and additional
borrowings available under our Credit Agreement. 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. 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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INOTIV, INC. 
