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 services and products; (iii) trends in the industries that consume our
services and products; (iv) our ability to develop or acquire new services and
products; (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 related to recent acquisitions; (ix) our ability to effectively
manage current expansion efforts or any future expansion or acquisition
initiatives undertaken by us; (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 our corporate name and 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, (xv) our ability to manage recurring and non-recurring costs, (xvi)
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, and additional risks set forth in our filings with the Securities
and Exchange Commission (the "SEC"). Actual results may differ materially from
those in the forward-looking statements as a result of various factors,
including but not limited to the risk factors disclosed in our reports with the
SEC, 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.
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. Through March 31, 2021, 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. Among other undertakings subsequent to March 31, 2021, we
acquired two additional businesses and completed a public offering or our common
shares and a refinancing of our credit arrangements with First Internet Bank to
fund portions of the cash consideration for the business acquisitions and to
support other corporate initiatives. Refer to the discussions below and in Note
13 "Subsequent Events" to the Notes to Condensed Consolidated Financial
Statements.
Over the last year, we have also improved our infrastructure and platform to
support future growth and additional potential acquisitions. These improvements
included establishing our new corporate name Inotiv, Inc., 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.
Significant Accomplishments during three months ended March 31, 2021
· Announcement of an initiative to broaden clinical pathology service offerings
· Appointment of Greg Beattie as Chief Operating Officer
· Announcement of investments in laboratory infrastructure, data and study
management technologies and internal expertise for SEND (Standard for Exchange
of Nonclinical Data) capabilities
· Announcement of investments in additional vivarium capacity at facility in West
Lafayette, IN
· Announcement for plans to expand offerings to include cardiovascular safety
pharmacology
· Corporate name change to Inotiv, Inc.
17
Events subsequent to March 31, 2021
· Announcement of partnership with PhoenixBio Co., Ltd. to expand discovery
pharmacology offering
· On April 19, 2021, the Company announced plan to expand internal operations at
its St. Louis location contingent upon receiving financing and obtaining
related business incentives.
· On April 23, 2021, the Company closed an underwritten public offering of
3,044,117 of its common shares, including 397,058 common shares sold pursuant
to the full exercise by the underwriter of its option to purchase additional
shares to cover over-allotments. All of the shares were sold at a price to the
public of $17.00 per share. Net proceeds to the Company from the offering were
approximately $49,000, after deducting the underwriting discount and estimated
offering expenses. . Part of the net proceeds were used to fund portions of the
cash consideration for the HistoTox Labs Acquisition and the Merger.
· On April 30, 2021, the Company closed the purchase of substantially all of the
assets used or useful in HistoTox Labs, Inc.'s business (the "HistoTox Labs
Acquistion") of non-clinical consulting, laboratory and strategic support
services and products related to routine and specialized histology,
immunohistology, histopathology and image analysis/digital pathology.
· On April 30, 2021, the Company closed transactions under the Agreement and Plan
of Merger with Bolder BioPATH, Inc. Following the consummation of the merger
(the "Merger") on May 3, 2021, Inotiv Boulder, LLC ("Inotiv Boulder"), as the
surviving wholly owned subsidiary of the Company, serves as a contract
pharmacology and pathology company specializing in in vivo models of rheumatoid
arthritis, osteoarthritis, and inflammatory bowel disease as well as other
autoimmune and inflammation models.
· On April 30, 2021, the Company refinanced its debt arrangement with First
Internet Bank of Indiana, to, among other things, raise additional debt capital
to fund portions of the cash consideration for the HistoTox Labs Acquisition
and the Merger. The Company also secured a commitment for approximately $5,000
of additional debt financing to be used in connection with the exercise of the
Company's option to buy its St. Louis facility for approximately $4,700 and to
complete associated expansion, contingent on the Company's receipt of related
business incentives.
Our financial results for the three months ended March 31, 2021 were positively
impacted by increases in sales and gross margins attributable to internal growth
the Company has experienced in the Service business. During the quarter ended
March 31, 2021, we saw an increase in operating expenses as a percentage of
revenue compared to the same quarter in the prior year due to higher expenses
for recruiting and relocation, higher compensation, including non-cash stock
compensation, new systems and transaction costs related to the HistoTox Labs and
Bolder BioPATH acquisitions. 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 which improved margins.
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.
We believe that the HistoTox Labs Acquisition and the Merger, along with the
remaining net proceeds from our recent public offering and the refinancing of
our indebtedness with First Internet Bank to be used for internal expansion
initiatives, will drive significant long-term value for our customers and
shareholders.
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 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.
18
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.
We review various metrics to evaluate our financial performance, including
revenue, margins and earnings. In the six months ended March 31, 2021, total
revenues increased to $36,636 from $28,930, a 26.6% increase from the six months
ended March 31, 2020. Gross profit increased to $12,201 from $8,670, a 40.7%
increase. Operating expenses were higher by 28.6% in the six months ended March
31, 2021 compared to the six months ended March 31, 2020. The most notable
growth in operating expenses is related to our investment and focus to continue
to build the infrastructure for growth, which included additional headcount,
recruiting and relocation expense, transaction costs related to the HistoTox
Labs Acquisition and the Merger, and investments in research and development,
technology, and systems. During the quarter, we announced services that we are
bringing in house such as clinical pathology, cardiovascular safety pharmacology
and investments in software solutions and human resources to support existing
internal expertise in the area of SEND (Standard for Exchange of Nonclinical
Data) data management and delivery. In addition, we announced investments being
made in laboratory infrastructure and data and study management technologies
through a partnership with Centric Consulting, LLC.
As of March 31, 2021, we had $2,186 of cash and cash equivalents as compared to
$1,406 of cash and cash equivalents at the end of fiscal 2020. In the first six
months of fiscal 2021, we generated $4,526 in cash from operations as compared
to $346 in the same period in fiscal 2020. During the six months ended March 31,
2021, cash from operations, cash on hand, and $387 from a cap ex line of credit
together funded capital expenditures of $2,427 for the investment in laboratory
equipment to increase capacity at all locations and facility improvements at the
Fort Collins location.
As of March 31, 2021, we did not have an outstanding balance on our $5,000
available general line of credit, we had a $2,865 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, the
PCRS Acquisition, the HistoTox Labs Acquisition, the Merger and the expansion of
facilities and services. Please refer to the Liquidity and Capital Resources
section herein as well as Note 13 "Subsequent Events" to the Notes to Condensed
Consolidated Financial Statements for a description of our credit arrangements
with First Internet Bank.
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 Six Months Ended
March 31, March 31,
2021 2020 2021 2020
Service revenue 95.5 % 94.9 % 95.4 % 94.5 %
Product revenue 4.5 5.1 4.6 5.5
Total revenue 100.0 100.0 100.0 100.0
Cost of Service revenue (a) 66.7 67.2 67.3 69.9
Cost of Product revenue (a) 61.5 74.6 54.8 71.5
Total cost of revenue 66.5 67.6 66.7 70.0
Gross profit 33.5 32.4 33.3 30.0
Total operating expenses 36.3 33.7 34.7 34.2
Operating income (loss) (2.8 ) (1.2 ) (1.4 ) (4.2 )
Other expense (1.0 ) (2.4 ) (1.4 ) (2.4 )
Loss before income taxes (3.8 ) (3.6 ) (2.8 ) (6.6 )
Income taxes 0.1 0.1 0.1 0.4
Net loss (3.9 )% (3.7 )% (2.9 )% (7.0 )%
(a) Percentage of service and product revenues, respectively
19
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Service and Product Revenues
Revenues for the quarter ended March 31, 2021 increased 17.1% to $18,751
compared to $16,012 for the same period last fiscal year.
Our Service revenue increased 17.8% to $17,902 in the three months ended March
31, 2021 compared to $15,191 for the three months ended March 31, 2020.
Nonclinical services revenues increased $1,903 due to an overall increase in the
number of studies from the prior year period and increased capacity to perform
studies. Other laboratory services revenues increased by $974 in the three
months ended March 31, 2021 compared to the three months ended March 31, 2020,
due to internal growth.
Three Months Ended
March 31,
2021 2020 Change %
Bioanalytical analysis $ 2,220 $ 2,386 $ (166 ) (7.0 )%
Nonclinical services 14,157 12,254 1,903 15.5 %
Other laboratory services 1,525 551 974 176.8 %
$ 17,902 $ 15,191 $ 2,711Sales in our Products segment increased 3.4% in the three months ended March 31,
2021 to $849 from $821 in the three months ended March 31, 2020. The increase in
the second fiscal quarter of 2021 stems from higher sales of analytical
instruments and other instruments, partially offset by a decrease in Culex
in-vivo sampling systems.
Three Months Ended
March 31,
2021 2020 Change %
Culex, in-vivo sampling systems $ 210 $ 230 $ (20 ) (8.7 )%
Analytical instruments 561 532 29 5.5 %
Other instruments 78 59 19 32.2 %
$ 849 $ 821 $ 28
Cost of Revenues
Cost of revenues for the three months ended March 31, 2021 was $12,471 or 66.5%
of revenue, compared to $10,819, or 67.6% of revenue for the three months ended
March 31, 2020.
Cost of Service revenue as a percentage of Service revenue decreased to 66.7%
during the three months ended March 31, 2021 from 67.2% in the three months
ended March 31, 2020, reflecting greater utilization of recently expanded
capacity.
Cost of Products revenue as a percentage of Products revenue in the three months
ended March 31, 2021 decreased to 61.5% from 74.6% in the three months ended
March 31, 2020 due to expense reductions implemented in the last half of fiscal
2020, which created improved margins on existing sales.
Operating Expenses
Selling expenses for the three months ended March 31, 2021 decreased 18.8% to
$1,175 from $1,447 compared to the three months ended March 31, 2020. This
decrease is mainly due to the reduction of non-recurring costs related to the
launch of the trade name Inotiv prior to the formal change of our corporate name
to Inotiv, Inc., 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.
20
Research and development expenses for the three months ended March 31, 2021
increased 25.3% compared to the three months ended March 31, 2020 to $203 from
$162. The increase was primarily due to internal development investments for new
services, such as clinical pathology and cardiovascular safety pharamacology.
General and administrative expenses for the three months ended March 31, 2021
increased 43.5% to $5,423 from $3,779 compared to the three months ended March
31, 2020, as the Company increased operating expenses related to strategic
investment in corporate general and administrative expense to support
anticipated future revenue growth, which included recruiting and relocations
expense, higher compensation expense, including non-cash stock compensation, new
systems and transaction costs related to the HistoTox Labs Acquisition and the
Merger. In addition, we announced investments being made in laboratory
infrastructure and data and study management technologies through a partnership
with Centric Consulting, LLC and investments in software solutions and human
resources to support existing internal expertise in the area of SEND (Standard
for the Exchange of Nonclinical Data) data management and delivery.
Other Income (Expense)
Interest expense for the three months ended March 31, 2021 decreased 6.6% to
$366 from $392 compared to the three months ended March 31, 2020.
Income Taxes
Our effective tax rates for the three months ended March 31, 2021 and 2020 were
(2.09) % and (2.15) %, respectively. The expense recorded for each period was
$15 and $11, 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.
Net Income/Loss
As a result of the above described factors, we had a net loss of $723 for the
three months ended March 31, 2021 as compared to a net loss of $588 during the
three months ended March 31, 2020.
Six Months Ended March 31, 2021 Compared to Six Months Ended March 31, 2020
Service and Product Revenues
Revenues for the six months ended March 31, 2021 increased 26.6% to $36,636 as
compared to $28,930 for the six months ended March 31, 2020.
Our Service revenue increased 27.8% to $34,934 in the six months ended March 31,
2021 compared to $27,333 for the six months ended March 31, 2020. The increase
in service revenue was due to incremental revenue of $1,500 in the first quarter
of fiscal 2021 attributable to a full six months of Fort Collins, CO, related
operations, combined with additional revenue as a result of organic growth.
Six Months Ended
March 31,
2021 2020 Change %
Bioanalytical analysis $ 3,870 $ 3,712 $ 158 4.3 %
Nonclinical services 27,845 22,382 5,463 24.4 %
Other laboratory services 3,219 1,239 1,980 159.8 %
$ 34,934 $ 27,333 $ 7,601Sales in our Product segment increased 6.6% in the first six months ended March
31, 2021 to $1,702 from $1,597 when compared to the six months ended March 31,
2020 reflecting higher sales of Culex in-vivo sampling systems and analytical
instruments, partially offset by a decrease in other instruments.
Six Months Ended
March 31,
2021 2020 Change %
Culex, in-vivo sampling systems $ 471 $ 406 $ 65 16.0 %
Analytical instruments 1,065 921 144 15.6 %
Other instruments 166 270 (104 ) (38.5 )%
$ 1,702 $ 1,597 $ 105
21
Cost of Revenues
Cost of revenues for the six months ended March 31, 2021 was $24,435 or 66.7% of
revenue, compared to $20,260, or 70.0% of revenue compared to the six months
ended March 31, 2020.
Cost of Service revenue as a percentage of Service revenue decreased to 67.3%
during the six months ended March 31, 2021 from 69.9% in the six months ended
March 31, 2020 reflecting operating leverage and the greater utilization of
recently expanded capacity.
Cost of Product revenue as a percentage of Product revenue in the six months
ended March 31, 2021 decreased to 54.8% from 71.5% in the six months ended March
31, 2020 due to expense reductions implemented in the last half of fiscal 2020,
which created improved margins on existing sales.
Operating Expenses
Selling expenses for the six months ended March 31, 2021 decreased 19.8% to
$2,138 from $2,665 compared to the six months ended March 31, 2020. This
decrease is mainly due to the reduction of non-recurring costs of nearly $190
that was related to the launch of the trade name Inotiv prior to the formal
change of our corporate name to Inotiv, Inc., 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 six months ended March 31, 2021
increased 23.1% compared to the six months ended March 31, 2020 to $399 from
$324. The increase was primarily due to internal development investments for new
services, such as clinical pathology and cardiovascular safety pharamacology.
General and administrative expenses for the six months ended March 31, 2021
increased 47.5% to $10,171 from $6,896 compared to the six months ended March
31, 2020 as the Company increased operating expenses related to higher strategic
investment in corporate general and administrative expense to support
anticipated future revenue growth, which included recruiting and relocations
expense, higher compensation expense, including non-cash stock compensation, new
systems and transaction costs related to the HistoTox Labs and Bolder BioPATH
acquisitions. In addition, we announced investments being made in laboratory
infrastructure and data and study management technologies through a partnership
with Centric Consulting, LLC and investments in software solutions and human
resources to support existing internal expertise in the area of SEND (Standard
for the Exchange of Nonclinical Data) data management and delivery.
Other Income (Expense)
Interest expense for the six months ended March 31, 2021 increased 1.4% to $713
from $703 compared to the six months ended March 31, 2020.
Income Taxes
Our effective income tax rates for the six months ended March 31, 2021 and 2020
were (4.58)% and (5.94)%, respectively. The expense recorded for each period was
$48 and $108, 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.
Net Income (Loss)
As a result of the factors described above, net loss for the six months ended
March 31, 2021 amounted to $1,089, compared to net loss of $2,014 for the six
months ended March 31, 2020.
Liquidity and Capital Resources
Comparative Cash Flow Analysis
At March 31, 2021, we had cash and cash equivalents of $2,186, compared to
$1,406 at September 30, 2020.
Net cash provided by operating activities was $4,526 for the six months ended
March 31, 2021 compared to net cash provided by operating activities of $346 for
the six months ended March 31, 2020. Contributing factors to our cash provided
by operations in the first six months of fiscal 2021 were noncash charges of
$2,154 for depreciation and amortization, $460 for stock compensation expense,
and a net increase in customer advances of $3,831, as a result of increasing
orders. These items were partially offset by an increase of $1,927 in accounts
receivable.
Days' sales in accounts receivable decreased to 48 days at March 31, 2021 from
56 days at September 30, 2020 due to an increase in revenue. 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.
Included in operating activities for the six months ended March 31, 2020 were
noncash charges of $1,673 for depreciation and amortization, $204 for stock
compensation expense, $75 of amortization of finance lease and a net increase in
customer advances of $3,791, as a result of increasing orders. These items were
partially offset by an increase of $1,873 in accounts receivable, an increase of
$723 in prepaid expenses and other assets, a decrease of $422 in accrued
expenses and a decrease of $577 in accounts payable.
22
Investing activities used $2,425 in the six months ended March 31, 2021 due
mainly to capital expenditures of $2,427 as compared to $3,351 in the first six
months of fiscal 2020. The capital additions during the six months ended March
31, 2021 consisted of investments in laboratory equipment to increase capacity
and improvements in our Fort Collins facility.
Financing activities used $1,321 in the six months ended March 31, 2021,
compared to $6,597 provided during the six months ended March 31, 2020. The use
of cash in the first six months of fiscal 2021 included payments on long-term
debt of $1,436, financing lease payments of $206 and debt issuance costs of $41,
which were partially offset by proceeds from the exercise of stock options of
$111. The main sources of cash in the first six months of fiscal 2020 were from
borrowings on the long-term loan of $3,533, and borrowings on the Construction
loans and Capex lines of credit of $1,089 and $1,329, respectively, and
additional borrowings against the Revolving Facility of $1,552. These items were
partially offset by long-term loan payments of $603, finance lease payment of
$212 and payment of debt issuance cost of $111.
Capital Resources
Credit Facility
On April 30, 2021, the Company refinanced its credit arrangements with First
Internet Bank ("FIB") in order to, among other things, secure additional debt
financing. The discussion below describes our credit arrangements with FIB as of
March 31, 2021. For a description of our credit arrangements with FIB as of the
April 30, 2021 refinancing, refer to Note 13 "Subsequent Events" to the Notes to
Condensed Consolidated Financial Statements.
On December 1, 2019, we entered into an Amended and Restated Credit Agreement
(as had previously been amended from time to time, the "Credit Agreement") with
FIB. As of March 31, 2021, the Credit Agreement included 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 March 31,
2021 was $3,622. 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 March 31, 2021 was
$3,634.
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 March 31, 2021 was $1,018.
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 March 31, 2021 was $1,286.
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 March 31, 2021 was $1,858. 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 April 31, 2021, the parties amended the Revolving Facility
to extend its maturity through April 30, 2023. Refer to Note 13 "Subsequent
Events" to the Notes to Condensed Consolidated Financial Statements.
The Construction Draw Loan and the Equipment Draw Loan were utilized in
connection with the Evansville facility expansion and provided for borrowings up
to principal amounts not to exceed $4,445 and $1,429, respectively. Amounts
outstanding under these loans bear interest at a fixed per annum rate of 5.20%.
The Construction Draw Loan and Equipment Draw Loan each mature on March 28,
2025. As of March 31, 2021, there was a $4,015 balance on the Construction Draw
Loan and a $1,103 balance on the Equipment Draw Loan.
23
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 March 31, 2021, had a balance of
$826. Interest accrues on the principal balance of the Initial Capex Line at a
fixed per annum rate equal to 4%. 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, and as of March 31, 2021, had a balance of $2,865.
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.
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 March 31, 2021, 5.75 to 1.00, (b) as of June 30, 2021, 5.00 to
1.00 and (c) 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 obtained a
life insurance policy in an amount of $5,000 for its President and Chief
Executive Officer and provided FIB an assignment of such life insurance policy
as collateral.
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 March 31,
2021, the balance on the note payable to the Smithers Avanza Seller was $480. 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 March 31, 2021, the balance on the note payable to the PCRS Seller was
$719. In connection with the Merger, the Company has also issued seller notes in
an aggregate principal amount of $1,500. Refer to Note 13 "Subsequent Events" to
the Notes to Condensed Consolidated Financial Statements.
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 terms of the Loan call for repayment of the principal and accrued
interest under the Loan in eighteen installments of $283 beginning on
November 16, 2020 and continuing monthly until the final payment is due on
April 16, 2022. However, 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.
24
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, additional borrowings
available under our Credit Agreement, as refinanced on April 30, 2021, an
additional commitment from FIB for approximately $5,000 of financing to be used
in connection with the exercise of the Company's option to buy its St. Louis
facility for approximately $4,700 and to complete associated expansion,
contingent on the Company's receipt of related business incentives, and
remaining net proceeds from our recent public offering. 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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