INOTIV,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share amounts)
|
|
March
31,
2021
|
|
|
September
30,
2020
|
|
|
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,186
|
|
|
$
|
1,406
|
|
Accounts
receivable
|
|
|
|
|
|
|
|
|
Trade,
net of allowance of $500 at March 31, 2021 and $561 at September 30, 2020
|
|
|
9,340
|
|
|
|
8,681
|
|
Unbilled
revenues and other
|
|
|
3,338
|
|
|
|
2,142
|
|
Inventories,
net
|
|
|
872
|
|
|
|
700
|
|
Prepaid
expenses
|
|
|
2,135
|
|
|
|
2,371
|
|
Total
current assets
|
|
|
17,871
|
|
|
|
15,300
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
29,353
|
|
|
|
28,729
|
|
Operating lease right-of-use assets, net
|
|
|
4,105
|
|
|
|
4,001
|
|
Finance lease right-of-use assets, net
|
|
|
4,710
|
|
|
|
4,778
|
|
Goodwill
|
|
|
4,368
|
|
|
|
4,368
|
|
Other
intangible assets, net
|
|
|
3,949
|
|
|
|
4,261
|
|
Lease
rent receivable
|
|
|
129
|
|
|
|
75
|
|
Other
assets
|
|
|
86
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
64,571
|
|
|
$
|
61,593
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
3,967
|
|
|
$
|
3,196
|
|
Restructuring
liability
|
|
|
|
|
|
|
168
|
|
Accrued
expenses
|
|
|
2,932
|
|
|
|
2,688
|
|
Customer
advances
|
|
|
15,186
|
|
|
|
11,392
|
|
Capex
line of credit
|
|
|
—
|
|
|
|
2,613
|
|
Current
portion on long-term operating lease
|
|
|
1,004
|
|
|
|
866
|
|
Current
portion of long-term finance lease
|
|
|
4,664
|
|
|
|
4,728
|
|
Current
portion of long-term debt
|
|
|
8,317
|
|
|
|
5,991
|
|
Total
current liabilities
|
|
|
36,070
|
|
|
|
31,642
|
|
Long-term
operating leases, net
|
|
|
3,278
|
|
|
|
3,344
|
|
Long-term
finance leases, net
|
|
|
42
|
|
|
|
44
|
|
Long-term
debt, less current portion, net of debt issuance costs
|
|
|
17,925
|
|
|
|
18,826
|
|
Deferred
tax liabilities
|
|
|
180
|
|
|
|
141
|
|
Total
liabilities
|
|
|
57,495
|
|
|
|
53,997
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
shares, authorized 1,000,000 shares, no par value:
|
|
|
|
|
|
|
|
|
No
Series A shares at March 31, 2021 and 25 shares at September 30, 2020 issued and outstanding at $1,000 stated value
|
|
|
—
|
|
|
|
25
|
|
Common
shares, no par value:
|
|
|
|
|
|
|
|
|
Authorized
19,000,000 shares; 11,179,041 issued and outstanding at March 31, 2021 and 10,977,675 at September 30, 2020
|
|
|
2,756
|
|
|
|
2,706
|
|
Additional
paid-in capital
|
|
|
27,319
|
|
|
|
26,775
|
|
Accumulated
deficit
|
|
|
(22,999
|
)
|
|
|
(21,910
|
)
|
Total
shareholders’ equity
|
|
|
7,076
|
|
|
|
7,596
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
64,571
|
|
|
$
|
61,593
|
|
The
accompanying notes are an integral part of the condensed consolidated financial statements
INOTIV,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
(Unaudited)
|
|
Three
Months Ended March 31,
|
|
|
Six
Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Service
revenue
|
|
$
|
17,902
|
|
|
$
|
15,191
|
|
|
$
|
34,934
|
|
|
$
|
27,333
|
|
Product
revenue
|
|
|
849
|
|
|
|
821
|
|
|
|
1,702
|
|
|
|
1,597
|
|
Total
revenue
|
|
|
18,751
|
|
|
|
16,012
|
|
|
|
36,636
|
|
|
|
28,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of service revenue
|
|
|
11,949
|
|
|
|
10,207
|
|
|
|
23,502
|
|
|
|
19,118
|
|
Cost
of product revenue
|
|
|
522
|
|
|
|
612
|
|
|
|
933
|
|
|
|
1,142
|
|
Total
cost of revenue
|
|
|
12,471
|
|
|
|
10,819
|
|
|
|
24,435
|
|
|
|
20,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
6,280
|
|
|
|
5,193
|
|
|
|
12,201
|
|
|
|
8,670
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
1,175
|
|
|
|
1,447
|
|
|
|
2,138
|
|
|
|
2,665
|
|
Research
and development
|
|
|
203
|
|
|
|
162
|
|
|
|
399
|
|
|
|
324
|
|
General
and administrative
|
|
|
5,423
|
|
|
|
3,779
|
|
|
|
10,171
|
|
|
|
6,896
|
|
Total
operating expenses
|
|
|
6,801
|
|
|
|
5,388
|
|
|
|
12,708
|
|
|
|
9,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(521
|
)
|
|
|
(195
|
)
|
|
|
(507
|
)
|
|
|
(1,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(366
|
)
|
|
|
(392
|
)
|
|
|
(713
|
)
|
|
|
(703
|
)
|
Other
income
|
|
|
179
|
|
|
|
10
|
|
|
|
179
|
|
|
|
12
|
|
Net
loss before income taxes
|
|
|
(708
|
)
|
|
|
(577
|
)
|
|
|
(1,041
|
)
|
|
|
(1,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
15
|
|
|
|
11
|
|
|
|
48
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(723
|
)
|
|
$
|
(588
|
)
|
|
$
|
(1,089
|
)
|
|
$
|
(2,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.19
|
)
|
Diluted net loss per
share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,151
|
|
|
|
10,843
|
|
|
|
11,083
|
|
|
|
10,756
|
|
Diluted
|
|
|
11,151
|
|
|
|
10,843
|
|
|
|
11,083
|
|
|
|
10,756
|
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
INOTIV,
INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(In
thousands, except number of shares)
|
|
Six
Month Period Ended March 31, 2021
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Preferred
Shares
|
|
|
Common
Shares
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
shareholders’
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
equity
|
|
Balance
at September 30, 2020
|
|
|
25
|
|
|
$
|
25
|
|
|
|
10,977,675
|
|
|
$
|
2,706
|
|
|
$
|
26,775
|
|
|
$
|
(21,910
|
)
|
|
$
|
7,596
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(366
|
)
|
|
|
(366
|
)
|
Stock
option exercises
|
|
|
|
|
|
|
|
|
|
|
23,350
|
|
|
|
6
|
|
|
|
39
|
|
|
|
|
|
|
|
45
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
116,974
|
|
|
|
29
|
|
|
|
152
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2020
|
|
|
25
|
|
|
$
|
25
|
|
|
|
11,117,999
|
|
|
$
|
2,741
|
|
|
$
|
26,966
|
|
|
$
|
(22,276
|
)
|
|
$
|
7,456
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(723
|
)
|
|
|
(723
|
)
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
12,502
|
|
|
|
3
|
|
|
|
275
|
|
|
|
|
|
|
|
278
|
|
Stock
option exercises
|
|
|
|
|
|
|
|
|
|
|
36,040
|
|
|
|
9
|
|
|
|
56
|
|
|
|
|
|
|
|
65
|
|
Preferred
stock conversion
|
|
|
(25
|
)
|
|
|
(25
|
)
|
|
|
12,500
|
|
|
|
3
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
Balance
March 31, 2021
|
|
|
0
|
|
|
$
|
0
|
|
|
|
11,179,041
|
|
|
$
|
2,756
|
|
|
$
|
27,319
|
|
|
|
(22,999
|
)
|
|
$
|
7,076
|
|
|
|
Six
Month Period Ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Preferred
Shares
|
|
|
Common
Shares
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
shareholders’
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
equity
|
|
Balance at September 30,
2019
|
|
|
35
|
|
|
$
|
35
|
|
|
|
10,510,694
|
|
|
$
|
2,589
|
|
|
$
|
25,183
|
|
|
$
|
(17,097
|
)
|
|
$
|
10,710
|
|
Adoption of accounting
standard
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
|
|
(128
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,426
|
)
|
|
|
(1,426
|
)
|
Stock issued in acquisition
|
|
|
|
|
|
|
|
|
|
|
240,000
|
|
|
|
60
|
|
|
|
1,073
|
|
|
|
|
|
|
|
1,133
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
54,363
|
|
|
|
14
|
|
|
|
67
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2019
|
|
|
35
|
|
|
$
|
35
|
|
|
|
10,805,057
|
|
|
$
|
2,663
|
|
|
$
|
26,323
|
|
|
$
|
(18,651
|
)
|
|
$
|
10,370
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(588
|
)
|
|
|
(588
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
26,521
|
|
|
|
7
|
|
|
|
116
|
|
|
|
|
|
|
|
123
|
|
Stock
option exercises
|
|
|
|
|
|
|
|
|
|
|
32,703
|
|
|
|
8
|
|
|
|
12
|
|
|
|
|
|
|
|
20
|
|
Balance March 31,
2020
|
|
|
35
|
|
|
$
|
35
|
|
|
|
10,864,281
|
|
|
$
|
2,678
|
|
|
$
|
26,451
|
|
|
|
(19,239
|
)
|
|
$
|
9,925
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
INOTIV,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Six
Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,089
|
)
|
|
$
|
(2,014
|
)
|
Adjustments
to reconcile net loss to net cash provided by operating activities, net of acquisition:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,154
|
|
|
|
1,673
|
|
Amortization
finance lease
|
|
|
72
|
|
|
|
75
|
|
Change
on operating lease
|
|
|
(31
|
)
|
|
|
81
|
|
Employee
stock compensation expense
|
|
|
460
|
|
|
|
204
|
|
Provision
for doubtful accounts
|
|
|
72
|
|
|
|
—
|
|
Gain
on disposal of property and equipment
|
|
|
(1
|
)
|
|
|
—
|
|
Unrealized
foreign currency gains
|
|
|
9
|
|
|
|
5
|
|
Financing
lease interest expense
|
|
|
137
|
|
|
|
133
|
|
Interest
payment true up
|
|
|
(3
|
)
|
|
|
—
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,927
|
)
|
|
|
(1,873
|
)
|
Inventories
|
|
|
(172
|
)
|
|
|
(109
|
)
|
Income
tax accruals
|
|
|
—
|
|
|
|
102
|
|
Prepaid
expenses and other assets
|
|
|
178
|
|
|
|
(723
|
)
|
Accounts
payable
|
|
|
770
|
|
|
|
(577
|
)
|
Accrued
expenses
|
|
|
66
|
|
|
|
(422
|
)
|
Customer
advances
|
|
|
3,831
|
|
|
|
3,791
|
|
Net
cash provided by operating activities
|
|
|
4,526
|
|
|
|
346
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(2,427
|
)
|
|
|
(3,351
|
)
|
Proceeds
from sale of equipment
|
|
|
2
|
|
|
|
—
|
|
Cash
paid in acquisition
|
|
|
—
|
|
|
|
(4,000
|
)
|
Net
cash used in investing activities
|
|
|
(2,425
|
)
|
|
|
(7,351
|
)
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Payments
on finance lease liability
|
|
|
(206
|
)
|
|
|
(212
|
)
|
Payments
of long-term debt
|
|
|
(1,436
|
)
|
|
|
(603
|
)
|
Payments
of debt issuance costs
|
|
|
(41
|
)
|
|
|
(111
|
)
|
Payments
on capex lines of credit
|
|
|
(135
|
)
|
|
|
—
|
|
Payments
on revolving line of credit
|
|
|
—
|
|
|
|
(22,711
|
)
|
Borrowings
on revolving line of credit
|
|
|
—
|
|
|
|
24,263
|
|
Borrowings
on construction loans
|
|
|
—
|
|
|
|
1,089
|
|
Borrowings
on capex lines of credit
|
|
|
387
|
|
|
|
1,329
|
|
Borrowings
on long-term loan
|
|
|
—
|
|
|
|
3,533
|
|
Proceeds
from exercise of stock options
|
|
|
111
|
|
|
|
20
|
|
Change
in finance lease
|
|
|
(1
|
)
|
|
|
—
|
|
Net
cash used/provided by financing activities
|
|
|
(1,321
|
)
|
|
|
6,597
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
780
|
|
|
|
(408
|
)
|
Cash,
cash equivalents, and restricted cash at beginning of period
|
|
|
1,406
|
|
|
|
606
|
|
Cash,
cash equivalents, and restricted cash at end of period
|
|
$
|
2,186
|
|
|
$
|
198
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
520
|
|
|
$
|
494
|
|
Preclinical
Research Services acquisition:
|
|
|
|
|
|
|
|
|
Assets
acquired
|
|
$
|
—
|
|
|
$
|
6,442
|
|
Liabilities
assumed
|
|
|
—
|
|
|
|
(1,378
|
)
|
Common
shares issued
|
|
|
—
|
|
|
|
(1,133
|
)
|
Cash paid
|
|
$
|
—
|
|
|
$
|
3,931
|
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
INOTIV,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands except per share data or as otherwise indicated)
(Unaudited)
1.
|
DESCRIPTION
OF THE BUSINESS AND BASIS OF PRESENTATION
|
Inotiv, Inc. and its subsidiaries
(“We,” “Our,” “Us,” the “Company,” and “Inotiv”) comprise a leading contract
research organization specializing in nonclinical and analytical drug discovery and development services. The Company also manufactures
scientific instruments for life sciences research, which it sells with related software for use by pharmaceutical companies, universities,
government research centers and medical research institutions. The Company’s customers are located throughout the world. On March
18, 2021, the Company filed Articles of Amendment to the Company’s Second Amended and Restated Articles of Incorporation, as amended,
and amended its Second Amended and Restated Bylaws, as amended, to reflect a corporate name change from Bioanalytical Systems, Inc. to
Inotiv, Inc.
The Company has prepared the
accompanying unaudited interim condensed consolidated financial statements pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles (“GAAP”), and therefore should be read in conjunction with
the Company’s audited consolidated financial statements, and the notes thereto, included in the Company’s annual report on
Form 10-K for the fiscal year ended September 30, 2020. In the opinion of management, the condensed consolidated financial statements
for the three and six months ended March 31, 2021 and 2020 include all adjustments which are necessary for a fair presentation of the
results of the interim periods and of the Company’s financial position at March 31, 2021. The results of operations for the three
and six months ended March 31, 2021 may not be indicative of the results for the fiscal year ending September 30, 2021.
Certain prior period amounts have been reclassified for consistency
with the current year presentation. These reclassifications had no effect on the reported results of operations.
2.
|
STOCK-BASED
COMPENSATION
|
In March 2008, the Company’s
shareholders approved the 2008 Stock Option Plan (the “Plan”) to replace the 1997 Outside Director Stock Option Plan and the
1997 Employee Stock Option Plan. The purpose of the Plan was to promote the Company’s long-term interests by providing a means of
attracting and retaining officers, directors and key employees. The Compensation Committee administered the Plan and approved the particular
officers, directors or employees eligible for grants. Under the Plan, employees were granted options to purchase common shares at an exercise
price equal to the fair market value of the common shares of the end of the trading day prior to the date of the grant. Generally, options
granted vest and become exercisable in three equal installments commencing one year from date of grant and expire upon the earlier of
the employee’s termination of employment, or ten years from the date of grant. Restricted shares are valued as the average of the
high and low on the day prior to the date of the grant. The Plan is described more fully in Note 9 in the Notes to the Consolidated Financial
Statements in the Company’s Form 10-K for the fiscal year ended September 30, 2020.
In March 2018, the Company’s
shareholders approved the amendment and restatement of the Plan in the form of the Amended and Restated 2018 Equity Incentive Plan and
in March 2020 the Company’s shareholders approved a further amendment to increase the number of shares issuable under the amended
and restated plan by 700 and to make corresponding changes to the number of shares issuable as incentive options and as restricted stock
or pursuant to restricted stock units (as amended, the “Equity Plan”). The Company currently grants equity awards from the
Equity Plan. The purpose of the Equity Plan is to promote the Company’s long-term interests by providing a means of attracting and
retaining officers, directors and key employees. At March 31, 2021, 663 shares remained available for grants under the Equity Plan.
The Company expenses the estimated fair value of stock options over
the vesting periods of the grants. The Company recognizes expense for awards subject to graded vesting using the straight-line attribution
method. The Company adopted a change in accounting policy effective October 1, 2020 for forfeitures. Prior to October 1, 2020, stock-based
compensation expense was reduced for estimated forfeitures, and if necessary, an adjustment was recognized in future periods if actual
forfeitures differed from those estimates. The accounting change was made prospectively; therefore, stock-based compensation for equity
grants subsequent to October 1, 2020, will not be reduced for estimated forfeitures as expense will be adjusted in the period that a forfeiture
occurs. The Company feels that this accounting change will more accurately account for expense relating to forfeitures. The Company has
assessed the cumulative effect of this change in accounting policy and has deemed the impact to be immaterial; therefore, an adjustment
has not been recorded to beginning retained earnings. Stock based compensation expense for the three and six months ended March 31, 2021
was $278 and $460, respectively. Stock based compensation expense for the three and six months ended March 31, 2020 was $123 and $204,
respectively.
A summary of the Company’s stock option activity for the six
months ended March 31, 2021 is as follows (in thousands except for share prices):
|
|
|
Options
(shares)
|
|
|
Weighted-
Average
Exercise Price
|
|
Outstanding – October 1, 2020
|
|
|
|
712
|
|
|
$
|
2.21
|
|
Granted
|
|
|
|
43
|
|
|
$
|
10.12
|
|
Exercised
|
|
|
|
(60
|
)
|
|
$
|
1.86
|
|
Forfeited
|
|
|
|
(22
|
)
|
|
$
|
3.99
|
|
Expired
|
|
|
|
(2
|
)
|
|
$
|
2.02
|
|
Outstanding – March 31, 2021
|
|
|
|
671
|
|
|
$
|
2.69
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2021
|
|
|
|
392
|
|
|
$
|
1.82
|
|
The
weighted average estimated fair value of stock options granted for the six months ended March 31, 2021 and March 31, 2020 were
$6.64 and $3.41, respectively. The weighted-average assumptions used to compute the fair value of the options granted in the six
months ended March 31, 2021 were as follows:
Risk-free interest rate
|
|
|
0.40
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Volatility of the expected market price of the Company’s common shares
|
|
|
76.56
|
%
|
Expected life of the options (years)
|
|
|
5.95
|
|
As
of March 31, 2021, total unrecognized compensation cost related to non-vested stock options was $592 and is expected to be
recognized over a weighted-average service period of 2.1 years.
During the six months ended March 31, 2021, the Company granted a total
of 132 restricted shares to members of the Company’s leadership team, including 40 restricted shares granted on December 29, 2020
to the CEO under his employment agreement. A summary of restricted share activity for the six months ended March 31, 2021 is as follows:
|
|
|
Restricted Shares
|
|
|
Weighted-
Average
Grant
Date Fair
Value
|
|
Outstanding – September 30, 2020
|
|
|
|
128
|
|
|
$
|
3.88
|
|
Granted
|
|
|
|
132
|
|
|
$
|
8.74
|
|
Vested
|
|
|
|
(10
|
)
|
|
$
|
1.28
|
|
Forfeited
|
|
|
|
(2
|
)
|
|
|
6.63
|
|
Outstanding – March 31, 2021
|
|
|
|
248
|
|
|
$
|
6.54
|
|
As
of March 31, 2021, total unrecognized compensation cost related to non-vested restricted shares was $1,193 and is expected
to be recognized over a weighted-average service period of 1.9 years.
3.
|
INCOME
(LOSS) PER SHARE
|
The Company computes basic
income (loss) per share using the weighted average number of common shares outstanding. As of March 31, 2021, the Company had two categories
of dilutive potential common shares: Series A preferred shares issued in May 2011 in connection with the Company’s registered direct
offering and shares issuable upon exercise of options. The Company computes diluted earnings per share using the if-converted method for
preferred shares and the treasury stock method for stock options, respectively. Shares issuable upon exercise of 671 options and 7 common
shares issuable upon conversion of preferred shares were not considered in computing diluted income (loss) per share for the three and
six months ended March 31, 2021 because they were anti-dilutive. Shares issuable upon exercise of 802 options and 17 common shares issuable
upon conversion of preferred shares were not considered in computing diluted income (loss) per share for the three and six months ended
March 31, 2020 because they were anti-dilutive.
The following table reconciles the computation of basic net loss per
share to diluted loss per share:
|
|
Three Months Ended
March 31,
|
|
|
Six Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Basic net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shareholders
|
|
$
|
(723
|
)
|
|
$
|
(588
|
)
|
|
$
|
(1,089
|
)
|
|
$
|
(2,014
|
)
|
Weighted average common shares outstanding
|
|
|
11,151
|
|
|
|
10,843
|
|
|
|
11,083
|
|
|
|
10,756
|
|
Basic net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.19
|
)
|
Inventories
consisted of the following:
|
|
March 31,
2021
|
|
|
September 30,
2020
|
|
Raw materials
|
|
$
|
545
|
|
|
$
|
577
|
|
Work in progress
|
|
|
69
|
|
|
|
70
|
|
Finished goods
|
|
|
421
|
|
|
|
230
|
|
|
|
|
1,035
|
|
|
|
877
|
|
Obsolescence reserve
|
|
|
(163
|
)
|
|
|
(177
|
)
|
|
|
$
|
872
|
|
|
$
|
700
|
|
The Company operates in two principal segments - research services
and research products. The Services segment provides research and development support on a contract basis directly to pharmaceutical companies.
The Products segment provides liquid chromatography, electrochemical and physiological monitoring products to pharmaceutical companies,
universities, government research centers and medical research institutions. The accounting policies of these segments are the same as
those described in the summary of significant accounting policies found in Note 2 to the Consolidated Financial Statements in the Company’s
annual report on Form 10-K for the fiscal year ended September 30, 2020.
|
|
Three Months Ended
March 31,
|
|
|
Six Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
17,902
|
|
|
$
|
15,191
|
|
|
$
|
34,934
|
|
|
$
|
27,333
|
|
Product
|
|
|
849
|
|
|
|
821
|
|
|
|
1,702
|
|
|
|
1,597
|
|
|
|
$
|
18,751
|
|
|
$
|
16,012
|
|
|
$
|
36,636
|
|
|
$
|
28,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
3,794
|
|
|
$
|
2,575
|
|
|
$
|
6,905
|
|
|
$
|
3,933
|
|
Product
|
|
|
(26
|
)
|
|
|
(200
|
)
|
|
|
141
|
|
|
|
(470
|
)
|
Corporate
|
|
|
(4,289
|
)
|
|
|
(2,570
|
)
|
|
|
(7,553
|
)
|
|
|
(4,678
|
)
|
|
|
$
|
(521
|
)
|
|
$
|
(195
|
)
|
|
$
|
(507
|
)
|
|
$
|
(1,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(366
|
)
|
|
|
(392
|
)
|
|
|
(713
|
)
|
|
|
(703
|
)
|
Other income
|
|
|
179
|
|
|
|
10
|
|
|
|
179
|
|
|
|
12
|
|
Loss before income taxes
|
|
$
|
(708
|
)
|
|
$
|
(577
|
)
|
|
$
|
(1,041
|
)
|
|
$
|
(1,906
|
)
|
The Company uses the asset and liability method of accounting for income
taxes. The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax
credit carry-forwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The Company recognizes the effect on deferred
tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date. The Company records valuation
allowances based on a determination of the expected realization of tax assets.
The difference between the enacted federal statutory rate of 21% and
the Company’s effective rate of (4.58)% for the six months ended March 31, 2021 is due to changes in the valuation allowance on
its net deferred tax assets.
The Company recognizes the tax benefit from an uncertain tax position
only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The Company measures
the amount of the accrual for which an exposure exists as the largest amount of benefit determined on a cumulative probability basis that
it believes is more likely than not to be realized upon settlement of the position.
At March 31, 2021 and September 30, 2020, the Company had no liability
for uncertain income tax positions.
The Company records interest and penalties accrued in relation to uncertain
income tax positions as a component of income tax expense. Any changes in the liability for uncertain tax positions would impact the effective
tax rate. The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.
The Company files income tax returns in the U.S. and several U.S. states.
The Company remains subject to examination by taxing authorities in the jurisdictions in which it has filed returns for years after 2014.
On
March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, due to the coronavirus
pandemic. Among other things, the legislation provides tax relief for businesses. The Company is still assessing the tax benefit,
if any, that it could receive under this legislation. The Company received a Payroll Protection Program (“PPP”) loan
of $5,051 and applied for forgiveness of $4,851. Based on satisfaction of requirements under the CARES Act for forgiveness, the
Company recorded a deferred tax asset for nondeductible expense relating to the PPP funds of $1,276 at September 30, 2020.
On
December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law, clarifying that business expenses paid out of
PPP forgivable loan funds may in fact be fully deducted for federal income tax purposes. Based on this clarification in the bill,
the Company reversed the $1,276 deferred tax asset related to PPP loan expenses, along with the corresponding valuation allowance
for the same amount, as of December 31, 2020.
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 these Notes to Condensed Consolidated
Financial Statements.
On December 1, 2019,
the Company 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. The Company used
the proceeds from the Initial Term Loan to satisfy its 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. The Company 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 March 31, 2021. On April 30, 2021, the parties amended the Revolving Facility
to extend its maturity through April 30, 2023. Refer to Note 13 “Subsequent Events” to these 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.
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 (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 the Credit Agreement, as part of the Smithers Avanza acquisition, the Company has 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 a 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, the Company also has 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 (as defined below), the Company has also issued seller notes in an aggregate principal amount of $1,500. Refer to Note 13 “Subsequent
Events” to these Notes to Condensed Consolidated Financial Statements.
On April 23, 2020, the
Company was 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. The Company has applied for forgiveness of the loan in the amount of $4,851.
Long term debt as of March
31, 2021 and September 30, 2020 is detailed in the table below.
|
|
As of:
|
|
|
|
March 31,
2021
|
|
|
September 30,
2020
|
|
Initial Term Loan
|
|
$
|
3,622
|
|
|
$
|
3,748
|
|
Second Term Loan
|
|
|
3,634
|
|
|
|
4,004
|
|
Third Term Loan
|
|
|
1,018
|
|
|
|
1,115
|
|
Fourth Term Loan
|
|
|
1,286
|
|
|
|
1,425
|
|
Fifth Term Loan
|
|
|
1,858
|
|
|
|
1,891
|
|
Initial Capex Line
|
|
|
826
|
|
|
|
920
|
|
Second Capex Line
|
|
|
2,865
|
|
|
|
—
|
|
Subtotal Term Loans
|
|
|
15,109
|
|
|
|
13,103
|
|
Construction and Equipment loans
|
|
|
5,119
|
|
|
|
5,496
|
|
Seller Note – Smithers Avanza
|
|
|
480
|
|
|
|
650
|
|
Seller Note – Preclinical Research Services
|
|
|
719
|
|
|
|
752
|
|
Paycheck protection program loan
|
|
|
5,051
|
|
|
|
5,051
|
|
|
|
|
26,478
|
|
|
|
25,052
|
|
Less: Current portion
|
|
|
(8,317
|
)
|
|
|
(5,991
|
)
|
Less: Debt issue costs not amortized
|
|
|
(235
|
)
|
|
|
(235
|
)
|
Total Long-term debt
|
|
$
|
17,925
|
|
|
$
|
18,826
|
|
As part of a fiscal 2012 restructuring,
the Company accrued for lease payments at the cease use date for its 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 improvements. Based on these matters, the
Company 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. During the three and six months ended March 31, 2021, the Company released all of the remaining reserve for lease
related liabilities. At March 31, 2021 and September 30, 2020, respectively, the Company had $0 and $168 reserved for the remaining liability.
The reserve was classified as a current liability on the condensed consolidated balance sheets as of September 30, 2020.
9.
|
NEW
ACCOUNTING PRONOUNCEMENTS
|
In
June 2016, the FASB issued ASU 2016-13 “Financial Instruments (Topic 326) Measurement of Credit Losses on Financial
Instrument” “CECL”). ASU 2016-13 requires an allowance for expected credit losses on financial assets to be
recognized as early as day one of the instrument. This ASU departs from the incurred loss model which means the probability threshold
is removed. It considers more forward-looking information and requires the entity to estimate its credit losses as far as it can
reasonably estimate. This update became effective for the Company on October 1, 2020. The adoption of this guidance did not have
a material impact on the Company’s consolidated financial statements.
|
10.
|
BUSINESS COMBINATIONS
|
The Company accounts for acquisitions
in accordance with guidance found in ASC 805, Business Combinations. The guidance requires consideration given, including contingent consideration,
assets acquired, and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides
that: (1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition
costs will generally be expensed as incurred, (3) restructuring costs associated with a business combination will generally be expensed
subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally will affect income tax expense. ASC 805 requires that any excess of purchase price over fair value of assets
acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill.
PCRS acquisition
Overview
On November 8, 2019, the Company
and Bronco Research Services LLC, a wholly owned subsidiary of the Company (the “PCRS Purchaser”), entered into an Asset Purchase
Agreement (the “Purchase Agreement”) with Pre-Clinical Research Services, Inc., a Colorado corporation (the “PCRS Seller”),
and its shareholder. Pursuant to the Purchase Agreement, on December 1, 2019, the Company indirectly acquired (the “PCRS Acquisition”)
substantially all of the assets of PCRS Seller used or useful by PCRS Seller in connection with PCRS Seller's provision of GLP and non-GLP
preclinical testing for the pharmaceutical and medical device industries. The total consideration for the PCRS Acquisition was $5,857,
which consisted of $1,500 in cash, subject to certain adjustments, 240 of the Company’s common shares valued at $1,133 using the
closing price of the Company’s common shares on November 29, 2019 and an unsecured promissory note in the initial principal amount
of $800 made by PCRS Purchaser. The promissory note bears interest at 4.5%. The Company also purchased certain real property located in
Fort Collins, Colorado, comprising the main facility for the PCRS Seller’s business and additional property located next to the
facility available for future expansion, for $2,500. The Company funded the cash portion of the purchase price for the PCRS Acquisition
with cash on hand and the net proceeds from the refinancing of its credit arrangements with FIB, as described in Note 7. As contemplated
by the Purchase Agreement, the Company also entered into a lease arrangement for an ancillary property used by Seller’s business,
located in Livermore, Colorado.
Accounting for the Transaction
Results are included in the
Company’s results from the acquisition date of December 1, 2019.
The Company’s allocation
of the $5,857 purchase price to PCRS Purchaser’s tangible and identifiable intangible assets acquired and liabilities assumed, based
on their estimated fair values as of December 1, 2019, is included in the table below. Goodwill, which is derived from the enhanced scientific
expertise, expanded client base and our ability to provide broader service solutions through a comprehensive portfolio, is recorded based
on the amount by which the purchase price exceeds the fair value of the net assets acquired and is deductible for tax purposes. The
purchase price allocation as of March 31,2021 is as follows:
|
|
Allocation as of
March 31, 2021
|
|
Assets acquired and liabilities assumed:
|
|
|
|
|
Receivables
|
|
$
|
578
|
|
Property and equipment
|
|
|
2,836
|
|
Unbilled receivables
|
|
|
162
|
|
Prepaid expenses
|
|
|
27
|
|
Intangible assets
|
|
|
2,081
|
|
Goodwill
|
|
|
751
|
|
Accounts payable
|
|
|
(109
|
)
|
Accrued expenses
|
|
|
(118
|
)
|
Customer advances
|
|
|
(351
|
)
|
|
|
$
|
5,857
|
|
The allocation of the purchase
price is based on valuations performed to determine the fair value of such assets and liabilities as of the acquisition date. Goodwill
from this transaction is allocated to the Company’s Services segment. PCRS Purchaser recorded revenues of $3,813 and net income
of $711 for the six month period ending March 31, 2021.
Pro Forma Results
The Company’s unaudited
pro forma results of operations for the six months ended March 31, 2020 assuming the PCRS Acquisition had occurred as of October 1, 2019
are presented for comparative purposes below. These amounts are based on available information of the results of operations of the PCRS
Seller’s operations prior to the acquisition date and are not necessarily indicative of what the results of operations would have
been had the PCRS Acquisition been completed on October 1, 2019.
The unaudited pro forma information
is as follows:
|
|
Six Months Ended
|
|
|
|
March 31, 2020
|
|
Total revenues
|
|
$
|
29,847
|
|
|
|
|
|
|
Net loss
|
|
|
(1,887
|
)
|
|
|
|
|
|
Pro forma basic net loss per share
|
|
$
|
(0.17
|
)
|
Pro forma diluted net loss per share
|
|
$
|
(0.17
|
)
|
In
accordance with Accounting Standards Codification (“ASC”) 606, the Company disaggregates its revenue from clients
into three revenue streams, service revenue, product revenue, and royalties. At contract inception the Company assesses the services
promised in the contract with the clients to identify performance obligations in the arrangements.
Service
revenue
The
Company enters into contracts with clients to provide drug discovery and development services with payments based on mainly fixed-fee
arrangements. The Company also offers archive storage services to its clients.
The
Company’s fixed fee arrangements may involve nonclinical research services (toxicology, pathology, pharmacology), bioanalytical,
and pharmaceutical method development and validation, nonclinical research services and the analysis of bioanalytical and pharmaceutical
samples. For bioanalytical and pharmaceutical method validation services and nonclinical research services, revenue is recognized
over time using the input method based on the ratio of direct costs incurred to total estimated direct costs. For contracts that
involve in-life study conduct, method development or the analysis of bioanalytical and pharmaceutical samples, revenue is recognized
over time when samples are analyzed or when services are performed. The Company generally bills for services on a milestone basis.
These contracts represent a single performance obligation and due to the Company’s right to payment for work performed,
revenue is recognized over time. Research services contract fees received upon acceptance are deferred until earned and classified
within customer advances on the condensed consolidated balance sheets. Unbilled revenues represent revenues earned under contracts
in advance of billings.
Archive
services provide climate controlled archiving for client’s data and samples. The archive revenue is recognized over time,
generally when the service is provided. These arrangements include one performance obligation. Amounts related to future archiving
or prepaid archiving contracts for clients where archiving fees are billed in advance are accounted for as deferred revenue and
recognized ratably over the period the applicable archive service is performed.
Product
revenue
The
Company’s products can be sold to multiple clients and have alternative use. Both the transaction sales price and shipping
terms are agreed upon in the client order. For these products, all revenue is recognized at a point in time, generally when title
of the product and control is transferred to the client based upon shipping terms. These arrangements typically include only one
performance obligation. Certain products have maintenance agreements available for clients to purchase. These are typically billed
in advance and are accounted for as deferred revenue, are recognized ratably over the applicable maintenance period and are included
in customer advances on the condensed consolidated balance sheet.
Royalty
revenue
The
Company has an agreement with Teva Pharmaceuticals (formerly Biocraft Laboratories, Inc,) which manufactures and markets
pharmaceutical products. The Company receives royalties in accordance with sales of certain pharmaceuticals that Teva manufactures
and sells. The royalties are received on a quarterly basis and the revenue is recognized over the quarter. Royalty revenue is
included in service revenue on the condensed consolidated statement of operations. Total revenue recognized was $94 and $179 in
the three months ended March 31, 2021 and 2020, respectively. Total revenue recognized was $153 and $436 in the six months ended
March 31, 2021 and 2020, respectively.
The
following table presents changes in the Company’s contract assets and contract liabilities for the six months ended March
31, 2021.
|
|
Balance at
September 30,
2020
|
|
|
Additions
|
|
|
Deductions
|
|
|
Balance at
March 31,
2021
|
|
Contract Assets: Unbilled receivables
|
|
$
|
1,879
|
|
|
$
|
1,371
|
|
|
$
|
(857
|
)
|
|
$
|
2,393
|
|
Contract liabilities: Customer advances
|
|
$
|
11,392
|
|
|
$
|
77,700
|
|
|
$
|
(73,906
|
)
|
|
$
|
15,186
|
|
The
Company records a right-of-use (“ROU”) asset and lease liability for substantially all leases for which it is a lessee,
in accordance with ASU 842. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company
recognizes lease expense for the leases on a straight-line basis over the lease term. At inception of a contract, the Company
considers all relevant facts and circumstances to assess whether or not the contract represents a lease by determining whether
or not the contract conveys the right to control the use of an identified asset, either explicit or implicit, for a period of
time in exchange for consideration.
The
Company has various operating and finance leases for facilities and equipment. Facilities leases provide office, laboratory, warehouse,
or land, the company uses to conduct its operations. Facilities leases range in duration from two to ten years, with either renewal
options for additional terms as the initial lease term expires, or purchase options. Facilities leases are considered as either
operating or financing leases.
Equipment
leases provide for office equipment, laboratory equipment or services the Company uses to conduct its operations. Equipment leases
range in duration from 30 to 60 months, with either subsequent annual renewals, additional terms as the initial lease term expires,
or purchase options.
Right-of-use
lease assets and lease liabilities that are reported in the Company’s condensed consolidated balance sheets are as follows:
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
2021
|
|
|
September 30,
2020
|
|
Operating right-of-use assets, net
|
|
$
|
4,105
|
|
|
$
|
4,001
|
|
|
|
|
|
|
|
|
|
|
Current portion of operating lease liabilities
|
|
|
1,004
|
|
|
|
866
|
|
Long-term operating lease liabilities
|
|
|
3,278
|
|
|
|
3,344
|
|
Total operating lease liabilities
|
|
$
|
4,282
|
|
|
$
|
4,210
|
|
|
|
|
|
|
|
|
|
|
Finance right-of-use assets, net
|
|
$
|
4,710
|
|
|
$
|
4,778
|
|
|
|
|
|
|
|
|
|
|
Current portion of finance lease liabilities
|
|
|
4,664
|
|
|
|
4,728
|
|
Long-term finance lease liabilities
|
|
|
42
|
|
|
|
44
|
|
Total finance lease liabilities
|
|
$
|
4,706
|
|
|
$
|
4,772
|
|
During
the three and six months ended March 31, 2021, the Company had operating lease amortizations of $242 and $474, respectively, and
had finance lease amortization of $35 and $72, respectively. Finance lease interest recorded in the three and six months ended
March 31, 2021 was $68 and $137, respectively.
One
of the operating leases contains a variable lease component based on revenue for one component of the Company. The total variable
payments for this lease for the three and six months ended March 31, 2021was $69 and $145.
Lease expense for lease payments
is recognized on a straight-line basis over the lease term. The components of lease expense related to the Company’s leases for
the three and six months ended March 31, 2021 were:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
March 31, 2021
|
|
|
March 31, 2021
|
|
Operating lease costs:
|
|
|
|
|
|
|
|
|
Fixed operating lease costs
|
|
$
|
242
|
|
|
$
|
474
|
|
Short-term lease costs
|
|
|
42
|
|
|
|
52
|
|
Lease income
|
|
|
(159
|
)
|
|
|
(318
|
)
|
Finance lease costs:
|
|
|
|
|
|
|
|
|
Amortization of right-of-use asset expense
|
|
|
35
|
|
|
|
72
|
|
Interest on finance lease liability
|
|
|
68
|
|
|
|
137
|
|
Total lease cost
|
|
$
|
228
|
|
|
$
|
417
|
|
The
Company serves as lessor to a lessee in one facility through the end of calendar year 2024. The gross rental income and underlying
lease expense are presented gross in the Company’s condensed consolidated balance sheet. The Company received rental income
of $159 and $318 for the three and six months ended March 31, 2021, respectively.
Supplemental
cash flow information related to leases was as follows:
|
|
Three months Ended
|
|
|
Six months Ended
|
|
|
|
March 31, 2021
|
|
|
March 31, 2021
|
|
Cash flows included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
240
|
|
|
$
|
469
|
|
Operating cash flows from finance leases
|
|
|
68
|
|
|
|
137
|
|
Finance cash flows from finance leases
|
|
|
103
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
Non-cash lease activity:
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
772
|
|
|
$
|
1,175
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
|
9
|
|
|
|
—
|
|
The
weighted average remaining lease term and discount rate for the Company’s operating and finance leases as of March 31, 2021
were:
|
|
As of
|
|
|
|
March 31, 2021
|
|
Weighted-average remaining lease term (in years)
|
|
|
|
|
Operating lease
|
|
|
4.49
|
|
Finance lease
|
|
|
0.37
|
|
|
|
|
|
|
Weighted-average discount rate (in percentages)
|
|
|
|
|
Operating lease
|
|
|
5.24
|
%
|
Finance lease
|
|
|
5.82
|
%
|
Lease
duration was determined utilizing renewal options that the Company is reasonably certain to execute.
As
of March 31, 2021, maturities of operating and finance lease liabilities for each of the following five years and a total thereafter
were as follows:
|
|
Operating Leases
|
|
|
Finance Leases
|
|
2021 (remainder of fiscal year)
|
|
$
|
522
|
|
|
$
|
4,777
|
|
2022
|
|
|
1,069
|
|
|
|
22
|
|
2023
|
|
|
1,113
|
|
|
|
16
|
|
2024
|
|
|
1,231
|
|
|
|
16
|
|
2025
|
|
|
393
|
|
|
|
5
|
|
Thereafter
|
|
|
494
|
|
|
|
-
|
|
Total minimum future lease payments
|
|
|
4,822
|
|
|
|
4,836
|
|
Less interest
|
|
|
(540
|
)
|
|
|
(130
|
)
|
Total lease liability
|
|
|
4,282
|
|
|
|
4,706
|
|
13.
|
SUBSEQUENT EVENTS (Amounts not in thousands)
|
On April 13, 2021, the Company
and Inotiv - Boulder HTL, LLC, a wholly owned subsidiary of the Company (”Inotiv – Boulder HTL”), entered into an Asset
Purchase Agreement (the “Purchase Agreement”) with HistoTox Labs, Inc., a Colorado corporation (the “HistoTox Labs”),
and its stockholder. On April 30, 2021, the Company closed the transactions contemplated by the Purchase Agreement, indirectly acquiring
(the “HistoTox Labs Acquisition”) substantially all of the assets of HistoTox Labs used or useful by HistoTox Labs in connection
with HistoTox Labs’ business of non-clinical consulting, laboratory and strategic support services and products related to routine
and specialized histology, immunohistology, histopathology and image analysis/digital pathology. Consideration for the HistoTox Labs Acquisition
consisted of $22.0 million in cash, subject to certain adjustments and inclusive of a $1.65 million escrow for purposes of securing any
amounts payable by the selling parties on account of indemnification obligations and other amounts payable under the Purchase Agreement.
In addition, Inotiv – Boulder HTL assumed certain specified liabilities of HistoTox Labs.
On April 15, 2021, the Company
entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Rock Mergeco, Inc., a Colorado corporation and
a wholly-owned subsidiary of the Company, Inotiv Boulder, LLC, an Indiana limited liability company and a wholly-owned subsidiary of the
Company (“Inotiv Boulder”), Bolder BioPATH, Inc., a Colorado corporation (“Bolder BioPATH”), and the holders of
all of the outstanding common shares of Bolder BioPATH (the “Selling Shareholders”). On April 30, 2021, the Company closed
(the “Closing”) the transactions contemplated by the Merger Agreement and the merger under the Merger Agreement was consummated
on May 3, 2021 (the “Merger”). Following the Merger, 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.
As of the Closing, the Company
paid consideration to the Selling Shareholders, consisting of (i) $18.5 million in cash, subject to customary purchase price adjustments
and inclusive of $1.25 million being held in escrow for purposes of securing any amounts payable by the selling parties on account of
indemnification obligations, purchase price adjustments, and other amounts payable under the Merger Agreement, (ii) 1,588,235 of the Company’s
common shares and (iii) seller notes in an aggregate principal amount of $1.5 million.
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 $49.0 million, after deducting the underwriting
discount and estimated offering expenses, a portion of which net proceeds were used to fund parts of the cash consideration under the
HistoTox Labs Acquisition and the Merger.
On April 30, 2021, the Company
entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with First Internet Bank of Indiana
(“FIB”) to, among other things, secure additional debt financing in order to fund portions of the consideration for
the HistoTox Labs Acquisition and the Merger, respectively. The Credit Agreement includes eleven term loans (the “Term Loans”
), an equipment draw loan (the “Equipment Loan”), and a revolving line of credit (the “Revolving Facility”).
The terms of each such loans are set forth below. The obligations of the Company under the Credit Agreement are secured by all of the
assets of the Company and are guaranteed by each of its subsidiaries and secured by the assets thereof.
Included
in the Credit Agreement is a requirement that the Company maintain certain financial covenants, including maintaining a senior
funded debt to adjusted EBITDA ratio (as defined in the Credit Agreement) of not greater than (i) 5.25 to 1.00 as of the date
of the Credit Agreement and as of June 30, 2021, (ii) 4.75 to 1.00 as of September 30, 2021, (iii) 4.50 to 1.00 as of December
31, 2021, (iv) 4.25 to 1.00 as of March 31, 2022, (v) 4.00 to 1.00 as of June 30, 2022, and (vi) 3.50 to 1.00 as of September
30, 2022 and as of each fiscal quarter end thereafter.
Also
included in the Credit Agreement is a requirement that the Company maintain a fixed charge coverage ratio (as defined in the Credit
Agreement) of not less than (i) 1.20 to 1.00, commencing as of September 30, 2021, and continuing as of each fiscal quarter end
thereafter up to and including June 30, 2022, and (ii) 1.25 to 1.00 as of September 30, 2022 and as of each fiscal quarter end
thereafter.
(a)
Terms of the Equipment Loan.
The
Company may borrower under the Equipment Loan on or before April 30, 2022 in the aggregate principal amount of up to $3.0 million
(the “Equipment Loan Commitment”). The Equipment Loan Commitment shall automatically terminate upon the earlier
of (x) any funding of the maximum amount of the Equipment Loan Commitment and (y) at 5:00 p.m., Indianapolis time, April 30, 2022.
Until April 30, 2022, the Company must pay interest on the amount outstanding under the Equipment Loan at a fixed annual rate
of 4.00%. On April 30, 2022, all amounts outstanding under the Equipment Loan shall be converted to a term loan and repaid monthly
in installments of principal based on a five (5) year amortization schedule together with the interest that shall accrue thereon.
A final installment representing the entire unpaid principal of the Equipment Loan, and all accrued and unpaid interest thereon
and all fees and charges in connection therewith, shall be due and payable on April 30, 2027. Advances under the Equipment Loan
shall be used to fund equipment needs of the Company as approved by FIB.
(b)
Terms of the Revolving Facility.
The
Revolving Facility provides a line of credit for up to $5.0 million, 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 the effective date of the
Credit Agreement. Advances under the Revolving Facility shall be used for general working capital purposes of the Company.
(c)
Terms of the Term Loans:
Loan Name
|
|
Principal
Amount as of
date of Credit
Agreement
|
|
Annual
Interest
Rate
|
|
|
Monthly
Payment
Amount
(000)
|
|
|
Maturity Date
|
|
Use of Proceeds
|
Term Loan 1
|
|
$3.980 million
|
|
|
5.20
|
%
|
|
$
|
36
|
|
|
March 28, 2025
|
|
Funded expansion of building on real property in Mount Vernon, IN
|
Term Loan 2
|
|
$3.571 million
|
|
|
5.06
|
%
|
|
$
|
78
|
|
|
July 2, 2023
|
|
Funded a portion of the cash consideration for the Seventh Wave Laboratories acquisition
|
Term Loan 3
|
|
$1.076 million
|
|
|
5.20
|
%
|
|
$
|
32
|
|
|
March 28, 2025
|
|
Funded equipment needs associated with expansion of real property in Mount Vernon, IN
|
Term Loan 4
|
|
$1.001 million
|
|
|
4.63
|
%
|
|
$
|
20
|
|
|
November 1, 2025
|
|
Funded the cash consideration for the Smithers Avanza acquisition
|
Term Loan 5
|
|
$810 thousand
|
|
|
4.00
|
%
|
|
$
|
17
|
|
|
June 30, 2025
|
|
Funded certain capital expenditures
|
Term Loan 6
|
|
$2.865 million
|
|
|
4.25
|
%
|
|
$
|
56
|
|
|
December 31, 2025
|
|
Funded certain capital expenditures
|
Term Loan 7
|
|
$1.263 million
|
|
|
4.00
|
%
|
|
$
|
28
|
|
|
June 1, 2025
|
|
Financed aspects of the Pre-Clinical Research Services and related real property acquisitions
|
Term Loan 8
|
|
$1.853 million
|
|
|
4.00
|
%
|
|
$
|
12
|
|
|
December 1, 2024
|
|
Financed aspects of the Pre-Clinical Research Services and related real property acquisitions
|
Term Loan 9
|
|
$10.000 million
|
|
|
3.85
|
%
|
|
$
|
184
|
*
|
|
April 30, 2026
|
|
Funded a portion of the cash consideration of the Merger
|
Term Loan 10
|
|
$5.000 million
|
|
|
3.85
|
%
|
|
$
|
92
|
*
|
|
April 30, 2026
|
|
Funded a portion of the cash consideration of
the HistoTox Labs Acquisition
|
Term Loan 11
|
|
$3.622 million
|
|
|
3.99
|
%
|
|
$
|
33
|
|
|
June 23, 2022
|
|
Refinanced debt with The Huntington Bank for general business purposes
|
*See
Mandatory Prepayments information below
(d)
Mandatory Prepayments.
Commencing
with the fiscal year ending September 30, 2021 and for each fiscal year thereafter until the Term Loan 9 and/or Term Loan 10,
in each case, are paid in full, the Company shall prepay Term Loan 9 and Term Loan 10 on a pro rata basis on the following January
31st, in an amount equal to 50% of the excess cash flow of the Company (as defined in the Credit Agreement) for such
fiscal year (in each case, an “Excess Cash Flow Payment”), provided that for the fiscal year ending September
30, 2021 the Excess Cash Flow Payment, if any, shall be calculated only for the period from April 30, 2021 through September 30,
2021. Excess Cash Flow shall be calculated for each fiscal year based on (a) the Company’s adjusted EBITDA (as defined in
the Credit Agreement), minus (b) cash interest expense, minus (c) cash taxes paid or cash distributions made for payment of taxes,
minus (d) principal payments paid in respect of long-term indebtedness (excluding any principal reduction on Term Loan 9 or Term
Loan 10, in each case, with respect to Excess Cash Flow and excluding principal payments on the Revolving Facility), minus (e)
capital expenditures not funded by advances under the Equipment Loan as specified under the Credit Agreement.
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 not less than $5.0
million for its President and Chief Executive Officer and provided FIB an assignment of such life insurance policy as collateral.
In addition to the financing
arrangements described above, the Company has secured a commitment for approximately $5.0 million of additional debt financing from FIB
to be used in connection with the exercise of the Company’s option to buy our St. Louis facility for approximately $4.7 million
and to complete associated expansion, contingent on the Company’s receipt of related business incentives.
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains statements that
constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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.
|
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.
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
March 31,
|
|
|
Six Months Ended
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
|
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
|
|
|
$
|
2,711
|
|
|
|
|
|
Sales 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.
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
|
|
|
$
|
7,601
|
|
|
|
|
|
Sales
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
|
|
|
|
|
|
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.
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.
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.
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.